Starting a business begins with making informed decisions from the ground floor – especially when you intend to form a corporation. In addition to creating a corporate structure compliant with Texas law, and navigating administrative and regulatory processes, you want to be sure any risks, agreements, and relationships central to your business are properly managed.
At Hendershot Cowart P.C., our business law and litigation team has cultivated a reputation for providing the comprehensive counsel clients need for business formation. With decades of collective experience and a multi-disciplinary team, we tailor business- and industry-specific strategies to facilitate proper entity selection, and set the stage for future growth and success.
Corporate Formation 101: How to Structure Your Business
Every business entity has a "structure" which governs its creation and management, how it raises capital, and what rights and liabilities its owners / managers have. The most popular corporate forms are those which allow owners to raise capital and conduct business while limiting their personal liability for corporate obligations (by default, any business not organized under a law which limits liability is either a sole proprietorship or a general partnership).
The actual structure of a corporation or business entity can vary depending on considerations specific to taxes, liability, management, transferability, and formality of operation.
In Texas, laws concerning liability-limiting corporate structures are codified under the Texas Business Organizations Code ("TBOC"). These laws define how corporations are created and operated, and touch on specific corporate structures, including:
- Corporation (Inc.): A corporation is a “legal person” with defining characteristics that include the issuance of shares of stock which are freely transferable, a term of perpetual duration, limited personal liability for corporate obligations, and centralized management. Those who own a corporation are referred to as shareholders, and those who manage it are known as directors; however, entities designated as “close corporations” can be managed by a shareholders’ agreement rather than bylaws or a Board of Directors (BOC § 21.701). Corporations may be for-profit, not-for-profit, or special purpose.
- Limited Liability Company (LLC): As with a corporation, an LLC has "members" (akin to corporate shareholders) who enjoy limited liability for corporate obligations. Like a Limited Partnership, an LLC's members' rights and obligations, the LLC's management structure, transferability of LLC "units," the LLC's ability to raise capital, its duration and termination, and other aspects can be defined by agreement with near infinite flexibility, with only bare-bones rules dictated by the BOC in the absence of an agreement. For these reasons, LLCs have become a favored corporate form for a wide variety of businesses. Only banking- and insurance-related businesses, title companies, certain cemetery services, and certain professionals such as physicians are barred from operating as LLCs.
Limited Partnerships vs. Limited Liability Partnerships
Though partnerships are not corporations, there are “hybrid” forms of general partnerships (entities with more than one owner, where all are responsible for partnership obligations) which feature liability limiting characteristics similar to corporations.
These business structures are commonly used by professionals (such as lawyers or health care providers), and may include:
- Limited Partnerships (LP), which allows at least one “General Partner” (a person or an entity) to retain personal liability for partnership debts / obligations, and other “Limited Partners” to benefit from limited personal liability for business debts.
- Limited Liability Partnerships (LLP) are similar to LPs, but differ in that they do not have General Partners; all LLP owners have limited personal liability for business debts.
Forming a Series Limited Liability Company (Series LLC)
Though traditional Corporations and LLCs are the most common types of corporate structures, some business entities may need to choose between forming multiple corporations, or a single Series Limited Liability Company (Series LLC).
Under Texas law, a Series LLC is essentially a traditional LLC which has adopted language in governing documents allowing the use of “series” (or “sub-series” / “cells”) within the framework of a single LLC. This can offer advantages over traditional LLCs, where all assets are available to satisfy obligations and liabilities of the LLC, by insulating assets of one entity from the liabilities and obligations of others.
- Series LLC Characteristics: Each sub-series within a Series LLC retains the rights of a traditional LLC, including the right to own assets, enter into contracts, provide liens or own titles, incorporate different management or ownership structures, have different business purposes, and sue or be sued.
- Asset Segmentation: Assets associated with a Series LLC may be held in the name of the sub-series or in the name of the “master” LLC. Its members / managers are not liable for debts or obligations of the parent LLC or sub-series, but do hold express rights / duties with each series as stated in the Company Agreement. Per Texas BOC § 101.602: “debts, liabilities, obligations, and expenses incurred...with respect to a particular series, shall be enforceable against the assets of that series only.” In short, the parent LLC is protected from liability of the series, and each series is protected from the liabilities of the parent and other LLCs.
- Forming a Series LLC: Though a Series LLC creates multiple cells which function as “stand-alone” entities with a single filing, they are not technically considered distinct domestic entities under the TBOC. Being relatively new, Series LLCs have also yet to be thoroughly tested in the Courts, and therefore are not for everyone. For some, multiple entity filings may offer more predictable asset segmentation; for others, a Series LLC may be a more attractive alternative to costly filing and maintenance expenses associated with multiple entities. For example:
- Series LLCs are commonly used by real estate investors, and entities with multiple lines of business or large assets;
- Series LLCs may not be the most appropriate option for entities with both for-profit and not-for-profit activities, branches with significantly higher levels of liability than others, or a need for tax / financial confidentiality between members.
While asset protection, tax benefits, low start-up costs, and less administrative upkeep make series LLCs attractive, there is a caveat to its firewall protection – it exists only with compliant formation and management. This includes incorporating necessary language into the certificate of formation and company agreements, properly accounting for the assets of each sub-series, and implementing policies for thorough record-keeping.
Given the complexity of Series LLC formation, assistance from experienced attorneys is essential.
Texas Corporate Formation: General Guidelines
While every corporation is unique, there are some general guidelines worth knowing:
- Business Name – One of the first steps in forming a corporation is choosing a business name. While this may seem straightforward, the name must contain either Corporation, Incorporated, Company, or Limited, or the appropriate abbreviation, and must be distinguishable from names of other businesses currently operating in the state of Texas. The Texas Secretary of State provides information about business name availability and allows business names to be reserved for up to 120 days.
- Certificate of Formation – A corporation is legally created when a Certificate of Formation has been filed with the Texas Secretary of State. The Certificate of Formation includes relevant information about the company, including name and address, service or nature of business, business purpose, shares authorized by the corporation, name and address of organizer, and names and address of members on the Board of Directors. Filing a Certificate of Formation in Texas creates a for-profit corporation, professional corporation, close corporation, non-profit, LLC, or Limited Partnership.
- Registered Agent – Texas requires corporations to appoint an agent for service of process, which can be an individual (if they reside in Texas) or a corporation (domestic or foreign, and authorized to do business in Texas) which accepts legal, tax, and government documents on the corporation’s behalf if lawsuits are filed against it. A registered agent must be named in a corporation’s Certificate of Formation.
- Corporate Personnel Requirements – In addition to making decisions about personnel to be involved in a corporation, other requirements must be met. In Texas, directors and incorporators must be at least 18 years of age. While they do not have to live in Texas, their addresses must be included in a corporation’s Certificate of Formation to ensure they can receive mail and notices. Single-officer or single-director corporations are permitted in Texas, and the same individual can hold more than one position.
- Business records – Texas recommends corporations create and maintain various business records, including shareholder and director meeting minutes, stock certificates, and corporate bylaws, which serve as internal guidelines for the operation of a corporation and are not filed with or required by the state. Records are not required by law, but they are important in establishing operational rules and legitimacy in the eyes of lenders, financial institutions, and the IRS.
Comprehensive Counsel: Addressing the Future of Your Corporation
When you create a corporation, you have more concerns than the basic steps of business formation. At Hendershot Cowart P.C., we’ve helped clients across Texas and beyond establish the foundations of successful companies by providing comprehensive counsel, and strategies tailored to the unique issues, risks, regulations, and applicable laws in which they’re immersed.
Our services run the gamut from initial formation to structure, organization, ongoing compliance, and planning – and include:
- Advising clients on entity selection and legal / tax implications
- Drafting, reviewing, and enforcing partnership, employment, and shareholder agreements
- Contractual agreements for corporate control, non-competition, non-solicitation, NDAs, and more
- Startup funding and private placement memorandums
- Acquisition of key assets, real estate, or equipment
- Regulatory compliance, including OSHA and health and medical law compliance
- Intellectual property and trade secrets