Starting up your own company is an excellent way to move past working for others and being constrained by their pay, working conditions, and required hours. However, you want to make sure you get your company up and running the right way, so you can have a great start and a bright future.
One of the ways you may be able to do that in Texas is through the formation of an LLC. In order to determine if that’s the right choice for you, you’ll want to be clear on what an LLC actually is, how to start one, how it operates, and the possible pitfalls you could encounter.
An LLC, or Limited Liability Company, is the United States version of the private, limited company. It gives you two big benefits:
- Limitations on your personal liability
- Pass-through taxation
Normally, pass-through taxation is seen with a partnership. This type of tax advantage means that you won’t have to pay dividend taxes or deal with double taxation, so it protects you financially and keeps your taxes potentially lower.
At the same time, you get the liability protection more typical of a corporation. While partners of a general partnership have unlimited liability, an LLC member is ordinarily not personally liable for the debts of the company. If someone decides to sue you, they will be suing the company and your personal assets will be protected in most cases. For many companies, an LLC is the way to go since they provide the tax benefits of a partnership and the liability protections of a corporation, all the while being relatively easy to form and operate.
How do you start an LLC in Texas?
Starting an LLC can vary a bit from state to state, so it’s important to follow all the rules for the state where your business will be created and operated. In Texas, you form an LLC through:
- Choosing a name for your company
- Filing a certificate of formation
- Appointing a registered agent
- Preparing an operating agreement
- Complying with regulatory and taxation requirements
Some states also have publication requirements, but Texas is not one of them.
While the creation of an LLC is not that difficult, it’s extremely important that it is done correctly in order to get all the protections and benefits that come with that type of business entity. An attorney who handles business formation can help you create your LLC to ensure that you file everything properly and have the right business structure.
Operation of an LLC (Member-Managed vs. Manager-Managed)
The creation of your LLC is not where your decision-making stops. You will also need to decide if you want the LLC to be member-managed or manager-managed. The difference between the two is that manager-managed LLCs are more hands off, where member-managed LLCs are more hands on.
When you have a member-managed LLC, the owners of the company are responsible for management. A manager-managed LLC means that others are appointed to run the company, leaving the owners to do other things. A Member can also be a Manager. Only you can decide how much active involvement you want in the operation of your LLC.
What are the pitfalls of a single-member LLC?
If you choose a single-member LLC, which you might pick as an individual looking for increased liability protection, you must consider that it is possible to lose this liability protection. It would be an unfortunate result after so carefully choosing your business entity type. To find that you didn’t have it and your company was not considered a separate entity could be financially devastating. Unfortunately, it can and does happen, especially if your LLC isn’t created or operated correctly.
A single-member LLC owner may also have a higher than average audit risk by the IRS.
When it comes to court rulings on separation between a single person and their company, the decisions have been somewhat inconsistent. Much of the determination will center upon how much separation you generally showed, on a consistent basis, between yourself and the company. An attorney can help you work toward the highest possible level of separation and protection if you decide a single-member LLC is right you.