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Model Company Agreements for Closely Held LLCs
Records maintained by the Texas Secretary of State indicate that the limited liability company has become the entity of choice among Texas organizations. The office of the Texas Secretary of State reports that of the 374,301 certificates of formation filed for domestic for-profit entities in 2024, 348,753 (or approximately 93%) were limited liability companies, and of the 391,934 certificates of formation filed for domestic for-profit entities in 2023, 365,417 (or approximately 93%) were limited liability companies. It is often stated that one of the benefits of organizing an entity as a limited liability company is that this form of entity offers the owners and governing authority of the entity the flexibility to agree to provisions for the economic terms and governance that are more flexible than available with respect to a corporation. This is true, and indeed limited liability companies are sometimes used to create highly complex structures with multiple classes of ownership interests and highly customized provisions regarding management and governance of the entity, including complicated provisions for voting and management succession. However, given the large number of entities now being created as limited liability companies in Texas and other states, it is likely that many of these new entities are not entities with complex structures with multiple classes of ownership and complex bureaucracies for governance. Statistics compiled by the Internal Revenue Service show that for the tax year 2021 (the most recent year for which statistics are currently available), approximately 68% of the S corporation returns are for single-shareholder S corporations and approximately 24% have only two shareholders. The Internal Revenue Service does not publish similar statistics for limited liability companies, and single-member limited liability companies are typically disregarded entities that do not file tax returns. But if one assumes that most limited liability companies are closely held entities, then by analogy, it is likely that a large portion of limited liability companies have one or two owners. Therefore, it is much more likely that practitioners will find themselves needing to draft simple limited liability company agreements suitable for entities with one or two or a very few owners, rather than more complex documents. The purpose of this paper is to present and discuss models for governing agreements for limited liability companies when a simple structure is needed.
Model Company Agreements for Closely Held LLCs
It is often stated that one of the benefits of organizing an entity as a limited liability company is that this form of entity offers the owners and governing authority of the entity the flexibility to agree to provisions for the economic terms and governance that are more flexible than available with respect to a corporation. This is true, and indeed limited liability companies are sometimes used to create highly complex structures with multiple classes of ownership interests and highly customized provisions regarding management and governance of the entity, including complicated provisions for voting and management succession. However, given the large number of entities now being created as limited liability companies in Texas and other states, it is likely that many of these new entities are not entities with complex structures with multiple classes of ownership and complex bureaucracies for governance. Statistics compiled by the Internal Revenue Service show that for the tax year 2020 (the most recent year for which statistics are currently available), approximately 67% of the S corporation returns are for single-shareholder S corporations and approximately 24% have only two shareholders. The Internal Revenue Service does not publish similar statistics for limited liability companies, and single-member limited liability companies are typically disregarded entities that do not file tax returns. But if one assumes that most limited liability companies are closely held entities, then by analogy, it is likely that a large portion of limited liability companies have one or two owners. Therefore, it is much more likely that practitioners will find themselves needing to draft simple limited liability company agreements suitable for entities with one or two or a very few owners, rather than more complex documents.The purpose of this paper is to present and discuss models for governing agreements for limited liability companies when a simple structure is needed.
Appendix A of 2024 Model Company Agreements for Closely Held LLCs
Model Company Agreement for Manager-Managed, Multi-Member Limited Liability Company. This Model Agreement is Appendix A to an article by Cliff Ernst and Elizabeth S. Miller entitled Model Company Agreements for Closely Held LLCs (the “Accompanying Article”). This Model Agreement should not be considered a form to be completed by filling in the blanks. Drafters should be certain that any agreement used by them is appropriate for the particular transaction. This Model Agreement should be read together with the Accompanying Article, including the various references to the Accompanying Article throughout this Model Agreement.
Choice of Entities
These are the slides for the presentation
Jurisdiction and Venue in the New Texas Business Court: Practice Pointers for Drafting Business Agreements and Organizational Documents
Every year businesses organized in, having a presence or principal office in, or otherwise actively engaging in business in, the great state of Texas enter into hundreds of thousands of written contracts to govern their business arrangements (“Texas contracts”). Many of these Texas contracts include provisions expressing the parties’ agreements regarding the state, or subdivision of a state, in whose courts any litigation arising in connection with the contract will be conducted (choice of forum) and the specific county, city or court within that forum in which litigation arising in connection with the contract is to be conducted (choice of venue). Those agreements have been formed based upon the parties’ understanding of the laws of Texas and other leading commercial states governing the subject matter jurisdiction and geographic jurisdiction of their courts as established by statute and judicial decision.
Forming a New Business
The purpose of this article and the accompanying presentation by the authors is to present a high-level overview of legal considerations involved in counseling clients forming a new business. In an attempt to be clear and truly fundamental, we have assumed that the reader or listener has little or no prior knowledge of the laws in this area. The topics covered consist of a description of types of entities, ethical considerations, fundamental tax considerations,choice of jurisdiction, securities laws and choice of entity. Each of these topics could be the subject of a longer, in-depth article or a whole program and indeed whole books and whole programs have been written and sponsored on almost all of these topics. It is our hope that these materials will provide a useful introduction and we have attempted to include footnotes with references to more in-depth materials for the practitioner wishing to take a deeper dive. At the end of the article, we have provided lists of documents a lawyer would need to prepare to form a general partnership,a for-profit corporation, a limited partnership and a limited liability company under Texas law. While it is not practical to provide examples for each of these documents, because some of these documents are highly dependent upon the business terms agreed to by the parties, we have provided models and resources where we felt it appropriate.
Common Pitfalls in Drafting LLC and LP Agreements
Given their structural flexibility and tax advantages, it is little wonder that limited liability companies (“LLCs”) and limited partnerships (“LPs”) have eclipsed the corporation as the primary entities of choice for new businesses in Texas. LLCs and LPs offer a myriad of almost limitless options on ownership structure, company governance and almost all other aspects related to the operation of the entity. However, as it is often said, with much freedom comes much responsibility. A practitioner who puts together a limited liability company (“LLC agreement”) or an agreement of limited partnership (“LP agreement”) for a client should be well versed in the overall structure of these entities and the variables that should be considered in drafting the operative agreement. Both LLCs and LPs are so-called “creatures of contract” in that the Texas Business Organizations Code (“TBOC”) chapters on LLCs and LPs give great deference to the LLC agreement or LP agreement to define the rights and obligations of the members and partners, respectively, of these entities. This paper analyzes select provisions of the LLC agreements and LP agreements that practitioners are likely to have to address in drafting an agreement for a client.
How Do You Incorporate an Entirely Digital Corporation?
This paper describes what attorneys need to know about incorporating companies that rely heavily – if not exclusively – on blockchains. Because technology is central to this topic, references will be provided for a brief introduction to: cryptocurrencies, blockchains (which is the underlying technology to cryptocurrencies), smart contracts, and distributed autonomous organizations. Finally, this paper will discuss the peculiar requirements for incorporating a blockchain-based company.
The Series LLC: A New Planning Tool
While the Series LLC is a new vehicle that has some unanswered questions, it is a solution to problems of management of assets that have common, but not identical features. The statute makes very clear the ability to deal with assets and the transactions surrounding assets that may be held by an entity. If you focus on the feature of asset management and commonality, but not identity, the confusion caused by the flexibility permitted in the TBOC provisions falls away, and you are able to focus on fact patterns that are truly facilitated by this structure. The single most ―common‖ commonality is management, but the commonality may be the nature of the asset (such as the accumulation of one large asset from divided parts) or the development of an asset over time, where ownership may shift. We would like to encourage you to join the ranks of the optimists and urge you to study and think about this new vehicle. Consider embracing the good points of a Series LLC in transactions appropriate for the solutions that it provides.
What are Series LLCs? An Overview of Drafting and Operational Considerations
This paper is to discuss what the state of law is on series under the Texas statute, with some consideration of the other jurisdiction and practice pointers for resolving the issues presented by the statutory formulation for the Series LLC.
Acquisitions of Partnerships and LLCs
These are the presentation slides.
Acquisition Structure Decision Tree
Buying or selling a business in Texas, including the purchase of a division or a subsidiary, revolves around a purchase agreement between the buyer and the selling entity and sometimes its owners. Purchases of assets are characterized by the acquisition by the buyer of specified assets from an entity, which may or may not represent all or substantially all of its assets, and the assumption by the buyer of specified liabilities of the seller, which typically do not represent all of the liabilities of the seller. When the parties choose to structure an acquisition as an asset purchase, there are unique drafting and negotiating issues regarding the specification of which assets and liabilities are transferred to the buyer, as well as the representations, closing conditions, indemnification and other provisions essential to memorializing the bargain reached by the parties. There are also statutory (e.g., bulk sales and fraudulent transfer statutes) and common law issues (e.g., de facto merger and other successor liability theories) unique to asset purchase transactions that could result in an asset purchaser being held liable for liabilities of the seller which it did not agree to assume.
Choice of Entity and Acquisition Structure Decision Tree
These are the presentation slides.
Choice of Entity How to Choose What Entity or Acquisition to Use
This outline discusses certain relevant federal income and Texas state tax considerations relating to the selection of an entity for engaging in business or investment.
Private Target Mergers & Acquistion Deal Study Points
These are the presentation slides.
They're Real and They're Spectacular: The 2009 Private M&A Target Deal Points
Copy of an article from the M&A Lawyer magazine.
Merger & Acquisitions
Buying or selling a business in Texas, including the purchase of a division or a subsidiary, revolves around a purchase agreement between the buyer and the selling entity and sometimes its owners. Purchases of assets are characterized by the acquisition by the buyer of specified assets from an entity, which may or may not represent all or substantially all of its assets, and the assumption by the buyer of specified liabilities of the seller, which typically do not represent all of the liabilities of the seller. When the parties choose to structure an acquisition as an asset purchase, there are unique drafting and negotiating issues regarding the specification of which assets and liabilities are transferred to the buyer, as well as the representations, closing conditions, indemnification and other provisions essential to memorializing the bargain reached by the parties. There are also statutory (e.g., bulk sales and fraudulent transfer statutes) and common law issues (e.g., de facto merger and other successor liability theories) unique to asset purchase transactions that could result in an asset purchaser being held liable for liabilities of the seller which it did not agree to assume.
Federal Income Tax Effect of Corporate Transactions
This is an outline of the major sub-topics involving federal taxation of business in the purchase or sale of business entities.
Raising Capital and Selling a Company During and After the Great Recession
Approximately three years ago the American economy entered into the worst economic downturn since the Great Depression. Only now are we beginning to get a feel for the magnitude of this most recent recession, sometimes referred to by economists and commentators as “the Great Recession.” Traditionally, economic downturns have had the greatest impact on those who are most susceptible to economic distress: the economically disenfranchised. However, the Great Recession, though affecting almost everyone, has been most disruptive to those who were previously the most protected: the wealthy, the privileged, and the gainfully employed.1 Corporations have also felt the impact of the Great Recession. The Federal Reserve’s statistics show that 86% of all industries have cut back production since November of 2007, the most widespread reduction in the 42 years the Fed has tracked this figure. Likewise, recent economic events have had a significant adverse impact on the ability of companies, particularly smaller and emerging growth companies, to raise capital. The Great Recession has also resulted in a significant decline in activity in mergers and acquisitions (“M&A”). From 2007 until 2008, M&A activity declined by 21%. From 2008 until 2009, M&A activity declined an additional 53%.2 There was a brief uptick in global M&A activity toward the end of 2009, but unfortunately the gains were short lived as M&A activity began to experience a “double-dip” decline at the beginning of 2010.
Operational and Transitional Issues for LLCs Or Tax Topics Business Lawyers Can Master
Effectively representing clients in the formation, operation and termination of their LLCs requires both a good working knowledge of state law principles and federal taxation principles. Routine issues of formation, operation and dissolution all have federal income tax effects that can be mastered in their basic format by all general business lawyers. The purpose of this paper is to discuss and link the state and federal law issues that commonly arise in the one hour conference all ―general‖ practitioners have with their clients, and to permit that generalist to more effectively deal with a tax specialist.
Acquisitions of Entities in Texas
Selected asset purchase agreement provisions are provided.
Choice of Entity Alternatives
In the 81st Session of the Texas Legislature (the “2009 Legislative Session”), which convened on January 13, 2009 and adjourned sine die June 1, 2009, changes were made to the Texas statutes that govern and tax business entities. These changes affected the following five business entity forms: Corporation; General Partnership; Limited Partnership; Limited Liability Partnership (“LLP”); and Limited Liability Company (“LLC”). These changes may affect the form of business entity most advantageous in a particular situation. In most situations, the choice of entity focus will be on how the entity and its owners will be taxed and the extent to which the entity will shield the owners of the business from liabilities arising out of its activities. Appendix A at the back of this paper is an Entity Comparison Chart that compares key characteristics of the available Texas business entities, and Appendix B compares the tax attributes of the respective entities.
Corporation, Partnership (General, Limited and LLP) and Limited Liability Company Acquisitions Under Texas Business Organizations Code
The Texas Business Organizations Code (the "TBOC" or the "Code") is a substantive codification of the prior Texas statutes governing non-profit and for-profit, private-sector entities, which, for the most part were repealed effective as of January 1, 2010. These statutes consisted of the Texas Business Corporation Act ("TBCA"), Texas Miscellaneous Corporation Laws Act ("TMCLA"), Texas Limited Liability Company Act ("TLLCA"), Texas Revised Limited Partnership Act ("TRLPA"), Texas Revised Partnership Act ("TRPA"), Texas Non-Profit Corporation Act ("TNPCA"), Texas Real Estate Investment Trust Act ("TREITA"), Texas Uniform Unincorporated Nonprofit Associations Act ("TUUNAA"), Texas Professional Corporation Act ("TPCA"), Texas Professional Associations Act ("TPAA"), Cooperative Associations Act ("CAA") and other existing provisions of Texas statutes governing private entities.
Review of Entity Formation and Governing Documents
The process of determining the best entity for a client's purpose is often daunting. The legal advisor is challenged to determine the many needs of the client and make a recommendation which strikes the correct balance of each of these many needs. As a part of this process the client and legal advisor will generally consider the impact the form of entity will have on: (i) the formation of the entity; (ii) the initial and future capital needs of the business; (iii) the method of sharing profits and losses among the owners of the business, including the personal exposure to risk of loss (iv) the management structure of the business; (v) taxation of the business, and (vi) the exit plan or back door for the various owners of the business when circumstances dictate that they can no longer participate in the business.
Shareholder Agreements, Buy/Sell Agreements and Voting Trusts
This outline analyzes the use of shareholder agreements and voting trusts in connection with a startup or venture capital funded company. Shareholder agreements and voting trusts are contractual control mechanisms that are designed to address various issues, including: (i) restrictions on the transfer of equity ownership, (ii) rights of first refusal and (iii) buy-sell provisions.