People ask should I form an LLC for my Texas business. In this WPHK Office Hours video, Attorneys Philip Hundl and Kari Wittig talk about the characteristics of various entities available to Texas business owners, and they explain why the LLC or limited liability company is the choice for many of them. Ms. Wittig is no longer with the Firm. Call or text 800-929-1725 for an appointment. Our appointments can be in-person, online or by phone.
Summary of the Should I Form an LLC Video
– [Philip Hundl] Hi, I’m Philip Hundl. I’m an attorney with Wadler Perches Hundl and Kerlick, and I’d like to introduce Kari Wittig. She’s an attorney here at Wadler Perches Hundl and Kerlick. and her practice covers a lot of different areas, but primarily she does transactional work and corporate work. We’re talking about business formation and business entities. I know we get a lot of people calling to asking this question about LLCs. Should I form an LLC? What is an LLC? There are various different business structures right?
– [Kari Wittig] Sure.
– [Philip Hundl] We’re doing a new video series we’re calling WPHK Office Hours to focus on the frequently asked questions we get. Hopefully people can watch this video and get some of their questions answered. Maybe they’ll be better prepared to meet with an attorney to talk about whether an LLC would work for their business. So with that Kari, tell us maybe what kind of entities are out there and then why is the LLC, the entity du jour?
Is a Corporation the Right Entity for My Business?
– [Kari Wittig] Sure, as you mentioned, Philip, there are a variety of different entities that are available. Some of them have been around a little bit longer than others. Most people are familiar with the concept of a corporation. Generally it could be described as a separate legal entity that will provide a bunch of advantages to potential owners. The greatest one of course is it provides personal liability protection for the shareholders or the owners of the company.
What that means is in the event there were any sort of liability or a claim attached to the business dealings of the entity, the owners or the shareholders would have all of their personal assets protected. Which of course, as you know, is a big benefit.
Texas is a very debtor-friendly state. There are many clients who have acquired a lot of wealth and assets, and they’re very interested in protecting those. A corporation is a great way to do that. Another advantage of a corporation is it allows for easily raising capital, and it provides for a lot of flexibility.
However, there is a sort of a dual tiered structure. You’ve got the shareholders who are the owners. They will elect a board of directors and the board of directors is an individual or individuals who will essentially manage the company. They can appoint officers who will direct the day-to-day operational activities, or they can kind of manage it at that level. But there is sort of a formalized structure that’s in place. It’s been established over years of legal jurisprudence.
Is a Sole Proprietorship Right for My Business?
I should say that the simplest structure is just a sole proprietorship. That is basically the client just deciding to open up shop, doing business in their own name or perhaps creating a DBA or an assumed name. The biggest disadvantage to operating in that manner is that you don’t have any sort of liability protection. So you are in effect the business. If the business is sued, you’re sued your personal assets are potentially at risk.
– [ Philip Hundl] And we see that right away, we may have a client come in and I’m just going to make up a name, but it’ll be, you know, Smith AC. So we think, okay, well, Smith’s, you know air conditioning service, you know, we start looking to see if it’s a corporation or an LLC or partnership. You know, they just say, well “I’m doing business as, okay.” Well then it’s going to be John Smith individually sole proprietorship.
Frankly, that kind of, at least throws up a lot of red flags for me because that person is completely wide open to liability in the event they don’t have insurance or if their insurance is, you know, surpassed, right?
So, we talked about corporation. I know there’s some other entities out there maybe we can touch on. And some of these I know we could spend a lot of time on. But just quickly partnership or limited partnership.
Is a Partnership the Best Entity Choice for My Business?
– [Kari Wittig] Sure, so a general partnership is basically an operation or an endeavor that involves two or more individuals. The downside to a general partnership is both of those individuals have unlimited liability, which is similar to a sole proprietorship. However, the added detriment in conducting business in that way is that essentially both partners or all the partners could potentially be liable for the acts of their other partners. So it adds a little bit of an added risk that is not necessarily something that will be desirable.
So to sort of a hedge against some of those risks, a lot of people, especially in days of old would set up a limited partnership. Essentially what a limited partnership is, It allows us to have more people to conduct business. It’s a joint operation, but it provides limited liability to those folks who are acting as limited partners. Now, the downside is you do have to have at least one general partner and that partner is subject to unlimited liability, but you do get added protection for the limited partners. The downside of being a limited partner though, is that you really don’t have any say so in the management or operation of the company. Those tasks are retained exclusively by the general partner. So those are kind of the balances between those two classes of ownership.
– [Philip Hundl] And now, going through all those different entities, it seems that what we’ve talked about, an LLC or Limited Liability Company, checks almost all the boxes. So that’s why we see the proliferation of LLCs. Everyone talks about forming an LLC and if you Google LLC, it’s everywhere on the internet. So now we can talk about whether someone might form an LLC.
Should I Form an LLC for My Business?
– [Kari Wittig] An LLC is really the best of all worlds. With an LLC, you form a separate legal entity which is a separate legal person. However, as an owner of the LLC, you have limited liability. Similar to a corporation, your personal assets are not at risk if there are any liabilities that are associated with the operation of the company.
Should I Form a Member-Managed LLC?
The other benefit to an LLC is there’s a lot of flexibility. You can run it as a member. That’s called a member-managed LLC where basically as the owner has the right to make the day-to-day decisions. The member is analogous to a shareholder in a corporation.
Remember as we discussed before, the shareholders in a corporation don’t necessarily have the right to make the day-to-day decisions. It’s not true with an LLC. The members have a lot more direct participation in a member-managed LLC.
Or a Manager-Managed LLC?
You can also form an LLC to have a manager-managed LLC. This is similar to a corporation. The LLC board of managers looks like a board of directors in a corporation. The managers are the ones that would make the decision.
The great thing about that is if you have certain individuals that you want to hire that have more knowledge in the particular area that you want to conduct business you can appoint them as managers. They don’t necessarily have to have any ownership interest in the company. So that’s kind of a nice little feature of that entity as well.
It’s very flexible like I mentioned, you create a company agreement which kind of sets out the rights and duties of all of the members. And you can essentially include whatever provisions that you want. If it’s not addressed in a company agreement then generally Texas law will provide how the company is governed or if there are issues that come up, how those are dealt with.
But forming an LLC gives a business a lot of flexibility. You can determine how distributions are made and how operational decisions are made. You can also provide for different buyout provisions to address the interactions amongst the owners. So it’s a nice little entity.
And I think due to those facts, the flexibility, the limited liability protection, and kind of all the other bells and whistles that are available, I think this is the reason that this is probably our most requested, most popular, and most recommended entity for most clients.
– [Philip Hundl] Well, Kari, this has been great. You’ve covered a lot of territory. I feel like I just took my legal entities class in law school. We’ve covered everything. What I’d like to do is focus on the LLC in another segment. So everyone stay tuned for another WPHK Office Hours.
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Wadler, Perches, Hundl & Kerlick has offices in Wharton County, Fort Bend County and Matagorda County. We have clients from all over Texas.