As with any business structure, there are both advantages and disadvantages to setting up your business as a limited liability company, or LLC, in Texas. Whether a particular feature is an advantage or a disadvantage may depend upon the type of business structure being compared.
In general, an LLC is considered advantageous because it offers the same limited liability as a corporation, but with less formality of creation and operation. However, as will be seen, it is a bit more complicated than that.
Advantages of a Texas LLC
Limitation of liability. The owners of an LLC, also called members, are not personally liable for the debts of the business, including debts resulting from most lawsuits against the company. This is the main reason most people set up an LLC for their business. A corporation also affords limited liability, but the LLC requires less formality.
A limited liability partnership, or LLP, also provides asset protection for all owners, but is more restricted regarding tax options. A limited partnership, or LP, only limits the liability of the limited partners—not of the general partners who are engaged in the actual operation of the business. There is no limitation of liability for sole proprietors or for partners in a general partnership.
Registration costs. The Texas LLC formation cost is $300. This is the same as for a corporation, but less than the cost of registering a limited partnership ($750). It is also less than the cost of registering a limited liability partnership (LLP), for which the registration fee is $200 per partner. There is no annual Texas LLC registration fee.
Flexible tax treatment. For federal tax purposes, an LLC has choices as to how it will be taxed. An LLC with only one member will be taxed as a sole proprietorship unless it elects to be taxed as either an S corporation or a C corporation. An LLC with two or more members will be taxed as a partnership unless it elects to be taxed as either an S corporation or a C corporation.
Minimal formalities. There is no requirement under Texas law for an LLC to hold annual meetings or to keep detailed minutes, as there is with a corporation.
Flexible membership. There are no restrictions on the number of members of an LLC. With an S corporation, there cannot be more than 100 members. While a C corporation can have more members, the business will then be subject to double taxation, as well as more regulation regarding its operations.
Disadvantages of a Texas LLC
Registration costs. As mentioned above, the initial fee for filing an LLC in Texas is $300. For a sole proprietorship or a general partnership, there is no registration requirement, so there is no registration cost. However, these other two forms of doing business do not offer protection from personal liability.
Registered agent. Unlike a sole proprietorship or general partnership, an LLC is required to have a registered agent for the purpose of receiving official documents, such as lawsuit papers and subpoenas. If your LLC designates a member or employee as its registered agent, there are certain office staffing requirements that must be met. If your LLC hires an outside registered agent, it will cost from $40 to $500 per year, depending upon the agent you hire.
Texas taxes. The two types of business taxes for an LLC in Texas are sales tax and the Texas franchise tax. All businesses are subject to sales tax. The only types of business entities that are not subject to the franchise tax are sole proprietorships, and general partnerships where the partners are all natural persons—that is, no partner is a corporation, LLC, or other type of business entity. For more information on LLC taxes in Texas, visit the Texas Comptroller's website.
Federal self-employment tax. The self-employment tax for an LLC in Texas is the same as for an LLC formed in any other state. This is no different than if a business is operated as a sole proprietorship, general partnership, LP, LLP, or S corporation. Unless the LLC elects to be taxed as a C corporation, all of the LLC's profits are passed through to the members. The members will need to pay self-employment tax on their share of the profits, even if they do not actually receive a share of the profits.
Difficulty raising capital. Unlike a corporation, an LLC cannot issue shares of stock to raise capital. Any new investor would need to become a member of the LLC, which is a more complicated process. Furthermore, many outside investors consider LLCs risky, and prefer to invest in corporations.
Difficulty obtaining loans. Banks and other lenders may be more reluctant to loan directly to an LLC than they would to a corporation. Members of the LLC may be required to personally guarantee a loan, which partially defeats the limitation of liability afforded by an LLC. However, limited liability would remain intact for other business debts, including lawsuits against the LLC. On the other hand, lenders may also require a personal guarantee from the owners of a small start-up business formed as a corporation.
If you need more information before deciding whether a limited liability company provides the right structure for your business, you can visit the Texas Secretary of State resources available online.