USA – TEXAS Law and Practice Contributed by: Taylor Cooksey, David Brooks, Serena Kramer and Philip Kinkaid, Cokinos | Young
S Corporation Like a partnership, the entity is a “pass-through” for FIT purposes. However, there are strict federal require - ments regarding owners and shares that must be met in order to elect and maintain this classification. This classification may be elected by any corporation, LLC or limited partnership if it meets the requirements. C Corporation The entity is subject to federal “double taxation”: it pays FIT on its income, and its owners pay FIT on dividends they receive from the entity. This is the default classification of a corporation. This classification may also be elected by any LLC or lim - ited partnership. 5.3 REITs A real estate investment trust must be formed as a corporation or trust and must meet federal REIT rules, including distributing at least 90% of its income to its shareholders. There is no tax at the entity level, with income passing to the shareholders, and dividends being deductible by the entity. REITs are subject to Texas franchise tax if formed as a corporation. REITs in Texas may be either public or private, and are available to foreign investors. REITs must comply with federal requirements in order to maintain their status. 5.4 Minimum Capital Requirement There are no minimum capital requirements in Texas for the entities listed in 5.2 Main Features and Tax Implications of the Constitution of Each Type of Entity . 5.5 Applicable Governance Requirements Governance requirements for partnerships, LLCs and corporations are set forth in the Texas Business Organizations Code and may also be set forth in writ - ten partnership agreements, company or operating agreements, by-laws and shareholders’ agreements, in addition to certificates of formation. Governance requirements for trusts are set forth in the Texas Trust Code (part of the Property Code) and trust agree - ments.
• LLC; • limited partnership; or • corporation.
All of these entities may have one or more owners, except that a limited partnership must have at least one general partner and one limited partner. The gen - eral partner is typically an LLC, but could be a corpo - ration, which may be wholly owned by one or more limited partners. In each case, all owners are protected from the entity’s liabilities, except that the general partner of a limited partnership has no such protection. Using a special- purpose LLC or corporation as the general partner, however, accomplishes the same goal. All of these entities are subject to the Texas franchise tax, which is based on the entity’s marginal revenue. Regardless of which type of entity is used, the most important question is usually what classification the entity will have for federal income tax (FIT) purposes – either by “default” (automatically) or by “election” (through a voluntary filing with the IRS). The four prin - cipal federal tax classifications are as follows. Disregarded Entity The entity is disregarded for FIT purposes, with its assets and income attributed to its sole owner. This • a limited partnership with a sole limited partner, and a sole general partner that is a disregarded entity of the sole limited partner. Partnership The entity is a “pass-through” for FIT purposes: its owners pay FIT on the entity’s income, but the entity itself does not pay FIT. This is the default classification of an LLC with multi - ple owners, or a limited partnership that is not a dis - regarded entity. is the default classification of: • an LLC with a sole owner; or
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