Economic Nexus

In 2018, the Supreme Court overruled the previous ruling that states can only require sellers to collect tax when they have a physical presence in the state. Now, states can require tax collection responsibilities on sellers who have an economic presence without a physical presence.

Many online retailers sell products all over the United States. Out of state sales without a physical presence can still trigger tax obligations in other states. Most states have economic nexus which is a threshold set by the state requiring the out of state seller to collect and remit sales tax. Economic nexus is triggered by reaching a certain amount of sales and/or number of sales transactions in another state.

If you reach any of the nexus thresholds, you must collect and remit sales tax in those states. If you do not reach the nexus threshold, you will collect and remit sales tax in the state your business is located in.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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Defer Taxes with a Drop and Swap on Your 1031 Property

When all the partners don’t agree on what to do with the proceeds from the sale of real property, executing a “drop and swap” allows real estate investors to “drop” real property ownership from the LLC to individual partners as tenants in common (TIC) prior to selling the real property. The “drop” to individual partners as TIC should take place prior to the sale, allowing as much time as possible for the property to be “held for business or investment purposes” by the individual tenants. As with all 1031 exchanges, there is no clear rule in the tax code about how long before a sale the property must be owned by the tenants in common.

When the property is sold (the “swap”), the proceeds are divided among the TIC. Each individual can then decide whether to cash out and pay taxes or reinvest into another investment property and continue to defer taxes. 

Revenue Ruling 77-337 and Revenue Ruling 75-292 provide examples of exchanges that were disqualified due to transfers which occurred immediately before or after an exchange from or to an entity controlled by the taxpayer. 

Partners will want to ensure that the partners not involved in the 1031 Exchange (those that want to cash out) truly drop their interests in the partnership. If not, the IRS may recharacterize their TIC interests to partnership interests. Refer to Rev. Proc. 2002-22 for minimum “drop and swap” criteria. 

Be aware of two questions on the Form 1065, Schedule B:

Question 13 asks 

…during the current or prior tax year, the partnership distributed any property received in a like-kind exchange or contributed such property to another entity (other than entities wholly-owned by the partnership throughout the tax year)

 

Question 14 asks

 

 “At any time during the tax year, did the partnership distribute to any partner a tenancy-in-common or other undivided interest in partnership property?

 

It is best to negotiate and take title as individuals rather than entities.

 

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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Active or Passive? That is the question…

Income falls into three buckets
  1. Active Income (wages, business where the taxpayer is materially participating, etc.)
  2. Passive Income
There are two kinds of passive activities.
1. Trade or business activities in which you don’t materially participate during the year
2. Rental activities, even if you do materially participate in them, unless you’re a real estate professional
 

3. Portfolio Income (royalties, capital gains, interest, qualified dividends, etc.)

pexels-leeloo-thefirst-8962453

How is Active Income is taxed? Ordinary tax rates plus self employment tax (SS and Medicare tax) of 15.3%.
 
For employees, SS and Medicare is automatically taken out of your paycheck and split 50/50 with employer. For someone who is self employed or active in a business, they must pay both halves of the SS and Medicare, known as self employment tax.
 
How is Passive Income taxed? Ordinary tax rates with no self employment tax. Subject to Net Investment Income Tax (NIIT) of 3.8% if your AGI is above the threshold of $250,000 for MFJ.
 
How is Portfolio Income taxed? Ordinary tax rates or preferential rates for LTCG and qualified dividends.
 
So this might seem that having passive income is better than active income. NOT NECESSARILY.
 
Losses: When you are an owner in a pass through entity (partnership, S Corp), you need to be careful with how you categorize your participation in the business because if the company is generating losses, you may not get to take them.
 
Passive Activity Losses (PALs): When a taxpayer has a loss from a passive activity, it can only offset passive income, NOT active income.
 
Example of passive investor and passive activity loss limitations:
Pete is an individual taxpayer who owns a 25% interest in an LLC. He is categorized as a limited partner and his 25% ownership interest is just an investment as he does not participate in the day-to-day managerial decisions of the business. This means that Pete is a passive partner. The LLC generated a $100,000 loss, $25,000 allocated to Pete on his Schedule K-1. Pete has a full time job where he makes a salary of $100,000.
 
It would appear that Pete can offset his $100,000 income from his W-2 with his $25,000 loss from his Schedule K-1, however, because the loss is passive and the income is active, Pete cannot deduct the $25,000 loss until he has passive income. Therefore, the loss rolls forward until the LLC generates income in a future year, or Pete has passive income from another income stream.
 
How do you qualify as material participation?
    1. You participated in the activity for more than 500 hours.
    2. Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
    3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
    4. The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities under Recharacterization of Passive Income, later.
    5. You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
    6. The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
    7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.
Rental Activities
Rental activities are always passive unless you are a “Real Estate Professional.” There is a special $25,000 allowance for a taxpayer who actively participates in a passive rental real estate activity. So you can deduct up to $25,000 of passive loss against active income if you are deemed to have “actively participated” in the rental real estate activity.
 
Rental-Property-2
 
Active participation- not the same as material participation. Active participation is a less stringent standard than material participation. Examples of active participation (management decisions, approving new tenants, deciding on rental terms, approving expenses, etc.).
 
**So basically any taxpayer can easily qualify as active participation as long as they are making high level decisions for the rental.
 
Real Estate Professional Status
 
You qualified as a real estate professional for the year if you met both of the following requirements.
 
  • More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.
  • You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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Accrual vs. Cash Basis

The two primary accounting methods are accrual and cash basis

The main difference between the two methods is the timing of when expenses and revenues are recognized. There are advantages and disadvantages to both methods, so depending on your company’s operations and goals, you can decide which method best aligns with your company’s needs and preferences.

Consult with a Certified Public Accountant or tax professional to ensure the appropriate accounting method is used.

Accrual Accounting

Under this method, revenue is recognized when a sale transaction occurs and expenses are recognized when the purchase of goods or services occur, regardless of whether any cash was received or dispersed.  

The Accrual method is more complex but provides a more accurate picture of a company’s financial position due to its recognition of payables and receivables. However, because some transactions are recorded before cash is actually received, a company’s revenue books will not be aligned with the current amount of cash in their bank account.

The Accrual method is most commonly used by publicly traded companies that are required to receive a financial audit and is accepted under the Generally Accepted Accounting Principles (GAAP).

One example of revenue recognition under the Accrual method: You work for a landscaping company, you mulched a lawn for a client and you invoice the client $200 on December 31. You will recognize revenue on December 31 because the service was performed that day, regardless of whether you received a form of payment from the client.

Cash Accounting

This method is known for its simplicity of keeping track of cash flow because revenue and expenses are accounted for only when cash is received or dispersed.

The Cash method gives you an accurate picture of the cash in your bank account today but does not account for payables or receivables; therefore, the risk of overstating the health of a company is present and does not provide an accurate representation of a company’s financial position. Typically, this method is most used for small businesses and sole proprietorships.

The Cash method is not acceptable under the Generally Accepted Accounting Principles (GAAP).

One example of a revenue recognition under the Cash method: Let’s use the same example from above. You work for a landscaping company, you mulched a lawn for a client, and you invoice the client $200 on December 31. You do not recognize revenue on December 31, because you have not received any form of payment. You will record revenue on the day you receive cash, a check, or a credit card payment from the client for your mulching services.

Why is it important to choose the correct accounting method?
  • It is useful to track your cash flow and understand the future of your company’s financial position
  • It is important for tax purposes in order to determine the accurate amount of annual taxes you will need to pay to the Internal Revenue Service (IRS)
  • It is important to ensure compliance of state and federal regulations. Some states have a preferred accounting method to be used by businesses
Can a company change its method of accounting?

Yes, but a tax return must be filed and approved by the Internal Revenue Service (IRS) before changing its accounting method. To make this legal change, Form 3115, Application for Change in Accounting Method, must be filed by the taxpayer.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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Filing 1099s in 2023 – Updates and New IRS Filing Portal

What is a 1099?

  • The IRS Forms 1099 are a series of forms used to report certain types of income that do not come from a direct employer in the form of wages, salaries, tips, etc. The most common is Form 1099-NEC (nonemployee compensation), frequently used by small business owners.
  • The primary purpose of these forms is to give nonemployees (contractors or subcontractors) a record of total annual payments they received and need to report during tax time. When paying a nonemployee, businesses do not withhold or pay any employer taxes on those payments. When tax time comes, each individual or business who has received a 1099 is required to report this income and pay any related taxes.

Businesses and Individuals Required to file Forms 1099

  • If a business pays $600 or more in compensation through the year to a contractor or other nonemployee, the business is required to send copies of Form 1099-NEC to the IRS and payees. This form is typically issued to individuals, sole proprietors, partnerships, interest payees, rent payees, and single member LLCs (businesses are not required to send a 1099-NEC to S and C corporations). However, all attorneys receive a 1099, even if they are an S or C corporation.
  • Refer to the IRS guidance here.

Due Date for Forms 1099

  • The due date for filing a copy of a 1099 with the IRS and providing a copy to your contractors and vendors is January 31 for most businesses. If the business is not filing Forms 1099-NEC, the due date to submit any other type of 1099 is February 28. If either of these dates is on a weekend, the deadline falls on the following Monday.

Information required to file a 1099

  • Have all contractors complete a Form W-9. This will request their full name, social security number, and address (if it is an individual) or their business name, EIN, and address (if it is a business).
  • A total of all payments made to the nonemployee (contractor) throughout the year.

Electronic Filing Update – New IRS Portal

  • The IRS is scheduled to launch a new internet filing portal in early January 2023. Under Section 2102 of the Taxpayer First Act, the IRS is developing an internet portal that will allow taxpayers to electronically file Forms 1099 after December 31, 2022. Reference part F of the IRS Instructions for additional information.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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  1. Active Income (wages, business where the taxpayer is materially participating, etc.)
  2. Passive Income
There are two kinds of passive activities.
1. Trade or business activities in which you don’t materially participate during the year
2. Rental activities, even if you do materially participate in them, unless you’re a real estate professional
 

3. Portfolio Income (royalties, capital gains, interest, qualified dividends, etc.)

pexels-leeloo-thefirst-8962453

How is Active Income is taxed? Ordinary tax rates plus self employment tax (SS and Medicare tax) of 15.3%.
 
For employees, SS and Medicare is automatically taken out of your paycheck and split 50/50 with employer. For someone who is self employed or active in a business, they must pay both halves of the SS and Medicare, known as self employment tax.
 
How is Passive Income taxed? Ordinary tax rates with no self employment tax. Subject to Net Investment Income Tax (NIIT) of 3.8% if your AGI is above the threshold of $250,000 for MFJ.
 
How is Portfolio Income taxed? Ordinary tax rates or preferential rates for LTCG and qualified dividends.
 
So this might seem that having passive income is better than active income. NOT NECESSARILY.
 
Losses: When you are an owner in a pass through entity (partnership, S Corp), you need to be careful with how you categorize your participation in the business because if the company is generating losses, you may not get to take them.
 
Passive Activity Losses (PALs): When a taxpayer has a loss from a passive activity, it can only offset passive income, NOT active income.
 
Example of passive investor and passive activity loss limitations:
Pete is an individual taxpayer who owns a 25% interest in an LLC. He is categorized as a limited partner and his 25% ownership interest is just an investment as he does not participate in the day-to-day managerial decisions of the business. This means that Pete is a passive partner. The LLC generated a $100,000 loss, $25,000 allocated to Pete on his Schedule K-1. Pete has a full time job where he makes a salary of $100,000.
 
It would appear that Pete can offset his $100,000 income from his W-2 with his $25,000 loss from his Schedule K-1, however, because the loss is passive and the income is active, Pete cannot deduct the $25,000 loss until he has passive income. Therefore, the loss rolls forward until the LLC generates income in a future year, or Pete has passive income from another income stream.
 
How do you qualify as material participation?
    1. You participated in the activity for more than 500 hours.
    2. Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
    3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
    4. The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities under Recharacterization of Passive Income, later.
    5. You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
    6. The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
    7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.
Rental Activities
Rental activities are always passive unless you are a “Real Estate Professional.” There is a special $25,000 allowance for a taxpayer who actively participates in a passive rental real estate activity. So you can deduct up to $25,000 of passive loss against active income if you are deemed to have “actively participated” in the rental real estate activity.
 
Rental-Property-2
 
Active participation- not the same as material participation. Active participation is a less stringent standard than material participation. Examples of active participation (management decisions, approving new tenants, deciding on rental terms, approving expenses, etc.).
 
**So basically any taxpayer can easily qualify as active participation as long as they are making high level decisions for the rental.
 
Real Estate Professional Status
 
You qualified as a real estate professional for the year if you met both of the following requirements.
 
  • More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.
  • You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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TIME TO BRING IN THE HARVEST!

If you sold capital assets in 2022 and generated taxable capital gains, it’s a great time to consider harvesting your capital losses to reduce or eliminate the capital gains tax. Below are a few strategies to consider.

If you sold capital assets in 2022 and generated taxable capital gains, it’s a great time to consider harvesting your capital losses to reduce or eliminate the capital gains tax. Below are a few strategies to consider.

Sell and Buy Back Stocks or Crypto

  • For your long-term hold stocks or cryptos that have built-in losses, consider selling before year-end and buying back the same asset later. To avoid wash sales, wait at least 31 days to repurchase stocks. Wash sale rules do not apply to cryptos.
  • If you are expecting lower Q3 & Q4 earnings reports, you may be able to repurchase the same asset at a lower price. This allows you to offset your capital gains, while maintaining your current positions.
  • You may want to maximize tax-rate arbitrage by exchanging short-term capital gains for long-term capital gains (LTGC).

Sell and Buy Similar

  • For stocks that have built-in losses, consider selling stocks before year-end and buying back similar stocks the same day. This allows you to offset your capital gains while maintaining your current portfolio balance.
  • The stocks cannot be substantially identical, or the wash sale rules will disallow the loss. This includes puts and calls.
  • However, you can purchase stock with a performance that is highly correlated with the stock you sold.

Sell and Buy Alternatives

  • For assets that have built-in losses, consider selling before year-end and buying alternative assets. This allows you to offset your capital gains and rebalance or reposition your portfolio.
  • For example, you may want to sell growth stocks with built-in losses and purchase value stocks or real estate. Or, you may have a taxable gain on the sale of your personal residence or business that can be offset with loss harvesting.
  • This may be a great way to clean up legacy assets.

Sell and Deduct Losses

  • If you don’t have gains to offset with losses, it may still be advisable to harvest losses. You can deduct up to $3,000 per year against ordinary income and carry unused amounts forward to offset future gains.
  • This allows you to save up losses and better time future gains.

Points to Ponder

  • Remember, the long-term capital gains tax rate starts at 0%. It most likely will not be beneficial to harvest losses in a year that you have qualified for a 0% LTCG tax rate.
  • You may want to recognize built-in gains to maximize your 0% LTCG tax rate for the year.
  • Loss harvesting is for taxable accounts only. It should not be used in retirement accounts.
  • Wash sale rules apply to purchases by your spouse or the company you control.
  • Consider the timing of dividend payments before selling.
  • Always consult your financial team. Everyone’s situation is different. Benefits depend on the investor’s tax rate when they deduct the initial loss, as well as the rate at which they realize the later gain that the initial loss created. 

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

~Mitzi E. Sullivan, CPA

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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Avoiding and Navigating IRS Audits

Whether you are trying to avoid an IRS audit, or have received a notice from the IRS, this guide contains helpful information: irsaudits2019

See also: New Tax Law. What’s Hot. What’s Not.

~Mitzi E. Sullivan, CPA

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

Best Entity Selection for Operating in Texas

It’s a great time for many closely held businesses to revisit their entity selection.

The Tax Cuts and Jobs Act (TCJA) has added a new twist to selecting the best type of entity for doing business in Texas. The federal corporate tax rate was lowered from a maximum 35% to a flat 21%; while at the same time a new 20% deduction was allowed for individuals with Qualified Business Income (QBI). It’s a great time for many closely held businesses to revisit their entity selections.

Selecting the best entity for your business has important tax and legal ramifications. Below are some points to discuss with your CPA and attorney. Call us at (940) 539-3238 to learn more.

In general

Sole proprietorships are best suited for single owner entities that do not need liability protection, are not concerned with mitigating self-employment taxes and do not need to raise or accumulate capital. Sole proprietorships have relatively few administrative requirements and are simple and inexpensive to form. Personal assets may be seized to satisfy business obligations or debts.

Partnerships are best suited for multiple owner entities that do not need liability protection, are not concerned with mitigating self-employment taxes and do not need to raise or accumulate capital. Partnerships have relatively few administrative requirements and are simple and inexpensive to form. Partners may not be employees of the partnership. Personal assets may be seized to satisfy business obligations or debts, and partners are joint and severally liable.

Limited partnerships are best suited for multiple owner entities that do not need liability protection for general partners, are not concerned with mitigating self-employment taxes and do not need to raise or accumulate capital. Partners may not be employees of the partnership. Limited partnerships have relatively few administrative requirements. Assets of general partners may be seized to satisfy business obligations or debts, and general partners are joint and severally liable. Limited partners can not be active participants in the day-to-day operations of the business. An LLC may be created to serve as the general partner. Owners may not claim tax losses in excess of their investments.

The LLC is best suited for entities that need liability protection, are not concerned with mitigating self-employment taxes and do not need to raise or accumulate capital. The LLC has relatively few administrative requirements. Income is passed through to the members, unless the LLC elects to be taxed as a c-corporation. All members may participate in the day-to-day operations of the business and, typically, assets of members may not be seized to satisfy business obligations or debts. Ownership interests are typically not freely transferable and, in Texas, are not considered attachable property. Owners may claim tax losses in excess of their investments, such as on certain leveraged real estate investments.

The S corporation is best suited for entities that need liability protection, are concerned with mitigating self-employment taxes and do not need to raise or accumulate capital. Entities taxed as an s corp may be able to reduce self-employment taxes by paying owner-employees both salaries and distributions. Ownership interests are freely transferable and, in Texas, are considered attachable property.

C corporations are best suited for entities that desire to go public, raise capital or accumulate capital for expansion or to service debt. Ownership interests are freely transferable and, in Texas, are considered attachable property.

The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best structure for your entity.

See also: New Tax Law. What’s Hot. What’s Not.

~Mitzi E. Sullivan, CPA

M.E. Sullivan is a cloud based professional services provider specializing in cloud accounting.

Additional information is provided by the Texas Secretary of State and copied below:

  • Sole proprietorship: The most common and the simplest form of business is the sole proprietorship. In a sole proprietorship, a single individual engages in a business activity without necessity of formal organization. If the business is conducted under an assumed name (a name other than the surname of the individual), then an assumed name certificate (commonly referred to as a DBA) should be filed with the office of the county clerk in the county where a business premise is maintained. If no business premise is maintained, then an assumed name certificate should be filed in all counties where business is conducted under the assumed name.
  • General partnership: A general partnership is created when two or more persons associate to carry on a business for profit. A partnership generally operates in accordance with a partnership agreement, but there is no requirement that the agreement be in writing and no state-filing requirement. If the business of the partnership is conducted under an assumed name (a name that does not include the surname of all of the partners), then an assumed name certificate (commonly referred to as a DBA) should be filed with the office of the county clerk in the county where a business premise is maintained. If no business premise is maintained, then an assumed name certificate should be filed in all counties where business is conducted under the assumed name.
  • Corporation: A Texas corporation is created by filing a certificate of formation with the Texas Secretary of State. The Secretary of State provides a form that meets minimum state law requirements. Online filing of a certificate of formation is provided through SOSDirect.A corporation is a legal person with the characteristics of limited liability, centralization of management, perpetual duration, and ease of transferability of ownership interests. The owners of a corporation are called “shareholders.” The persons who manage the business and affairs of a corporation are called “directors.” However, state corporate law does provide for shareholders to enter into shareholders’ agreements to eliminate the directors and provide for shareholder management. Choosing the best management structure for your corporation is a decision you make with the advice of an attorney. The Secretary of State cannot assist you.

    An “S” corporation is not a matter of state corporate law but rather a federal tax election. A for-profit corporation elects to be taxed as an “S” corporation by filing an election with the Internal Revenue Service. Please contact the IRS or competent tax counsel regarding the decision to be taxed as an “S” corporation and the requirements for filing the election. This is not a matter with which the Secretary of State may assist.

  • Limited Liability Company: A Texas limited liability company is created by filing a certificate of formation with the Texas Secretary of State. The Secretary of State provides a form that meets minimum state law requirements. Online filing of a certificate of formation is provided through SOSDirect.The limited liability company (LLC) is not a partnership or a corporation but rather is a distinct type of entity that has the powers of both a corporation and a partnership. Depending on how the LLC is structured, it may be likened to a general partnership with limited liability, or to a limited partnership where all the owners are free to participate in management and all have limited liability, or to an “S” corporation without the ownership and tax restrictions imposed by the Internal Revenue Code. Unlike the partnership, where the key element is the individual, the essence of the limited liability company is the entity, requiring for its creation more formal requirements. 1 William D. Bagley & Phillip P. Whynott, The Limited Liability Company, §2.10, (2d ed. 2d rev. James Publishing, 1995).

    The owners of an LLC are called “members.” A member can be an individual, partnership, corporation, trust, and any other legal or commercial entity. Generally, the liability of the members is limited to their investment and they may enjoy the pass-through tax treatment afforded to partners in a partnership. As a result of federal tax classification rules, an LLC can achieve both structural flexibility and favorable tax treatment. Nevertheless, persons contemplating forming an LLC are well advised to consult competent legal counsel.

    A limited liability company can be managed by managers or by its members. The management structure must be stated in the certificate of formation. Management structure is a determination that is made by the LLC and its members. The Secretary of State cannot give advice about management structure.

  • Limited Partnership: A Texas limited partnership is a partnership formed by two or more persons and having one or more general partners and one or more limited partners. The limited partnership operates in accordance with a partnership agreement, written or oral, of the partners as to the affairs of the limited partnership and the conduct of its business. While the partnership agreement is not filed for public record, the limited partnership must file a certificate of formation with the Texas Secretary of State. The Secretary of State provides a form that meets minimum state law requirements. Online filing of the certificate of formation is provided through SOSDirect.
  • Limited Liability Partnership: In order to limit the liability of its general partners, a general or limited partnership may opt to register as a limited liability partnership. The Secretary of State provides a form for registration as a limited liability partnership. Online filing of the registration is provided through SOSDirect.
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