Limited Liability Companies are all the rage in business circles. You need to know the basics if you have any aspirations at all to run with the in-crowd. You may eventually decide that you need to bring at least one LLC into your life.
An LLC is a creature of statute. Since we’re in Texas, we will focus on LLCs created under Texas law.
When we talk LLC language, then we do not mention such outdated concepts as “stock.” Every owner of an interest in an LLC is part of its exclusive club of “members.” An LLC can have one member or hundreds of members. As in all social clubs, not every member has to be equal.
An LLC is operated by its members or by one or more managers. This is such an important point that the decision has to be spelled out in the LLC’s formation document, the Certificate of Formation.
The LLC usually comes alive when the Certificate is filed with the Secretary of State. The LLC is a separate taxable entity and has its own Employer Identification Number. The LLC can choose to be taxed as a corporation or as a partnership.
While some Certificates of Formation go into detail about operation and ownership, most are pretty simple. Instead, those details are set forth in a company agreement. A Company Agreement is enforceable even if the LLC has only one member.
Of course, some LLCs do not bother with such formalities. In that case, Texas helpfully fills in the blanks through the provisions found in the Texas Business Organizations Code.
A Texas LLC can exist forever. The formal term for this is “perpetual existence.” It is the default unless the Certificate provides a different term of existence.
There is a pretty cool variation of the run-of-the-mill LLC: a series LLC. If an LLC is set up as a series LLC in the Certificate of Formation, then the LLC can have one or more separate “series” of members and membership interests for certain property or assets. This is the go-to entity for people who own rent properties, since each property can be owned by a separate series.
One of the most endearing features of an LLC is its asset protection. Usually, a creditor of an LLC member cannot seize the member’s interest; it can only get a charging-order against the interest. And the member is almost always protected from personal liability arising from the LLC’s creditors.
Note the wiggle words “usually” and “almost always.” It is definitely possible for a member to step outside the box and mess up the liability protections.
LLCs can be simple or they can be complex. If you are investing in one, then you need to first review the Certificate of Formation, Company Agreement, minutes or consents, transfer documents, amendments and restatements, addendum agreements, current schedules, third-party agreements, voting agreements and tax returns, and then consult a lawyer. It may be a whole lot easier to get into the club than it is to get out.
This article does not constitute legal advice.