In Texas, a limited liability company may consist of a single owner, two partners or many owners. These owners are known as members. For tax purposes, an LLC operates more like a partnership than a corporation in that members in most cases report profits and losses on their personal income tax returns. There is no federal tax on the LLC itself, and tax returns must be filed on the business as a corporation, a sole proprietorship or a partnership. There may be advantages to filing returns as an S-Corp.
There are strict rules for creating an LLC. Its name cannot be the same as another entity in Texas. It must include language in its name that indicates it is a limited liability company, and the name can not contain any words that are prohibited by the state. An LLC must file articles of organization and, like any entity, obtain the necessary licenses and permits depending on the industry. An operating agreement among the members is recommended as a best practice. A company will run more smoothly with guidelines and structure in place from the start.
Advantages of an LLC include protection of members’ personal assets, less paperwork than an S-Corp and in many cases less-onerous income tax consequences than a corporation. Disadvantages include the necessity for members to dissolve the LLC if one member leaves. Members also must pay self-employment tax.
Those who are starting a business and are unsure whether an LLC is the best choice may wish to consult with an attorney who has experience in business and commercial law. The attorney might be able to discuss in greater depth the advantages and disadvantages of different entities depending on the industry and the needs of the prospective owners.