Top Three Things You Should Know About Forming an LLC in Texas
The act of forming a limited liability company (LLC) in Texas is fairly straight forward. All you have to do is file a Certificate of Formation with the Texas Secretary of State and pay the filing fee. The Certificate of Formation form can be found here. But before you get to that stage, consider and give real thought to these top three things about formation of LLCs in Texas: the LLC name, management structure, and LLC operating agreement.
Name of the LLC
Name Availability in Texas
For many businesses the company name is also their business name. These are actually two separate concepts because it is entirely possible to have one company name and operate under a separate business name (like a DBA or doing business as). In Texas, an LLC company name cannot be the same as the name of an existing entity formed or registered in the State of Texas. There are specific rules that the Texas Secretary of State follows in determining whether your proposed company name is the same as an existing entity name in Texas. These rules can be found here. If you don’t want to go through the hassle of reading administrative codes, then you can also call the Texas Secretary of State’s office at (512) 463-5555 to check on the availability of your proposed name or email the Corporations Section of the Texas Secretary of State at email@example.com. It is advisable to have a couple of backup names in case your first choice is unavailable.
If you want your website domain name to match or be similar to your company name, then you should also conduct a domain name availability search as part of the company naming exercise. For example, if you want your company name to be Best Ever Widget, LLC and your website domain to be www.besteverwidget.com, then you’ll need to see whether that domain name is available before you form the LLC. If matching the company name with the domain name is not that important to you, then this step isn’t essential. As I mentioned earlier, it is possible to have a company name that is different from the business or brand name. For example, Best Ever Widget, LLC can operate under the business name of Hi-Tech Widgets. Which brings us to trademarks and branding.
Trademarks and Branding
Another consideration in choosing a company name is whether it will also serve as the business or brand name. If you intend to use the company name as the business name or tradename as well, then you will need to do a broader name availability search. This is especially important if your business has a broader reach. If the business that the LLC will operate is local in nature, such as owning and operating a specific piece of real estate, a retail or manufacturing business serving the local market, or if you generally don’t intend to establish or register a brand name or tradename for the business, then this type of search may not be important.
However, for those who may or intend to establish a unique business name, brand name or tradename that is similar or the same as the company name, then you should also do a trademark or tradename search by visiting the U.S. Patent and Trademark Office website and performing a trademark search, or just seek the professional advice of an attorney. If your company name is going to be Best Ever Widget, LLC and you want the domain name www.besteverwidget.com, then it’s best to make sure that www.besteverwidget.com and the tradename Best Ever Widget are actually available.
Member-Managed vs. Manager-Managed
During the formation process of filling out the Certificate of Formation, you must decide whether you want the LLC to be member-managed or manager-managed. The biggest difference between the two is who makes decision for the LLC and has authority to bind and act on behalf of the LLC.
In a member-managed structure, then generally speaking each of the members (the owners of the LLC) by default has the authority to participate in the management and operation of the LLC, which includes being on bank accounts, signing contracts, etc. Thus, this structure is suited for LLCs whose members want to or has to participate in the management and operation of the LLC.
If there will be members who are more like investors, then generally speaking a manager-managed LLC is more appropriate. Under this structure, the managers have duties and functions very similar to a board of directors of a corporation. Among other things, they make strategic decisions, set overall goals for the LLC, and manage and oversee the officers of the LLC. The officers in turn are responsible for the day-to-day operation of the LLC. Managers and officers can be hired, so they don’t have to be members of the LLC to serve these functions. With a manager-managed LLC, members have very few decision-making authority, but the authority that members do have are generally of major (not day-to-day) importance, like incurring major debt, selling the business, dissolving the company, etc.
LLC Operating Agreement
An LLC operating agreement (also referred to as an LLC company agreement) sets out the rules, procedures, and processes for governing the LLC, the decision making on behalf of the LLC, and how the members (and managers, if there are any) interact with each other. These rules, procedures and processes are important because if a disagreement arises on how to operate, manage, and make decisions on behalf of the LLC, then the members (and managers, if there are any) can turn to the LLC operating agreement for binding guidance. These rules, procedures and processes essentially reflect the rights, duties, obligations, and responsibilities of the parties involved.
The LLC operating agreement can include provisions on how managers are appointed and replaced, what authority do members have to make decisions, whether decisions have to be made by majority vote, unanimous vote or some sort of super majority vote, when and how members have to contribute funds to the company, and when and how the members can sell their ownership interests in the LLC. The parties can be as creative and flexible as they want on setting these rules, procedures, and processes as long as they don’t violate the law or statute.
One of the main reasons people form LLCs to own and operate business ventures is for personal liability protection. The LLC can own and operate the business under its own name, so if there is a liability claim against the LLC, then the members and their personal assets are not liable or at stake. However, if members don’t have a guiding set of rules, procedures and processes for operating, managing and administering the LLC and its business, then it can be (and has been) argued that the business of the LLC is not being operated by a separate entity, but in fact by the members personally. This is an argument for “piercing of the corporate veil” of the LLC, which tries to hold the members personally liable for the debt, liabilities and obligations of the business of the LLC.
Having an LLC operating agreement and following the rules, procedures and processes for its operation, management, and administration is strong evidence that the members are taking the separate existence of the LLC seriously. The LLC operating agreement can be used to defend against “piercing the corporate veil” attacks.
Third Party Requirements
Sometimes, the LLC operating agreement is required to transact business. Banks may require the LLC operating agreement for funding. Governmental organizations may need an LLC operating agreement as part of licensing, permitting or certification requirements. If the LLC seeks funding from investors, then investors may want to review (and possibly negotiate) the terms of the LLC operating agreement so they can understand or establish their rights, duties and responsibilities before making an investment.
About the Author:
Tri Nguyen has served as general counsel and company lawyer to businesses, executives, startups and entrepreneurs for over 18 years. He particularly enjoys helping companies grow and achieve their strategic plan, and believes that every business needs a Chief Legal Advisor. He can be reached at www.trilawoffice.com.