Prospective business owners who plan to form their business in Texas may consider whether to form a corporation or organize a limited liability company, or LLC, in that state. Laws with regard to business formation vary from state to state. In Texas, corporations and LLCs have specific differences with regard to management, operations, owner liability and taxation.
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With an LLC, the owners, called members, have the flexibility to choose their management structure. The owners can themselves manage the company, called member-managed, or use other non-owner managers, called manager-managed. On the other hand, a Texas corporation has a board of directors that's responsible for managing the corporation, and can choose specific officers to manage the day-to-day operations of the corporation. A corporation's shareholders -- equivalent to LLC members -- have a passive role in which they only vote on issues that substantially affect the corporation, like a merger with another corporation or an amendment to the corporation’s bylaws.
Another significant difference between Texas corporations and LLCs is how the respective businesses operate. An LLC, again, has flexibility in this arena. Texas law does not require LLC members or managers to adhere to rigid corporate formalities. No requirement exists for managers or members to record minutes at meetings, for example, and Texas law encourages but does not require the execution of an operating agreement which functions similarly to corporate bylaws. However, corporations, under Texas law, must follow rigid corporate formalities, such as maintaining written minutes at all meetings involving shareholders and directors, and maintaining records of all books and accounts.
Texas corporations and LLCs do have limited liability in common. In both business entities, the members or shareholders are protected by what the law calls the “corporate veil” that generally shields owners from personal liability for the actions of the business. In addition, both a corporation and an LLC are considered separate legal entities and can acquire debts in their own name. Therefore, the owners are not usually held liable for the debts of the business. However, Texas courts can “pierce" the corporate veil of both corporations and LLCs in specific cases of fraud or misrepresentation by the owners.
LLC members can elect how they want to get taxed because the IRS does not have a specific tax classification for LLCs. LLCs can choose partnership taxation, where the losses and profits “flow through” to the individual members, or elect to get taxed as a corporation. Most LLCs, however, typically elect partnership taxation because getting taxed like a corporation involves what critics call “double taxation,” where the corporation itself gets taxed on any profits and the shareholders also get taxed from any profit they receive from the corporation.