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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
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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 Walking Dead: Forfeitures and Involuntary Terminations of Filing Entities
Do either of these sound familiar? 1) Your client tells you she wants to terminate her entity and she has heard that if she just ignores the notices from the Comptroller’s officer to file the franchise tax report the state will terminate her company for her. Your client called the Secretary of State’s office, and they told her she needs to file documents with the Comptroller and Secretary of State. The client asks why she should go to all that trouble when the state will terminate the entity for her if she does nothing? or 2) The client’s existence was forfeited for failure to pay franchise taxes in 2011, but the company has continued to operate and has a substantial amount of real and personal property, including intangible property such as receivables. This situation comes to your attention when you filed suit for the company to collect on a promissory note executed in favor of the company in 2010 that became due in 2016. The maker of the note is arguing that the company cannot sue on the note and that the claim is barred because it was not brought within three years after the company’s existence was forfeited. Now that the company’s “forfeited existence” has come to your attention, you and the client have many questions. Can the company collect on the note? Where does the company stand with respect to its assets, rights, and liabilities?Does anyone in the company have any personal liability for liabilities incurred in the business? Can the company reinstate even though it is beyond the three-year post-termination survival period? What effect will a reinstatement have?
How Different Court Systems in Delaware and Texas Affect Choice of Entity Domicile Decisions
In choosing a State of incorporation, a sophisticated company with good lawyers will account for the possibility of internal-affairs litigation in the chartering State’s courts. Recognizing as much, Delaware trumpets the quality of its specialized business courts when marketing itself to potential corporate citizens. In counseling clients on where to incorporate, therefore, Texas lawyers should consider how business litigation unfolds in Texas and elsewhere. Stepping back a bit, Texas lawyers should also ask whether Texas can make itself a more attractive chartering destination by improving the efficiency and expertise with which its courts handle business litigation.
Diverse Mergers: How to Divide an Entity into Two or More Entities Under a Merger Authorized by the Texas Business Organizations Code
The common conception of a merger is the combination of two entities into one surviving entity. However, the Texas Business Organizations Code (the “TBOC”) provides that through the use of the merger provisions of the code, a Texas domestic entity (an organization formed under or the internal affairs of which are governed by the TBOC ) may be divided into two or more new domestic entities or other organizations or into a surviving domestic entity and one or more new domestic or foreign entities or noncode organizations. This division through use of the merger statutes is sometimes called a divisive merger or a divisional merger. These provisions remain unique to Texas, although Pennsylvania provides for a statutory division but does not deal with division in its merger statutes. Through an illustrative, fictitious case study, this paper will consider the possibilities presented by the Texas divisional merger provisions as a tool to accomplish client goals and will provide a checklist of steps required to accomplish a divisional merger of a Texas limited liability company or limited partnership (including presenting a form plan of merger). This paper will not examine the federal income tax implications of a divisional merger.
Choice of Entity and Acquisition Structure Decision Tree
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Considerations in Drafting Limited Liability Company Agreements and Limited Partnership 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.
Drafting Sensitive Issues in Company Agreements
NOTE: Limited Liability Company Agreements are highly customizable offering its Members great flexibility to agree to provisions for the economic terms and governance. This Example of a Company Agreement should not be considered a form. When drafting a Company Agreement, the drafter should draft provisions which are appropriate for the particular transaction. NOTE: Limited Liability Company Agreements often include provisions which address particular issues under the Federal tax laws and State tax laws. This Example of a Company Agreement does not include provisions designed to address Federal or State tax issues. When drafting a Company Agreement, please consult or have your client consult with appropriate tax advisors for the purpose of addressing any Federal or State tax issues that may arise from the investment or may impact the drafting of the Company Agreement.
Structuring Law Firm Organizations and Related Ethics Issues
This paper reviews the four principal forms of business entities used by Texas lawyers to organize themselves, along with eight informal sets of relationships that are being used in daily law practice to varying degrees. This paper is not intended as a complete analysis of choice of entity matters. There are ample materials elsewhere, indeed entire books, that consider the legal and tax implications of choosing one entity over another. The goal of the authors is to survey the four principal business entities and the eight informal relationships and highlight selected issues, and the liability and ethics implications that they present.
Choice of Entity - Federal Tax Reform Legislation Overview
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. The outline begins with a discussion of the classification of entities for federal tax purposes and, in particular, the check-the-box regulations. It then provides a summary of some of the principal tax considerations relating to sole proprietorships, C corporations, partnerships, limited liability companies and S corporations. This outline does not address the taxation of trusts and estates, regulated investment companies, real estate investment trusts, real estate mortgage investment conduits, cooperatives, exempt organizations or insurance companies.
Choosing the Correct Entity
Clients come to you with a sole proprietorship but you should never form one. Clients come to you with a general partnership that they have either intentionally formed, or formed as a matter of law. Both provide no tax advantage and no liability shield, and it is our responsibility to move them out of the sole proprietorship or general partnership into a better entity. LLPs seemed like a great idea for a few years, but I consider them obsolete and counterproductive. Limited Partnerships are excellent vehicles for things like oil and gas drilling or other areas where your client wants to raise money, there are numerous investors, and only one person (or one small group of people) are going to actually be involved in the operation of the business. For all other entities your options are a C Corp, an S Corp, or an LLC. A C Corp is an essential requirement to publicly trade the ownership interests or if you have a large group of investors who want a corporation. Usually you are forming either a Sub S Corp or an LLC depending upon the unique facts of your client’s proposed business, their management structure, the number of people who are going to invest, the tax treatment they want to receive, and the advice of their independent CPA. One of our jobs is to take the opaque, Mississippi mud filled, zero visibility ocean of law that the client is swimming in and simplify it to the clarity of the water of the Caribbean. It all comes down to liability shield, tax treatment, management structure, and potential expansion and enlargement of the investor pool.
Fiduciary Duties of Directors in M&A Transactions
There are several landmark cases which define the duties of directors in DE and TX companies, including the duties of obedience, loyalty and care. Within the last five years, there have been a number of cases providing additional color.
Development of a Family Business Objectives Statement (AKA Family Business Mission Statement)
This paper contains a checklist of questions to ask of clients forming a family business.
Setting the Stage for Planning with the Family Business Owner | Choosing a Business Entity in Today's Business World
Taxes, liability protection, and other considerations have caused the choice of business entity by a new business owner, or an existing owner, to be an issue requiring competent advice from the business owner’s lawyer and accountant. Only after understanding all of the goals and plans of the business owner, both short term and long term, can a business owner’s advisors recommend to him or her the proper entity for their business operations. This outline is intended to raise the issues for a business owner to consider – not to provide answers. Only after a thorough analysis and review can the answers be provided by the business owner’s advisors.
Tough Discussions for a Family Owned Business Tax Free Division - Family Business Succession Planning
Family business succession planning is the cornerstone of any successful family business owner’s estate plan. As is often the case, however, planning for the intergenerational transfer of ownership and control of the business becomes complicated by the intra-generational conflicts of the business owner’s heirs. These conflicts among members of the second generation, if severe enough, can render the effective management of the business by the second generation virtually impossible, leading to a loss in productivity and profitability with a resulting decline in the enterprise’s value.
General Corporate Formation
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M&A Transactions: How to Negotiate Key Provisions in a Private Company Acquisition Agreement
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Texas Law on Dissolution of Entities
In the current market conditions of the energy markets that are significant contributors to the economy of this state, the next few years will have to necessarily focus on “downside” issues of entity formation – namely insolvency and dissolution. This paper will focus on the statutory and case law in Texas concerning the dissolution of entities, in particular the “filing entities,” corporations, LLCs and limited partnerships. I will start with the statutory rules and procedures, to review the rules and procedures for the process, along with a discussion of what is “not there” in the statute (especially in comparison to other states), and follow with the glosses to the statutory rules that have been added by case law. At the end, I hope you will have an excellent technical grasp of the process of dissolving an entity.
Formation and Governance of LLC's An Annotated Company Agreement
An Annotated Company Agreement (Short Form)