TEXAS LIMITED LIABILITY COMPANIES
Copyright © 2020, Michael D. Jenkins
Texas, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Texas may also choose to operate in the form of an LLC. LLCs are very attractive entities for many small businesses, in that they offer much the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes, and in most states (but not in Texas, which subjects LLCs to the franchise tax, as in the case of corporations and other limited liability entities).
Note that while the Texas franchise tax exempts individual sole proprietorships and general partnerships from tax, a single-member LLC is not exempt, even though it may be treated as a sole proprietorship for federal income tax purposes.
See Section IV(c) [hyper-text link disabled] for a discussion of the income tax (franchise tax) treatment of LLC's under Texas tax laws and see the discussion of the franchise tax law, in Section IV(a) [hyper-text link disabled].
To form an LLC under the laws of Texas, one or more persons must file articles of organization (certificate of formation, Form 205) with the secretary of state, which must be accompanied by a filing fee that is the same as for filing corporate articles of formation ($300 at present). [TEX. BUS. ORGS. CODE, Tit. 1, § 4.154]
Texas state law allows formation of one-owner LLC's, which will now qualify for treatment as sole proprietorships for federal tax purposes.
Foreign LLCs, those formed under the laws of another state, must obtain a certificate of authority to do business in Texas, by filing an application for a certificate of authority with the secretary of state and paying a filing fee that is the same as for a corporation ($750). [TEX. BUS. ORGS. CODE, Tit. 1, § 4.154; and Secretary of State fee list, 1/2020]
Under amendments to the Texas LLC law enacted in 2009, [TEX. BUS. ORGS. CODE, Tit. 3, § 101.601] a limited liability company operating agreement may establish or provide for the establishment of one or more designated series of members, managers or limited liability company interests having separate rights, powers or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations. Any such series may have a separate business purpose or investment objective. The company's certificate of formation and its operating agreement must spell out the fact that the liability of each "series" or subdivision is separate from the others. [TEX. BUS. ORGS. CODE, Tit. 3, § 101.602(b)]
This amendment to the LLC law, in effect, allows a single "series LLC" to be set up with multiple divisions or "series," each of which can function like a separate legal entity, as long as separate accounting is done for each. Thus, each such "series" may contain a separate business venture, whose losses or bankruptcy will be walled off, in terms of liability, from the other such divisions of the "series LLC." In addition, some tax advisors believe such a single LLC can be set up in place of multiple LLC's and thereby might save significant amounts of state taxes in many states where each LLC is subject to special taxes or fees.
However, note that California, which imposes a $800 minimum franchise tax and an "LLC fee" on every LLC that does business in California, has already ruled on the Delaware "series LLC" law, which is similar to the Texas law, and has announced that it will treat each Delaware "series LLC" as a separate LLC entity, subjecting each to the minimum California franchise tax and LLC fee, so this tax strategy may not work in California. (Presumably, California would treat a Texas series LLC that does business in California in the same manner as a Delaware series LLC.)
Some legal experts warn that these new "series LLC" laws are relatively experimental and untested, and, therefore, it is not clear how such a "series LLC" will be treated for tax and liability purposes by other states than Texas, or by the courts. However, the Internal Revenue Service has already indicated it will adhere to state law when dealing with series LLCs.
In addition to initial filing fees, an LLC formed in Texas must subsequently file annual public information reports (no fee is required) with the State Comptroller of Public Accounts, along with the annual Texas franchise tax return.
Professionals such as lawyers, accountants, and dentists, are permitted to operate professional LLC's in Texas. [TEX. BUS. ORGS. CODE, Tit. 7, § 304.001] While such professionals obtain the same degree of limited liability protection as in the case of a professional corporation, they remain individually liable for their own negligence, malpractice or other misconduct. [TEX. BUS. ORGS. CODE, Tit. 7, §§ 301.001(b)(2) and 301.010]
For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a) [hyper-text link disabled] of the State Laws and Information Chapter of "Starting and Operating a Business in Texas."