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January 13, 2020

Keeping Your Business in Harmony: Which Type of LLC Is Right for You?

Business Planning

Taylor Swift or The Temptations?

Whether you are in San Antonio, elsewhere in Texas or further afield, business has its risks. Forming an LLC (Limited Liability Company) enables you to keep your personal and business assets separate in order to reduce personal and business liabilities.  Generally in Texas, the liability of the members of an LLC is limited to their investment if the LLC is sued. Also, money or property of a Texas LLC can’t be taken by creditors to pay off personal debts of LLC members. 

LLCs are much easier to maintain than corporations are for small businesses, because they demand much less paperwork and reporting than corporations. LLCs usually offer the pass-through taxation structure of a partnership or sole proprietorship, but different types of LLCs have different tax requirements. Once you decide to form an LLC, you still have many options.  

Just as all music is not right for all listeners, even if the tunes are from the same genre, each business must find the LLC that is right for them. You will want to discuss whether or not an LLC or another business structure is right for your company with your Texas business attorney, and if so, what type of LLC to set up.  Let’s take a look at different types of LLCs using musicians to illustrate. (Needless to say, we are not commenting on what kind of business structures these musicians actually have.)

Taylor Swift: Single Member LLC

Like Taylor Swift, maybe you are tired of other people mucking up your business, and you want to be in sole control. Though you may have a host of supporting employees, you want to run the show. A Single-Member LLC, the most commonly filed type of LLC, is for companies with only one owner. A “member” is in fact an owner of the LLC, so the number of people the business employs is irrelevant. You should be aware that the protection Texas law offers to keep personal and business assets separate in the face of a lawsuit is not going to be as strong for a single-member LLC as for a multi-member LLC. This is generally true, not just in Texas.

A single-member LLC will have a pass-through tax treatment. This means you don’t pay at the corporate tax rate. (And whether the federal tax rate remains the same or changes again, let’s face it, depends on the next Presidential election.) Instead, you include the profits of your business on your own income tax. 

LLCs can be owned by people or other legal entities such as trusts, corporations or other LLCs. If one LLC owns many other LLCs, it is still a single-member LLC, because there is only one owner or “member.” However, if more than one LLC owns a single LLC, it is a multi-member LLC, because there is more than one member.  

The Temptations: Multi-Member LLC

You may prefer to form a business with others so you can join your areas of expertise. Like the Temptations, each voice may add to the harmony of your business to create something unique. An LLC with two or more unmarried owners is a multi-member LLC. It gets pass-through tax treatment and each member claims their share of the profits on their individual tax returns. If the LLC does not have a manager (more on that in a moment), then each member may act on behalf of the LLC.

Sonny and Cher: Married People LLC

Sometimes married people work well together (at least for a time) and want to form a business. A married couple can form an LLC, but since Texas is a community property state, you will have to file a partnership tax return for your LLC. This means you are both going to have to include your share of the profits on your income taxes. This can sometimes cause significant dissonance, so be sure to talk with your Texas business attorney about this issue before setting up a Married Couple LLC.

Big Brother & the Holding Company: Holding, Operating and Series LLCs

LLCs are set up for a variety of purposes, and some may be set up as holding entities while others are set up as operating entities. Holding LLCs are set up to hold assets or act as umbrella companies for subsidiary companies. Operating LLCs are set up to run businesses rather than to hold assets. This leads us to a discussion of series LLCs.

Texas law enables you to set up an LLC series structure in order to segregate your assets into separate entities under one holding company LLC. For tax purposes, there is only one LLC. You only file for one LLC with the state of Texas. However, each subsidiary entity is treated as a separate LLC, and each is called a “series.” Each series holds a separate property. Usually, people use series LLCs to protect investments such as stocks or real estate. Should one subsidiary be sued, the other subsidiaries under the umbrella LLC are protected from liability. 

Texas is one of the few states that permits setting up series LLCs. You do not have to live in Texas in order to set up series LLCs there. Not all Texas business attorneys are familiar with setting up series LLCs. If this is something that may be of interest to you, talk to a San Antonio business lawyer or other Texas business attorney who is experienced in this area. 

Who’s Managing the Band?

When you register your LLC, you will need to indicate if the members will manage it or if your LLC will have a third-party manager. If the members manage, then any member may act for the business. However, if some of your members are passive such as investors, you will probably want to choose a manager to act on behalf of your LLC. You can self-manage or use a third-party manager with any type of LLC, though using a manager for a single-member LLC would be very unusual.

Call the Law Offices of Shann M. Chaudhry Esq., Attorney at Law, for a Free Consultation 

For planning your business structure including discussing various types of LLCs, call the San Antonio law offices of Shann M. Chaudhry Esq., attorney at law, for a free consultation. Our experienced Texas attorneys provide business planning, estate planning and real estate law services. Contact us at (210) 646-9400 to schedule an appointment.

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