Presentation on theme: "CHOOSING THE TEXAS BUSINESS ENTITY John R. Williford Jackson Walker L.L.P. 1401 McKinney, Suite 1900 Houston, Texas 77010 Advanced Oil."— Presentation transcript:
CHOOSING THE TEXAS BUSINESS ENTITY John R. Williford jwilliford @jw.com Jackson Walker L.L.P. 1401 McKinney, Suite 1900 Houston, Texas 77010 Advanced Oil and Gas Short Course 2006 University of Houston Law Foundation
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ETHICAL CONSIDERATIONS BEFORE the Entity is formed: WHO do YOU represent ? WHO THINKS you are representing them ?
Beware of parts (b) and (c) of Texas Disciplinary Rule 1.06: (b)In...situations [other than litigation], and except to the extent permitted by paragraph (c), a lawyer shall not represent a person if the representation of that person: (1)involves a substantially related matter in which that person’s interests are materially and directly adverse to the interest to another client of the lawyer or the lawyer’s firm; or (2)reasonably appears to be or become adversely limited by the lawyer’s or law firm’s responsibilities to another client or to a third person or by the lawyer’s or law firm’s own interests.
(c) A lawyer may represent a client in the circumstances described in (b) if: (1) the lawyer reasonably believes the representation of each client will not be materially affected; and (2) each affected or potentially affected client consents to such representation after full disclosure of the existence, nature, implications and possible adverse consequences of the common representation and the advantages involved if any.
ENGAGEMENT LETTERS State that you are representing only one client; name the client (ie, the entity or one of the equity owners). Documentation may materially affect interests of other equity owners. You are not representing other equity owners or their spouses. They should seek separate counsel. Client, all other equity owners and all spouses should sign and deliver copy of letter acknowledging above.
STATE LAW ENTITIES 1.Proprietorship \ Division 2.Texas Corporation 3.Texas Ltd Partnership 4.Texas LLC 5.Texas LLP 6.Texas Gen Partnership or Joint Venture 7.Delaware Entities 8.Nevada Entities 9.Trusts 10.REIT’s 11.PC, PA, and other professional entities 12. Non-Profits 13.State Banks, Insurance Cos,S&L’s,Cooperatives
The “WHAT” Substantive codification of Texas statutes for profit and non-profit entities Texas Business Corporation Act Texas Non-Profit Corporation Act Texas Professional Corporation Act Texas Professional Association Act Texas Miscellaneous Corporation Laws Act Texas Limited Liability Company Act Corporations Texas Revised Limited Partnership Act Texas Revised Partnership Act Texas Real Estate Investment Trust Act Texas Uniform Unincorporated Non-Profit Associations Act Texas Cooperative Associations Act Partnerships
BOC STRUCTURE “Hub and Spoke” Title I is the “hub” - general provisions common to most forms of entities Remaining Titles are “spoke” - provisions specific to entity type Title 2 – Corporations Title 3 – LLCs Title 4 – Partnerships Title 5 – REITs Title 6 – Associations Title 7 – Professional Entities Title 8 – Miscellaneous/Transition Rules
Title I Definitions (cont’d) Any instrument or document required or permitted to be filed with the Texas SOS Filing Instrument Articles of Incorporation/Articles of Organization and Certificate of Limited Partnership ” Certificate of Formation Application for Qualification to do Business Application for Registration Articles of Amendment Certificate of Amendment Certificate of Dissolution Certificate of Termination
BASIC TEXAS BUSINESS ENTITIES AND FEDERAL / FRANCHISE TAXATION ALTERNATIVES TABLE Texas Law EntityCheck-the-BoxFederal TaxationTX Franchise Tax ProprietorshipNot ApplicableForm 1040, Schedule C or E None LLC \ single individual member Disregarded 1 Form 1040, Schedule C or E (Proprietorship) Yes LLC \ single entity memberDisregarded 1 Division of Member Entity Yes General Partnership or LLPPartnership 2 PartnershipNone General Partnership or LLPCorporationC or S Corp 3 None Limited PartnershipPartnership 2 PartnershipNone Limited PartnershipCorporationC or S Corp 3 None LLC \ multi-membersPartnership 2 PartnershipYes LLC \ multi-membersCorporationC or S Corp 3 Yes CorporationNot ApplicableC or S Corp 3 Yes 1 Unless a single member LLC affirmatively makes an election on Form 8832 to be taxed as a corporation, it defaults to being disregarded for federal tax purposes. Thus, where the single member of the LLC is an individual, the result is that the LLC is treated as a proprietorship for federal income tax purposes; where the single member of the LLC is an entity, the result is that the LLC is treated as if it were a division of the owning entity for federal income tax purposes. 2 Unless a partnership or multi-member LLC affirmatively makes an election on Form 8832 to be taxed as a corporation, it defaults to being taxed as a partnership for federal tax purposes. 3 To be taxed as an S Corp, the entity and all its equity owners must make a timely election on Form 2553 and meet several other requirements, generally having only citizen\resident individuals or estates as equity owners (with the exception of certain qualifying trusts and other holders), no more than 75 owners, and only one “class of stock.”
ItemC Corporation S Corp or Limited Liability Company* General Partner in General or Limited Partnership* Limited Partner in Limited Partnership* Entity Level Income100 Franchise Tax4.50 00 Taxable Income of Entity95.50 100 Fed. Income Tax (at 35%)33.43000 Income After Taxes62.0795.50100 Owner Level Distribution & Share of Income 62.0795.50100 Self-Employment Tax02.77#2.900 Taxable Income of Owner62.0794.11†98.55†100 Fed. Income Tax (at 39.6%)24.5837.2739.0339.60 Amount Received After Taxes 37.4955.4658.0760.40 * Assumes the entity is treated as a partnership for federal income tax purposes. # A non-managing member of an LLC may not be subject to the self-employment tax; a shareholder of an S-corporation is not subject to self-employment tax on actual or constructive dividends but would be subject to self-employment tax on compensation received. † One-half of the self-employment tax is deductible against the individual’s income.
EXAMPLE 1 COMMON OPERATING LIMITED PARTNERSHIP Individual Owners New Texas LLC (4.5% Franchise Tax) (Net franchise tax of.0045) New Texas Limited Partnership (No Franchise Tax) 100% Membership Interests 99% LP Interests 1% GP Interests
EXAMPLE 2 HOLDING COMPANY WITH SINGLE OPERATING L.P. Nevada LLC (No Franchise Tax) Texas LLC (4.5% Franchise Tax) (Net franchise tax of.0045) Owner Texas Limited Partnership (No Franchise Tax) 100% Membership Interest 99% LP Interests 1% GP Interest Owner
EXAMPLE 3 HOLDING COMPANY WITH DUAL OPERATING LP S New Nevada LLC (No Franchise Tax) Texas LLC 4.5% Franchise Tax (Net franchise tax of.0045) Owner Exploration and Production Texas Limited Partnership (No Franchise Tax) 100% 99% LP Texas LLC 4.5% Franchise Tax (Net franchise tax of.0045) Transportation & Marketing Texas Limited Partnership (No Franchise Tax) 100% 99% LP 1% GP Owner
Promoters Limited Partners Management L.P. 1% GP 99% LP Operations, L.P. 10% / 25% GP 90 / 75% LP Interest EXAMPLE 4 COMMON TWO-TIER LTD. PARTNERSHIP WITH GP PROMOTE
Are you using Entities 2006 or an earlier verson? Have you visited the Secretary of State website? www.sos.state.tx.us www.sos.state.tx.us Appendix A to the Paper—Entity Matrix Appendix B to the Paper—Tax Matrix Call the Help Desk