Setting Up an LLC – Why Do I Need an Attorney?

Entrepreneurs have many choices when setting up an LLC, including online services offering entity formation for a low package price. While there is no harm in being judicious about business expenses, opting for rock-bottom prices or five-minute filings that may not start your business on a solid foundation can cost you more time and money in the long run.

“The biggest issue we see with do-it-yourself solutions is that business owners end up with a template that doesn’t address all the issues,” advises Hendershot Cowart’s Managing Shareholder Trey Hendershot. “It’s a lot more expensive to clean up that mess later – and often in the middle of a dispute – than to ask the right questions from the start.”

Mistakes in LLC formations that can lead to legal issues and disputes down the road include:

• Unenforceable employment agreements;
• Vague or nonexistent operating agreements;
• Unprotected trade secrets; 
• Failure to report beneficial owner information with the Financial Crimes Enforcement Network (FinCEN), as required by law for most entities since 2024; and 
• Failure to maintain a compliant registered agent.

Additionally, most advertised prices for online LLC services do not include the filing fees required by the Texas Secretary of State. As of May 15, 2024, the filing fee for a certificate of formation for a Texas entity is $300. There are additional state filing fees for an assumed name certificate or to register a Texas trademark. 

Why Work with a Texas Attorney to Form your LLC?

As attorneys who counsel clients in all matters of business formation, our team at Hendershot Cowart P.C. can help you avoid preventable legal issues and establish your LLC on sound legal footing.

“We work with our LLC clients to determine what they need and help them plan for future contingencies such as death, divorce, bankruptcy, change in status of the members, etc.,” Hendershot continues. “We have been doing this long enough to know which questions to ask to help our client get the proper operational documents in place to avoid many issues in the future.”

What Are the Advantages of an LLC?

Business owners of all types choose to form limited liability companies because they offer several benefits, including:

• Limited personal liability. An LLC limits personal liability because it is legally separate from its owners. An LLC is responsible for its own debts and obligations, and owners’ personal assets cannot be used to satisfy business debts.
• Fewer requirements, less paperwork. Corporations must adhere to formal requirements that do not always make sense for a smaller business, including requirements for recordkeeping, reporting, shareholder meetings, and fees to the state. LLCs do not have the same obligations for meetings or recordkeeping, and do not have to file annual reports in many states, including Texas.
• Flexible taxation. LLCs are classified by the IRS as partnerships or sole proprietorships, which means they can take advantage of pass-through taxation in which an LLC’s income and expenses pass through the owner’s personal tax returns. By contrast, traditional C corporations are taxed on income twice – at the corporate level and at the individual shareholder level.
• Owner and management flexibility. LLCs are not required to use a formal structure like corporations, which have a board of directors that oversees company policies, officers who handle day-to-day operations, and shareholders who must meet annually to elect directors and handle company business. This gives LLC owners greater flexibility in how they run their business. LLCs also have greater flexibility in profit sharing and are not required to distribute profits equally or in accordance with ownership percentages.

LLCs can be a great option for small business owners but realizing the full potential of an LLC requires that it be correctly established and that owners implement the necessary structures and agreements.

An attorney can help you understand the formalities you will need to follow to take advantage of an LLC’s benefits. For limited personal liability, this means keeping separate accounts and records, not using business property for personal use, having a certain company structure, and more.

Failing to implement these policies and adhere to the necessary formalities can greatly jeopardize the future financial health of your business and potentially allow creditors or plaintiffs in legal judgments to “pierce the corporate veil” and go after an owner’s personal assets.

Here are a few more ways an experienced attorney can set your LLC on the right path:

Complying with Texas LLC Requirements

In Texas, state law governs how LLCs are formed and requires certain paperwork to be filed with the Texas Secretary of State. Mistakes in paperwork and failures to meet requirements specific to your state’s procedures can cause unnecessary delays when getting your business off the ground.

An experienced attorney familiar with Texas law can help you address state-specific requirements related to the certificate of formation and other paperwork you will need to file with the Secretary of State.

An attorney can also assist with designating a registered agent who accepts legal notices, service of process, and communications from the Secretary of State for the company and addressing issues related to business name registration and assumed name certificates.

Does An LLC Need A Registered Agent In Texas?

LLCs in Texas are required to maintain a registered agent. Your registered agent is the person you have designated to accept legal process on your business's behalf. Although an owner of a business may serve as an entity’s registered agent, the entity may not serve as its own registered agent.

Here's why a good registered agent is important: If your business gets into a legal dispute, that registered agent is the person who gets served with the lawsuit and once your registered agent is served, the business is deemed served. If a registered agent gets served and doesn't forward that to you, that's not a defense to a default judgment or any other adverse court action. So make sure that person is reachable, reliable, and located in the state of Texas.

Hendershot Cowart P.C. serves as the registered agent for many of our LLC clients, helping ensure they do not miss or overlook important communications, including notice of lawsuits. This service is included with our LLC formation services. 

Avoiding Litigation with Sound and Enforceable Contracts

By drafting sound corporate governance documents, attorneys can help owners effectively manage risks and protect against disputes that lead to costly and time-consuming litigation.

Unlike a one-size-fits-all solution, an attorney can evaluate the specific issues associated with your business and help structure your organization in a way that works best for your specific needs and goals. Legal counsel can also be invaluable in drafting the essential documents, policies, and contracts that can help limit exposure to litigation, such as partnership agreements, shareholder agreements, employment contracts, and IP protections.

These agreements provide LLC owners with enforceable remedies should disputes arise, help prevent disputes from becoming bigger problems, and establish processes for dealing with unexpected events.

Developing an Operating Agreement that Sets your LLC on a Solid Foundation

Operating agreements set parameters on how the affairs of an LLC will be conducted and governed. Operating agreements can also address issues that commonly lead to disputes among owners when no specific agreement exists. Without an operating agreement, state law (which isn’t always favorable) will govern how your LLC is run and how disputes are resolved.

Experienced attorneys can help owners create operating agreements that cover a diverse range of issues, including those unique to the nature of the business and individuals involved. LLC operating agreements can address:

• The structure of a company and the rights and responsibilities – and limitations – of managers and officers.
• Membership requirements, member voting rights, and how owners share decision-making.
• The rights members have in sharing business assets, how and when members make contributions, and how an LLC distributes assets to members.
• If and how members can join after the execution of the operating agreement and the processes for member withdrawals, including how membership interests can be sold or transferred.
• The fiduciary duties members, managers, or officers owe the LLC or one another and their limitations.
• Options for buy-sell agreements and the conditions and procedures for addressing dissolution.

These high-conflict issues are common sources of disagreement among LLC owners, especially in the absence of agreements and clarity. Attorneys who can assess your business and your goals in real time can provide more insight on how to avoid disputes over material business events than an off-the-shelf solution.

Does Texas require an LLC operating agreement?

Texas does not require LLC owners to draft or execute an operating agreement. Without one in place, however, the LLC’s operation and governance are dictated by the broad provisions of state law which may not reflect the intentions of the business owners.

Comprehensive Counsel Now and in the Future

Once you establish an LLC and create a solid foundation for success, you’ll likely encounter issues where legal counsel is prudent – whether it’s a desire to grow a business and hire executives or the need to deal with a business divorce or partnership dispute.

Online services that handle entity formation fall short of providing robust counsel and, for many LLCs, hiring in-house counsel doesn’t make sense. An ongoing relationship with the right firm, however, can ensure you have access to lawyers who know your business and its legal history when you need it.

At Hendershot Cowart P.C., our attorneys take pride in creating durable relationships with our clients. We like to think of our firm as your legal counselor for the life of your business. Because we have the experience and resources to tackle even the most challenging issues, we’re trusted by clients across a range of industries and corporate structures. To speak with a lawyer about your business law needs, contact us today.