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CHOOSING THE TEXAS BUSINESS ENTITY John R. Williford Jwilliford @jw.com Jackson Walker L.L.P. 1401 McKinney, Suite 1900 Houston, Texas 77010

CHOOSING THE TEXAS BUSINESS ENTITY John R. Williford Jwilliford @jw.com Jackson Walker L.L.P. 1401 McKinney, Suite 1900 Houston, Texas 77010

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CHOOSING THE TEXAS BUSINESS ENTITY

John R. WillifordJwilliford @jw.comJackson Walker L.L.P.1401 McKinney, Suite 1900Houston, Texas 77010

THE CENSUS

• Comparing December 31, 2002 and 2003, and also the end of September 2004, the total population of domestic business entities in Texas was:

Entity Type 12/31/2002 12/31/2003 09/30/2004Business corporations 391,838 388,609 386,176

Professional corporations 15,074 15,267 15,296

Professional associations 15,678 17,191 16,805

Limited partnerships 103,417 116,615 129,191

Limited liability companies 96,305 119,207 141,171

Limited liability partnerships 5,565 3,951 4,387

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 ENTITY BUILDING BLOCKS

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 Corporation

8. Nevada Corporation 9. Delaware LLC 10. Nevada LLC 11. PC, PA, and other

professional entities 12. Trust

TAX BUILDING BLOCKS

1. C Corporation 2. S Corporation 3. Qualified S Corp Subsidiary 4. Partnership5. Proprietorship 6. Grantor Trust 7. REIT 8. Consolidation

ENTITY COMPARISON CHART

Go to Appendix A of the Paper

BASIC TEXAS BUSINESS ENTITIES AND FEDERAL / FRANCHISE TAXATION ALTERNATIVES TABLE

Texas Law Entity Check-the-Box Federal Taxation TX Franchise Tax

Proprietorship Not Applicable Form 1040, Schedule C or E

None

LLC \ single individual member

Disregarded1 Form 1040, Schedule C or E (Proprietorship)

Yes

LLC \ single entity member

Disregarded1 Division of Member Entity

Yes

General Partnership or LLP

Partnership2 Partnership None

General Partnership or LLP

Corporation C or S Corp3 None

Limited Partnership Partnership2 Partnership None

Limited Partnership Corporation C or S Corp3 None

LLC \ multi-members Partnership2 Partnership Yes

LLC \ multi-members Corporation C or S Corp3 Yes

Corporation Not Applicable C or S Corp3 Yes1 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.”

Item C Corporation

S Corp or Limited Liability Company*

General Partner in General or Limited Partnership*

Limited Partner in Limited Partnership*

Entity Level

Income 100 100 100 100

Franchise Tax 4.50 4.50 0 0

Taxable Income of Entity 95.50 95.50 100 100

Fed. Income Tax (at 35%)

33.43 0 0 0

Income After Taxes 62.07 95.50 100 100

Owner Level

Distribution & Share of Income

62.07 95.50 100 100

Self-Employment Tax 0 2.77# 2.90 0

Taxable Income of Owner

62.07 94.11† 98.55† 100

Fed. Income Tax (at 39.6%)

24.58 37.27 39.03 39.60

Amount Received After Taxes

37.49 55.46 58.07 60.40* 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.

BOOKOO CAPITAL

EZ-Bookoo Venture Partners(Tx RUPA)

EZ- Bookoo Venture Partners, L.L.P.(Qualify under § 3.08 of Tx RUPA)

EZ- Bookoo Venture Partners, Ltd.EZ- Bookoo Venture Partners, Ltd., L.L.P.

EZ-Bookoo Corporation

EZ MANAGEMENT CO.

JOINT VENTURE STRUCTURES

EXAMPLE 1COMMON OPERATING LIMITED PARTNERSHIP

Individual Owners

New TexasLLC

(4.5% Franchise Tax)(Net franchise tax of .0045)

New TexasLimited Partnership

(No Franchise Tax)

100%

Membership Interests

99% LP Interests

1% GP Interests

EXAMPLE 2HOLDING COMPANY WITH SINGLE OPERATING L.P.

NevadaLLC

(No Franchise Tax)

TexasLLC

(4.5% Franchise Tax)(Net franchise tax of .0045)

Owner Owner

TexasLimited Partnership

(No Franchise Tax)

100%

Membership Interest

99% LP Interests

1% GP Interest

Owner

EXAMPLE 3HOLDING COMPANY WITH DUAL OPERATING LPS

New NevadaLLC

(No Franchise Tax)

TexasLLC

4.5% Franchise Tax(Net franchise tax of .0045)

Owner Owner

Real Estate ManagementTexas

Limited Partnership(No Franchise Tax)

100%

99% LP

TexasLLC

4.5% Franchise Tax(Net franchise tax of .0045)

Land & CapitalTexas

Limited Partnership(No Franchise Tax)

100%

99% LP

1% GP 1% GP

Owner

                 

     

Promoters Limited Partners

Management L.P.

1% GP 99% LP

Operations, L.P.

10% / 25%GP

90 / 75%LP Interest

EXAMPLE 4COMMON TWO-TIER LTD. PARTNERSHIP WITH GP PROMOTE

TEXAS BUSINESS ORGANIZATIONS CODE

effective for entities formed afterJanuary 1, 2006

Tex. H.B. 1156, available at http://www.capitol.state.tx.us/tlo/78r/billtext/HB01156F.HTM

Existing entities at 1/1/2006 grandfathered under existing statutes until 1/1/2010 unless electing earlier application under TBO Code.

2003 LEGISLATIVE HIGHLIGHTS

TBCA Permits Negation of Business Opportunity Doctrine

Preemptive Rights denied unless expressly reserved in Arts of Inc

Cumulative Voting denied unless expressly reserved in Arts of Inc

Electronic Procedures in TBCA

Minimum $ 1000 capital eliminated

Zero interest and capital contributions for LLC members and GP’s of LP’s

RECENT DEVELOPMENTS

2005 Legislative Session 

Texas House of Representatives CSHB 3       - Passed W&M Committee March 6th         - Supported by Governor        - Features

o        Replaces Franchise Tax with Payroll Taxo        Rate of 1.15% of annual comp up to $90k (($1,035 max)o        Tied to school property tax relief o        Self-employed and partners not coveredo        Raises state sales tax from 6.2% to 7.25%

Texas Senate 

- Business net profits tax on all entities in lieu of franchise tax- Still in Finance Committee

Apcar Investment Partners VI Ltd v Gaus,

No. 11-03-00332-CV (TEX. CIV. APP—Eastland, Jan. 20, 2005) 

• Texas first LLP contractual liability case

• Law firm partnership fails to make annual filing with Tx SoS

• Partnership signs new lease after LLP status lapses

• Held, individual partners not protected by LLP liability shield