Choice of Entity for Start-ups

When contemplating a new business, it is helpful to compare the record-keeping requirements of various types of entities. What follows is a summary of some of those requirements. Contact the Firm to discuss a start-up and which entity might best suit your needs.

Record Keeping Requirements pursuant to the Texas Business Organizations Code

All business organizations formed in Texas are subject to the Texas Business Organizations Code (“BOC”). The BOC includes sweeping re-codifications of prior statutory laws. Some of their provisions are outlined below. All references to the Code are to BOC.

Requirements Applicable to All Filing Entities

The BOC provides that records shall be kept by all filing entities. Section 3.151 of the Code requires that each filing entity shall keep:

  1. books and records of accounts;
  2. minutes of the proceedings of the owners or members or governing authority of the entity and committees thereof;
  3. at its registered office or principal place of business, or at the office of its transfer agent or registrar, a current record of the name and mailing address of each owner or member of the filing entity; and
  4. other books and records as required by other sections of the Code pertaining to the particular type of filing entity.

The Code allows, for the first time, such records to be kept in “written paper form or another form capable of being converted in written paper form within a reasonable time.” In other words, it is now specifically permissible to maintain such records in electronic form. The records listed above do not have to be kept by limited partnerships or limited liability companies except to the extent required by its governing documents. Therefore, unless the Certificate of Formation or Company Agreement of a limited liability company, or the limited partnership agreement of a limited partnership require the maintenance of such records, they are not required to be kept. The records listed above must be made available for inspection by any “governing person.” A governing person is defined as a person serving as part of the governing authority of the entity, and would include directors, managers, and partners, among others.

Requirements for For–Profit Corporations

The Code requires For–Profit Corporations to maintain the following records in addition to those required by Section 3.151 relating to all entities:

  1. records relating to the original issuance of shares issued by the corporation;
  2. each transfer of those shares that have been presented to the corporation for registration of transfer;
  3. the names and addresses of all past shareholders of the corporation; and
  4. the number and class or series of shares issued by the corporation held by each current and past shareholder.
Additional Requirements for Non–Profit Corporations

In addition to the records listed above, Section 22.352 of the Code requires that all non–profit corporations maintain current and accurate financial records with complete entries as to each financial transaction of the corporation, including income and expenditures in accordance with generally accepted accounting principles. This section of the Code further requires that the board of directors of the corporation shall annually prepare or approve a financial report for the corporation for the preceding year.

This report is required to conform to accounting standards as adopted by the American Institute of Certified Public Accountants and must include:

  1. a statement of support, revenue, and expenses;
  2. a statement of changes in fund balances;
  3. a statement of functional expenses; and
  4. a balance sheet for each fund.

Section 22.353 of the Code requires that such records be kept at the corporation’s registered or principal office in the State of Texas for at least three years after the close of the fiscal year. This section also requires that the corporation shall make the records, books and reports available to the public for inspection and copying during regular business hours. The corporation may charge a reasonable fee for preparing a copy of the record or report.

Additional Requirements for Limited Liability Companies

Section 101.501 imposes additional record–keeping requirements on limited liability companies. In addition to the records required to be maintained by all filing entities, a limited liability company “shall keep at its principal office in the United States, or make available to a person at its principal office in the United states not later than the fifth day after the date the person submits a written request to examine the books and records of the company under Section 3.152(a) or 101.502:

  1. a current list of each member of a class or group of membership interests in the company;
  2. a copy of the company’s federal state and local tax information or income tax returns for each of the six preceding tax years;
  3. a copy of the company’s certificate of formation, including any amendments to or restatements of the certificate of formation;
  4. if the company agreement is in writing, a copy of the company agreement, including any amendments to or restatements of the company agreement;
  5. an executed copy of any powers of attorney;
  6. a copy of any document that establishes a class or group of members of the company as provided by the company agreement; and
  7. except as provided by Subsection (b), a written statement of:
    1. the amount of a cash contribution and a description and statement of the agreed value of any other contribution made or agreed to be made by each member;
    2. the dates any additional contributions are to be made by a member;
    3. any event the occurrence of which requires a member to make additional contributions;
    4. any event the occurrence of which requires the winding up of the company; and
    5. the date each member became a member of the company.”

The production can be requested by a governing person pursuant to Section 3.152 of the Code or by a member or assignee of a membership interest or a representative of the member or assignee upon making a written request and showing a proper purpose, pursuant to Section 101.502 of the Code.

Information regarding Partnerships

Books and records of a partnership must be kept at its chief executive office. The partnership must provide access to its books and records to a partner or agent or attorney of the partner. The partnership may impose a reasonable charge for labor and material in providing copies. Section 152.212, BOC.

Records of Limited Partnerships

A domestic limited partnership shall maintain the following records at its principal office:

  1. A current list that states:
    1. the name and address of each partner, separately identifying in alphabetical order the general partners and the limited partners;
    2. the last known street address of the business or residence of each general partner;
    3. the percentage or other interest in the partnership owned by each partner; and
    4. if one or more classes or groups are established under the partnership agreement, the names of the partners who are members of each specified class or group.
  2. a copy of:
    1. the limited partnership’s federal, state and local information or income tax returns for each of the partnership’s six most recent tax years;
    2. the partnership agreement and certificate of formation; and
    3. all amendments and re–statements.
  3. copies of any document that creates classes or groups of partners;
  4. an executed copy of any powers of attorney under which any of the organizational documents were executed;
  5. unless contained in the partnership agreement, a statement of:
    1. the amount of cash contribution and a description and statement of the agreed value of any other contribution made by each partner;
    2. the amount of the cash contribution and a description and statement of the agreed value of any other contribution that a partner has agreed to make in the future;
    3. the date on which additional contributions are to be made or the date of events requiring additional contributions to be made;
    4. events requiring the limited partnership to be dissolved and its affairs wound up; and
    5. the date on which each partner became a partner.
  6. books and records of account of the limited partnership.

The production can be requested by a governing person pursuant to Section 3.152 of the Code or by a member or assignee of a membership interest or a representative of the member or assignee upon making a written request and showing a proper purpose, pursuant to Section 101.502 of the Code.

Information regarding Partnerships

Books and records of a partnership must be kept at its chief executive office. The partnership must provide access to its books and records to a partner or agent or attorney of the partner. The partnership may impose a reasonable charge for labor and material in providing copies. Section 152.212, BOC.

Records of Limited Partnerships

A domestic limited partnership shall maintain the following records at its principal office:

  1. A current list that states:
    1. the name and address of each partner, separately identifying in alphabetical order the general partners and the limited partners;
    2. the last known street address of the business or residence of each general partner;
    3. the percentage or other interest in the partnership owned by each partner; and
    4. if one or more classes or groups are established under the partnership agreement, the names of the partners who are members of each specified class or group.
  2. a copy of:
    1. the limited partnership’s federal, state and local information or income tax returns for each of the partnership’s six most recent tax years;
    2. the partnership agreement and certificate of formation; and
    3. all amendments and re–statements.
  3. copies of any document that creates classes or groups of partners;
  4. an executed copy of any powers of attorney under which any of the organizational documents were executed;
  5. unless contained in the partnership agreement, a statement of:
    1. the amount of cash contribution and a description and statement of the agreed value of any other contribution made by each partner;
    2. the amount of the cash contribution and a description and statement of the agreed value of any other contribution that a partner has agreed to make in the future;
    3. the date on which additional contributions are to be made or the date of events requiring additional contributions to be made;
    4. events requiring the limited partnership to be dissolved and its affairs wound up; and
    5. the date on which each partner became a partner.
  6. books and records of account of the limited partnership.

These documents may be examined by a partner or an assignee of a partnership interest, in person or by representative. The records may be copied at a reasonable time and at the partner’s sole expense. Sec. 153.552, BOC. On written request by a partner or assignee, certain records must be provided without cost. Sec. 153.552(c), BOC.