Limited Liability Company (classified as a partnership for federal income tax purposes): Choice of Entity Considerations for a Start-up Company

LIMITED

LIABILITY -COMPANY

Choice of Entity Considerations

for a Start-Up Company

TABLE OF CONTENTS

Page Number

Table of Authorities 3

I .History of the LLC in Texas 4

II .Ethic Considerations from the Attorney 's Perspective 6

III .Non-Tax Business Considerations 9

IV .Federal Tax Issues 13

V .Essentials of a Texas LLC Agreement 21

VI .Texas Margin Tax 24

VII .Conclusion 27

Endnotes 28 TABLE OF AUTHORITIES

LAWS AND STATUTES

Texas Limited Liability Company Act Tex . Rev . Civ . Stat . Ann . Article

1528n 4 , 5

Texas Business Organization Code 5 , 9 , 10 , 11 , 12 , 21 , 22 , 23

Texas Disciplinary Rules of Professional Conduct Tex . Disciplinary R Prof 'l . Conduct 6 , 7 , 8 , 9

Internal Revenue Code 15 , 16 , 17 , 18 , 19 , 20 , 21 , 23

Texas Tax Code Tex . Tax Code Ann . 24

House Bill No . 3 24 , 25 , 26

Texas administrative code 24

REGULATIONS

IRS treasury regulations 13

Former treasury regulations 15

revenue proclamation 95-10 15

revenue ruling 93-6 15

PUBLICATIONS

Carol R . Goforth . The Rise of the Limited Liability Company : Evidence of A Race Between the States , But Heading Where . 45 Syracuse L . Rev 1193 (1995 ) 4

Marybeth Bosko . The Best of Both Worlds : The Limited Liability Company 54 OHIO ST . L .J . 1752 (1993 ) 4

Michael C . Riddle et al . Choice of Business Entity in Texas . 4 Hous Bus Tax L .J . 292 (2004 , at 306-307 . 10 , 12 , 17

Steven C . Bahls . Application of Corporate Common Law Doctrines to Limited Liability Companies . 55 Mont . L . Rev . 43 (1994 ) 10

Jeffrey A . Maine . Linking Limited Liability and Entity Taxation : A Critique of the ALI Reporters Study on the Taxation of Private Business Enterprises . 62 U . Pitt . L . Rev . 223 (2000 ) 13 , 14

James and Moore , The New Texas Franchise Tax , Tex . B .J (Nov . 1991 ) 24 I .HISTORY OF THE LLC IN TEXAS

A .TEXAS LIMITED LIABILITY ACT (TLLCA

A limited liability company (LLC ) is a hybrid entity , combining the best features of corporation with that of a partnership . Typically , it provides businesses with the freedom to intervene in management affairs as in a partnership , while providing insulation from personal liability as with a stockholder of a corporation . The limited liability phenomenon began with Wyoming in 1977 , in response to a need for a business association form bearing a lower tax burden than the corporate form , yet providing for more protection from liability than a limited partnership ' and at present , all states have LLC legislation

Texas was the seventh state to permit the formation of limited liability companies and enact LLC legislation , resulting from a desire to make the state more economically competitive with others , and more specifically from efforts to be competitive with Delaware in terms of business legislation . On June 16 , 1991 , the Texas LLC Act was d without signature , following the IRS ruling on the Wyoming statute that LLCs would be taxed as partnerships , and thus motivating several attorneys to make a draft bill . To this day , the LLC medium of business remains popular in the...