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Top Three Things You Should Know About Forming an LLC in Texas

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Top Three Things You Should Know About Forming an LLC in Texas

The act of forming a limited liability company (LLC) in Texas is fairly straight forward.  All you have to do is file a Certificate of Formation with the Texas Secretary of State and pay the filing fee.  The Certificate of Formation form can be found here.  But before you get to that stage, consider and give real thought to these top three things about formation of LLCs in Texas:  the LLC name, management structure, and LLC operating agreement. 

Name of the LLC

Name Availability in Texas

For many businesses the company name is also their business name.  These are actually two separate concepts because it is entirely possible to have one company name and operate under a separate business name (like a DBA or doing business as).  In Texas, an LLC company name cannot be the same as the name of an existing entity formed or registered in the State of Texas. 

There are specific rules that the Texas Secretary of State follows in determining whether your proposed company name is the same as an existing entity name in Texas.  These rules can be found here. 

​If you don’t want to go through the hassle of reading administrative codes, then you can also call the Texas Secretary of State’s office at (512) 463-5555 to check on the availability of your proposed name or email the Corporations Section of the Texas Secretary of State at corpinfo@sos.texas.gov.  It is advisable to have a couple of backup names in case your first choice is unavailable.

Domain Names

If you want your website domain name to match or be similar to your company name, then you should also conduct a domain name availability search as part of the company naming exercise. 

For example, if you want your company name to be Best Ever Widget, LLC and your website domain to be www.besteverwidget.com, then you’ll need to see whether that domain name is available before you form the LLC. 

If matching the company name with the domain name is not that important to you, then this step isn’t essential.  As I mentioned earlier, it is possible to have a company name that is different from the business or brand name.  For example, Best Ever Widget, LLC can operate under the business name of Hi-Tech Widgets.  Which brings us to trademarks and branding.

Trademarks and Branding

Another consideration in choosing a company name is whether it will also serve as the business or brand name.  If you intend to use the company name as the business name or tradename as well, then you will need to do a broader name availability search.  This is especially important if your business has a broader reach.  If the business that the LLC will operate is local in nature, such as owning and operating a specific piece of real estate, a retail or manufacturing business serving the local market, or if you generally don’t intend to establish or register a brand name or tradename for the business, then this type of search may not be important.  

However, for those who may or intend to establish a unique business name, brand name or tradename that is similar or the same as the company name, then you should also do a trademark or tradename search by visiting the U.S. Patent and Trademark Office website and performing a trademark search, or just seek the professional advice of an attorney. If your company name is going to be Best Ever Widget, LLC and you want the domain name www.besteverwidget.com, then it’s best to make sure that www.besteverwidget.com is actually available.     

Member-Managed vs. Manager-Managed

During the formation process of filling out the Certificate of Formation, you must decide whether you want the LLC to be member-managed or manager-managed.  The biggest difference between the two is who makes decision for the LLC and has authority to bind and act on behalf of the LLC.

Member-Managed
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In a member-managed structure, then generally speaking each of the members (the owners of the LLC) by default has the authority to participate in the management and operation of the LLC, which includes being on bank accounts, signing contracts, etc.  Thus, this structure is suited for LLCs whose members want to or has to participate in the management and operation of the LLC. 

Manager-Managed

If there will be members who are more like investors, then generally speaking a manager-managed LLC is more appropriate.  Under this structure, the managers have duties and functions very similar to a board of directors of a corporation. 

Among other things, they make strategic decisions, set overall goals for the LLC, and manage and oversee the officers of the LLC.  The officers in turn are responsible for the day-to-day operation of the LLC.  Managers and officers can be hired, so they don’t have to be members of the LLC to serve these functions. 

​With a manager-managed LLC, members have very few decision-making authority, but the authority that members do have are generally of major (not day-to-day) importance, like incurring major debt, selling the business, dissolving the company, etc. 

 LLC Operating Agreement

Rule Book

An LLC operating agreement (also referred to as an LLC company agreement) sets out the rules, procedures, and processes for governing the LLC, the decision making on behalf of the LLC, and how the members (and managers, if there are any) interact with each other.  These rules, procedures and processes are important because if a disagreement arises on how to operate, manage, and make decisions on behalf of the LLC, then the members (and managers, if there are any) can turn to the LLC operating agreement for binding guidance.  These rules, procedures and processes essentially reflect the rights, duties, obligations, and responsibilities of the parties involved.  

The LLC operating agreement can include provisions on how managers are appointed and replaced, what authority do members have to make decisions, whether decisions have to be made by majority vote, unanimous vote or some sort of super majority vote, when and how members have to contribute funds to the company, and when and how the members can sell their ownership interests in the LLC.  The parties can be as creative and flexible as they want on setting these rules, procedures, and processes as long as they don’t violate the law or statute.

 Liability Protection

One of the main reasons people form LLCs to own and operate business ventures is for personal liability protection.  The LLC can own and operate the business under its own name, so if there is a liability claim against the LLC, then the members and their personal assets are not liable or at stake.  However, if members don’t have a guiding set of rules, procedures and processes for operating, managing and administering the LLC and its business, then it can be (and has been) argued that the business of the LLC is not being operated by a separate entity, but in fact by the members individually.  This is an argument for “piercing of the corporate veil” of the LLC, which tries to hold the members personally liable for the debt, liabilities and obligations of the business of the LLC.  

Having an LLC operating agreement and following the rules, procedures and processes for its operation, management, and administration is strong evidence that the members are taking the separate existence of the LLC seriously.  The LLC operating agreement can be used to defend against “piercing the corporate veil” attacks.      

Third Party Requirements

Sometimes, the LLC operating agreement is required to transact business.  Banks may require the LLC operating agreement for funding.  Governmental organizations may need an LLC operating agreement as part of licensing, permitting or certification requirements.  If the LLC seeks funding from investors, then investors may want to review (and possibly negotiate) the terms of the LLC operating agreement so they can understand or establish their rights, duties and responsibilities before making an investment.An Ounce of Preparation and Prevention Are WorthwhileIt is exciting to start a new company and get incorporated. As I know from personal experience and from my work with many Houston based new businesses, it is can be extremely rewarding. At the same time, failing to set up your company properly when starting can create huge headaches and even financial liabilities for you later on.

If you have any questions about the above or anything legal related to your new or existing business, know that I would be happy to see if I can help. Feel free to click below to schedule a complimentary initial call with me today.

CLICK TO SCHEDULE WITH TRI TODAY

About the Author:
Tri Nguyen has served as general counsel and company lawyer to businesses, executives, startups and entrepreneurs for over 18 years.  He particularly enjoys helping companies grow and achieve their strategic plan, and believes that every business needs a Chief Legal Advisor. He can be reached here or at +1-844-924-9529.

Doing Business Out of State & Foreign Qualification

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Doing Business Out of State & Foreign Qualification

There are many reasons a company will expand its business to a different state. Whether it’s for tax or government concerns or your business is selling products or services outside of the state it was formed, you should familiarize yourself with the process of registering your company in a different state – known as foreign qualification.

What is foreign qualification?
Foreign qualification is the process of registering your company to do business in a state different from the place your corporation or LLC was formed. Typically, where you formed your business is the place where you do most of your business transactions. However, if you do business outside of that state, your business should consider a foreign qualification in those other regions.

What is considered a foreign transacting business?
If you are considering filing your business for foreign qualification, you should ask yourself the following questions:

  • Do you have a physical location (office, retail space, etc.) in that state?
  • Did you apply for a business license in that state?
  • Do you conduct in-person meetings in that state on a regular basis?
  • Does a large portion of your business’s income derive from revenue in that state?
  • Do you have employees working in that state?
  • Do you accept orders in the state?

If you’ve answered “yes” to these questions, then you may need to register your company for foreign qualification.

Understanding foreign qualification is especially important for tax concerns. When you register for a “Certificate of Authority” in the state where your LLC or corporation will be doing business, you pay the required state fees and perhaps even income taxes on revenue derived from that state.

When it comes to expanding your business or forming your business in a state different from where you are completing transactions for your business, it’s important to remember that your company may be required to submit ongoing fees and taxes in the states where you formed your company and the state(s) of foreign qualification.

When you don’t need foreign qualification:
Not every company who does business out of the state its LLC or corporation is registered in will need foreign qualification. An example of this would be if you are a consultant or an online business that primarily handles your work on the internet for clients in multiple states.

Even though you may be making revenue from clients in other states, this does not mean you are transacting business there and therefore may not need to register for foreign qualification in those states.
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Nevertheless, it’s important to consult an attorney and/or accountant when it comes to filing for foreign qualification.

Penalties for failing to register for foreign qualification:
It’s important to understand the consequences and penalties for neglecting to follow state law. Disregarding foreign qualification could take away the right for you to bring lawsuits in that state court – meaning you may not be able to enforce a contract or recover damages – or, your company could be fined for penalties and/or back taxes for the length of time your company has done or was doing business transactions within that state.

Before you file, it’s important to make sure your business is up-to-date on all of its taxes and fees, because many states will require proof that your company is in good standing in the state where your LLC or corporation was formed.

If you need further assistance or clarification on foreign qualification, then please contact us.

DISCLAIMER: The information contained in this article is intended for informational purposes in order to give the reader a general understanding of this important topic. This article is not intended to be legal or tax advice, so if you need additional information, please consult a knowledgeable attorney.