Texas LLC Advantages and Disadvantages
Texas, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Texas may also choose to operate in the form of an LLC. LLCs are very attractive entities for many small businesses, in that they offer much the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes, and in most states (but not in Texas).
An Texas LLC
offers business entrepreneurs the form of corporate organization that provides perhaps the most flexibility to you. An LLC formation, like the alternative corporate forms of organization like a limited partnership
or a Subchapter S Corporation,
are generally prime candidates for a business juststarting. The state of Texas gives public support to an Texas LLC.
Should I form a Texas LLC?
An Texas LLC satisfies a necessary condition of your business planning developement in that it meets the requirement that you establish a legal form of organization in order to gain the statutory benefits and protection available in Texas to your LLC. Your Texas LLC establishes a legal presence within the state, which you can use either as a platform for in-state operations or by registering your Texas LLC via your agent's physical address in order to meet the purely statutory requirement for tax and filing purposes absent an in state operation.
Advantages and Disadvantages of a Texas LLC
A limited liability company (LLC) has many advantages as a form of business entity:
- Pass through taxation - under the default tax classification, profits taxed at the member level, not at the LLC level - no double taxation.
- Limited liability - the members (owners) of the LLC, are protected from liability for acts and debts of the LLC.
- An LLC can elect to be taxed as a sole proprietor, partnership, S-corp or corporation, providing the correct option for your business.
- Can be set up with just one natural person involved or, in some states, one owner which may be an business itself.
- No requirement of an annual general meeting for shareholders (in some states, such as Tennessee and Minnesota, this statement is not correct).
- No loss of power to a board of directors (although an operating agreement may provide for centralization of management power in a board).
- LLCs are enduring legal business entities, with lives that extend beyond the illness or even death of their owners, thus avoiding problematic business termination or sole proprietor death.
- Much less administrative work and recordkeeping.
- Membership interests of LLCs can be assigned, and the economic benefits of those interests can be separated and assigned, providing the assignee with the economic benefits of distributions of profits/losses (like a partnership), without transferring the title to the membership interest.
- Earnings of most members of an LLC are generally subject to self-employment tax. By contrast, earnings of an S corporation, after paying a salary to the shareholders working in the LLC, can be passed through as distributions of profits and are not subject to self-employment taxes.
- Since an LLC is considered a partnership for Federal income tax purposes, if 50% or more of the capital and profit interests are sold or exchanged within a 12-month period, the LLC will terminate for federal tax purposes.
- If more than 35% of losses can be allocated to nonmanagers, the LLC may lose its ability to use the cash method of accounting.
- An LLC which is treated as a partnership cannot take advantage of incentive stock options, engage in tax-free reorganizations, or issue Section 1244 stock.
- There is a lack of uniformity among LLC statutes. Businesses that operate in more than one state may not receive consistent treatment.
- In order to be treated as a partnership, an LLC must have at least two members. An S corp can have one shareholder. Although all states allow single member LLCs, the business is not permitted to elect partnership classification for federal tax purposes. The business files Schedule C as a sole proprietor unless it elects to file as a corporation.
- Some states do not tax partnerships but do tax LLCs.
- Minority discounts for estate planning purposes may be lower in a limited liability company than a corporation. Since LLCs are easier to dissolve, there is greater access to the business assets. Some experts believe that LLC discounts may only be 15% compared to 25% to 40% for a closely-held corporation.
- Conversion of an existing business to LLC status could result in tax recognition on appreciated assets
By Texas and other state law in order to proceed with forming a llc, you need to prepare a written abstract detailing your llc purpose, the names of your initial Texas LLC members, the name and address of your Texas registered agent, the details of which will be introduced into the body of your LLC operating agreement and related Texas LLC formation documents assembled for application to the state of Texas.
Texas' 2012 Business Tax Climate Ranks 9th
Texas ranks 9th nationally in the Tax State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property.
Tax Freedom Day Arrives on April 7 in Texas
Tax Freedom Day is the day when Americans finally have earned enough money to pay off their total tax bill for the year. In 2011, Texas taxpayers work until April 7 to pay their total tax bill, ranking it 25th highest in the nation. That's 5 days before national Tax Freedom Day (April 12).
Texas' State and Local Tax Burden Among Nation's Lowest
Texas' state and local tax burden is currently estimated at 7.9% of income (45th nationally), below the national average of 9.8%. Compared to the 1977 data, Texas had a tax burden of 7.9% (48th nationally), remaining relatively constant. Currently Texas taxpayers pay $3,197 per capita in state and local taxes.
Texas Levies No Personal Income Taxes
Texas levies no individual income taxes, joining six other states with the same policy.
Texas Levies a Gross Receipts Tax
Texas, in addition to collecting no personal income taxes, collects no corporate income taxes. However, the state recently instituted a gross receipts tax called the Texas Margins tax. It went into effect January 1, 2007. Texas joins Washington, Delaware, Michigan and Ohio as the only states that levy an economy-wide gross receipts tax.
Texas Sales and Excise Taxes
Texas levies a 6.25% general sales or use tax on consumers, slightly above the national median of 5.85%. In 2007 combined state and local general and selective sales tax collections were $1,624 per person, which ranks 14th highest nationally. Texas' gasoline tax stands at 20 cents per gallon, ranking 36th highest nationally. Texas' cigarette tax stands at $1.41 per pack of twenty and ranks 21st highest nationally. The sales tax was adopted in 1961, the gasoline tax in 1923 and the cigarette tax in 1931. 50-state table of sales, cigarette, gas, beer, wine, and spirits tax rates 50-State Table of State and Local General and Selective Sales Tax Collections Per Capita
Texas Property Taxes Comparatively High
Texas's local governments collected $1,404.76 per capita in property taxes during fiscal year 2006, which is the latest year the Census Bureau published state-by-state property tax collections. Texas is one of the 13 states that collect no state-level property taxes. Its per capita property tax collections in FY2006 rank 13th highest nationally.State property tax collections per capita by state
Federal Tax Burdens and Expenditures: Texas is a Donor State
Texas taxpayers receive less federal funding per dollar of federal taxes paid compared to the average state. Per dollar of Federal tax collected in 2005, Texas citizens received approximately $0.94 in the way of federal spending. This ranks the state 35th nationally and represents a slight decrease from 1995, when Texas received $0.95 per dollar of federal taxes paid (ranking them 37th nationally). Reference - Tax Foundation
| Texas LLC Advantages and Disadvantages