Limited liability companies are increasingly popular in Texas

Limited liability companies are valued for their versatility as a business entity form. The Wall Street Journal recently reported that wealthy families are now turning to family-owned limited liability companies to minimize taxes and transfer assets between generations. Older generations are preparing to transfer an estimated $30 trillion in wealth over the coming decades. LLCs are being formed to create a family investment pool utilizing assets such as commercial property, investment portfolios and even family-owned businesses. Family patriarchs and matriarchs act as the managing LLC members and initially retain control of LLC assets.

The LLC manager can make distributions directly to family members or to their trusts. Gradually, when the time is deemed right, the LLC's management can be turned over to younger generations. In order to avoid scrutiny by the IRS, family owned LLCs would need to serve a legitimate business purpose. For example, an LLC could be set up to manage commercial property or the family's investment portfolio. By contrast, an LLC could not be set up to hold the family's vacation homes or yachts.

LLCs are not mere vehicles for the nation's One Percenters to transfer wealth over the generations. Most typically, LLCs are used by those who wish to start a new business. Baylor University Professor Elizabeth Miller states that, since the advent of LLCs in Texas in the early 1990s, "the LLC has become an immensely popular form of business." The statistics cited by Professor Miller are impressive and reveal the extent to which LLCs have now "become the entity of choice in Texas." In 2012, slightly less than 30,000 new Texas for-profit corporations were formed compared to over 100,000 Texas LLCs which were formed. As of March 1, 2014, there were a total of some 567,576 active Texas LLCs compared to 359,764 active Texas for-profit corporations.

The Texas Secretary of State notes that an LLC is a distinct entity from partnerships and corporations. The owners of an LLC are called members. A member can be an individual, partnership, corporation, trust or any other legal or commercial entity. An LLC can be managed by managers, thereby making it more like a traditional corporation, or by its members which makes it more like a partnership.

LLC advantages

NASDAQ observes that the greatest obstacle to the corporation form of business are the formalities required of corporate managers. For example, corporations must hold annual meetings and keep formal minutes. By contrast, annual meetings and formal minutes are not required for LLCs. NASDAQ views LLCs as a good choice for small business owners because of the relative simplicity and flexibility of the LLC managerial structure.

Another primary advantage of an LLC, according to Investopedia, is the limited liability protection which affords members protection similar to that of the traditional corporate form. Indeed this is one of the LLC features that most resembles a traditional corporation. For example, the LLC provides the owners with a protective shield against business debts unlike sole proprietorships and partnerships where a business owner's personal assets are vulnerable to creditors for business debts.

Seek legal advice

For Texans considering starting a business, choosing the correct business entity is extremely important. If you desire to start a business, you should consult with a Texas attorney experienced in business formation. The attorney will be glad to discuss your business plans and can offer you advice on whether or not an LLC may be the best entity for achieving your goals.