New business owners in Texas often form LLCs to start their company, but this process can be full of pitfalls and sometimes even the most careful of small business owners can make a mistake. When consulting with clients that have formed their own LLC, these are the most common mistakes that I see that can be easily fixed.
- Wrong Entity: Is An LLC Right For You?
A lot of people form LLCs because they are familiar with the term and not because it is the best entity for their business. A limited liability company is a great entity choice when it is the one that suits your business needs, but this is not always the case. An LLC has formal requirements, for instance, that may be less beneficial than something like a Partnership, where you can have a more fluid relationship with your partner and the business venture. A corporation may seem a little a daunting at first, and the easier LLC formation may sway your thinking, but sometimes a little work up front to form your Corp. can mean avoiding the headache of reincorporating later on. Lastly, a sole proprietorship may be fine for what you are doing, especially in the case of a single member LLC—Sole proprietorships are a great tool for entrepreneurs or small business owners without a lot of capital to start.
SOLUTION: Reincorporate the business with the Secretary of State, Wind up the LLC and start fresh with a new entity, or simply file a name change form. Whatever the case may be, it is usually a straightforward process to switch entities if we determine that is the solution to the client’s problem.
- No Operating Agreement
An operating agreement is NOT required by law in Texas. However, starting your business without one is not a very good idea and not the way that will be advised to you by an attorney. An operating agreement is a contract, and without one, you are entering into a business deal without a contract—doesn’t sound so good when you put it like that, does it? Having a custom drafted operating agreement for your LLC drafted by an experienced attorney will pay dividends later on in the management of your business.
SOLUTION: Draft an Operating Agreement for the LLC. Working with the existing Members and Managers, we will draft a new operating agreement that spells out the business operation plan.
- Too Many Members—Keep it Simple
Sometimes when forming businesses, people want to have others involved in the business and the immediate thought is to make them Members. While this can be tempting when forming your new LLC, you should consult with your attorney about how you want the LLC to be run. Are you looking for passive investor members who may not have a full say on the day to day running of the business, or are you looking for input from other Members who have a reliable business acumen? Both are right answers, but you need to consult with the attorney forming your LLC about what kind of structure to setup within your LLC and what that looks like from a membership standpoint.
SOLUTION: Amend the Operating Agreement to more accurately and specifically reflect the actual role of the Members and Managers in the operations of the company, and consult with the existing Members of the LLC to determine if they would like to be bought out of their ownership.
If you’ve started looking to form an LLC in Texas and think you want to speak to an attorney about your questions, LLC Formation Attorney Nate Gilbert can help guide you and your business in the right direction. Nate can help form your LLC online, for a flat fee, in a timely and efficient manner, setting you up for success in the years to come. If you would like to read more about LLCs in Texas, Click Here. If you would like to get in touch with Nate directly, Click Here