There are lots of benefits when you choose a Limited Liability Company (LLC) in Texas. This is because, by default, LLCs in Texas do not pay federal income taxes, only their members do. Texas, however, imposes a state franchise tax on most LLCs.
The tax is payable to the Texas Comptroller of Public Accounts. A Limited Liability Company in Texas enjoys personal liability protection, flexibility in operational and taxation structure, and wide eligibility. In Texas, the LLC usually comes alive when the certificate is filed with the secretary of the state.
The LLC is a separate taxable entity that has its own Employer Identification Number. The LLC can be taxed as a corporation or as a partnership. Texas is a tax-friendly state, as it does not have an income tax. As a result, social security retirement benefits, pension income, retirement account income, and all other forms of retirement income are not taxed at the state level.
The Benefits of Owning a Limited Liability Company in Texas
Table of Content
- Option of Series LLC in the Certificate of Formation
- Texas Limited Liability Company (LLC) Can Exist Forever
- LLCs Are Subject to Fewer Regulations Than Traditional Corporations
- An LLC is Treated by Default as A Pass – Through Business Entity
- Choice of Tax Regime
- Enjoys Limited Liability
- Enjoys Flexible Membership
- Treated as Entities Separate from Their Members
Option of Series LLC in the Certificate of Formation
There is a variation of the run-of-the-mill LLC in Texas: a series LLC. For instance, 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 rental properties since each property can be owned by a separate series.
Texas Limited Liability Company (LLC) Can Exist Forever
Another benefit of a Limited Liability Company in Texas is that the company can exist forever. As a matter of fact, the formal term for this is “perpetual existence.” It is the default unless the certificate provides a different term of existence.
LLCs Are Subject to Fewer Regulations Than Traditional Corporations
Limited Liability Company (LLC) in Texas are subject to fewer regulations than traditional corporations, and thus may allow members to create a more flexible structure than is possible with other corporate forms.
As long as the LLC remains within the confines of state law, the operating agreement is responsible for the flexibility the members of the LLC have to decide how their LLC will be governed. State statutes usually provide automatic or “default” rules for how an LLC will be governed unless the operating agreement proves otherwise.
An LLC is Treated by Default as A Pass – Through Business Entity
For U.S. federal income tax purposes, an LLC is treated by default as a pass-through entity. If there is only one member in the company, the LLC is treated as a “disregarded entity” for tax purposes (unless another tax status is elected), and an individual owner would report the LLC’s income or loss on Schedule C of his or her individual tax return.
Thus, income from the LLC is taxed at individual tax rates. The default tax status for LLCs with multiple members is as a partnership, which is required to report income and loss on IRS Form 1065.
Under partnership tax treatment, each member of the LLC, as is the case for all partners of a partnership, annually receives a Form K – 1 reporting the member’s distributive share of the LLC’s income or loss that is reported on the member’s individual income tax return.
On the other hand, income from corporations is taxed twice: once at the corporate entity level and again when distributed to shareholders.
Choice of Tax Regime
Another benefit of having an LLC in Texas is that the company can elect to be taxed as a sole proprietor, partnership, S corporation, or C corporation (as long as they would otherwise qualify for such tax treatment), providing flexibility.
Note that a limited liability company with multiple members that elect to be taxed as a partnership may allocate the member’s distributive share of income, gain, loss, deduction, or credit via the company operating agreement on a basis other than the ownership percentage of each member so long as the rules contained in Treasury Regulation (26 CFR) 1.704 – 1 are met. S corporations may not allocate profits, losses, and other tax items under US tax law.
Enjoys Limited Liability
Having a Limited Liability Company (an LLC) in Texas limits your potential liability as a business owner. If a customer gets hurt using a product produced by your company or gets hurt when they are on any property owned by your company, an LLC can prevent a would-be plaintiff from going after your personal assets.
Some of the liabilities LLC owners can be shielded against include; Unpaid business debts (Unless you personally guarantee them), Vendor disputes (If they try to bill more than you owe), and Damages ( If someone is hurt by your business or on a property you own).
An LLCs liability protection is similar to S – Corps and C – Corps and in contrast to sole proprietorship owners who have unlimited personal liability for the debts and actions of their business. Under a sole proprietorship, if your business borrows or loses money, you are personally liable for those debts. In an LLC, you are only liable if you provide additional personal guarantees.
Enjoys Flexible Membership
This form of business structure gives you access to flexible membership. It means that members of an LLC may include individuals, partnerships, trusts, estates, organizations, or other business entities, and most states do not limit the type or number of members.
For some business ventures, such as real estate investment, each property can be owned by a separate LLC, thereby shielding the owners and their other properties from cross-liability. LLCs in some states can be set up with one natural person involved.
Treated as Entities Separate from Their Members
Limited Liability Companies in Texas and in most states in the United States are treated as entities separate from their members.
However, in some jurisdictions such as Connecticut, case law has determined that owners were not required to plead facts sufficient to pierce the corporate veil and LLC members can be personally liable for its operation. They also enjoy less risk of being “stolen” by fire-sale acquisitions (more protection against “hungry” investors).