Starting a Business in Texas? Pick a Legal Structure to Attract Your Ideal Investors

Starting a Business in Texas? Pick a Legal Structure to Attract Your Ideal Investors

Deciding on a legal entity for your start-up requires more thought and consideration than one might assume. This is especially true if you wish to attract investors to fund your business. Without the proper legal structure, you risk opening yourself to liability, losing control of your business, wasting your equity, and scaring away potential investors.

Whatever your needs, if you aim to recruit investors for your business, you need to ask yourself two questions before you decide on a legal structure: 

1.     Who should control what issues?

2.     How much money do you want investors to contribute?

With these two questions in mind, the two best structures for start-ups are Texas Limited Liability Companies (“LLCs”) or Delaware Corporations.

A Texas LLC is a legal entity that combines the ease of operations found in a partnership with structure and liability protection similar to a corporation. A Texas LLC, so named because it is formed and registered in Texas, is flexible and straightforward. It allows the day-to-day management of the business to continue with minimal oversight from owners, known as members. At the same time, a Texas LLC insulates owners from a great deal of financial and legal exposure.

Additionally, Texas LLCs are ideal for ventures with a handful of partners who have already secured or aim to obtain additional, relatively small investments. A Texas LLC also enjoys a low cost of compliance with state laws.

Texas offers two forms of the LLC: the Member-Managed LLC and Manager-Managed LLC.

A Member-Managed LLC affords any member the right to participate in the decision-making process, regardless of what percentage she owns. A member with a 1% share can participate in deciding how to take on debt, control assets, and enter into contracts. Investors who want to keep close tabs on their investment might prefer the active role this LLC offers.

A Manager-Managed LLC has a structure similar to a corporate board of directors. In this structure, members appoint managers to oversee the company’s operations with a simple majority of the voting membership. Managers can be members, but it is not legally required. Aside from voting for managers, members have no right to participate in the business. Investors who want to invest small amounts but don’t desire an active role in the business might be more comfortable with the more passive member role in this LLC.

On the other hand, a Delaware Corporation, incorporated and registered in Delaware, transforms a business into a legal entity separate from its owners. Thus, owners enjoy a high degree of insulation from financial risks and legal liability while reaping the rewards of their ownership.

Corporations have structured means of selling shares and can construct multiple classes of stock ownership, making corporations ideal for large-scale fundraising. As such, many sophisticated investors with deep pockets prefer Delaware corporations and are already comfortable with the role of a corporate shareholder.

However, the owners of a corporation, known as shareholders, do not manage the corporation. They must elect a board of directors, which in turn hires officers to run the corporation. Shareholders have no right to participate further in the business.

Your day-to-day operations will not be significantly affected between a Texas LLC and a Delaware Corporation, though the governorship of your business, owner rights, management, and compliance obligations will be different.

What legal structure have you chosen? Is it working to attract the investors you need? Ensure that your business is appropriately structured to serve your goals before you pitch to potential investors. Schedule your consultation with a Strahan Cain associate today.

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