Why Are LLCs So Popular?

Limited Liability Companies, also known as LLCs, have become a very popular form of business entity in Texas for several reasons.

One reason is that a single member, member managed LLC is very easy for tax purposes.  Unless you select otherwise, it is taxed as a disregarded entity, so taxes are paid just like you were a sole proprietor.  The business profit is counted as your own personal income, and you just prepare a personal tax return as usual.  (If there is more than one member, you will need to prepare a partnership tax return, and the income shown on the Schedule K will be listed as income on your personal tax return. Again, unless you select otherwise, it is treated as a pass through entity, and the profits are passed through to the members, just like a partnership.)  While you do need to file a margin tax return with the state, most small businesses only need to file a no tax due return.

Another big benefit of an LLC is that it protects its members from personal liability for business debt.  That means that if you have not personally guaranteed a debt, such as for an office lease, only the assets of the LLC will be liable to pay the business debts, and not the individual members.  (This protection will not protect or shield a member from their own personal malpractice, however.)

The LLC form is also beneficial in that it generally will protect the LLC assets from the personal debts of its members.  If someone took a personal judgment against one of the members of the LLC, the judgment creditor could not just take the members LLC interest and take control of the business.  Judgment creditors are only entitled to take an assignment interest in the LLC, which means that if any money is paid out, they can hold their hand out to get some, but they have no right of management and control, and cannot force a distribution.  It is only an economic interest they can hold.

Another reason that a single member, member managed LLC is so popular is that it is the easiest business form to maintain.  It does not require the same formality of conducting annual meetings and maintaining annual minutes, like a corporation requires.  While it is not technically required, our office always recommends that minutes be maintained, even if they are rather informal.  By maintaining minutes, it shows that you recognize that the entity is a separate “person” from you under state law.

If you would like to see a comparison between LLCs and corporations, click here.

If you have questions about LLC’s, please give us a call or email.

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