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2015 Choice of Entity

Presented on May 16, 2025 in San Antonio, Texas

Drafting Considerations for Exculpation of Duties (Including Fiduciary) in LLC Agreements

This paper will discuss and set out suggested provisions for Texas LLC Agreements for exculpation of “Governing Persons” under the TBOC and in the LLC contractual provisions. This process has several component parts, including statutory provisions, common law directives and influences from Delaware law, as well as contractual “glosses” that have developed in practice for specific activities. In drafting an LLC Agreement, the practitioner must be cognizant of the actual statutory provisions governing the duties of Governing Persons, the case law that is developing about LLCs, as well as the statutorily permitted management structures unique to the LLC. The statutory provisions for LLCs on exculpation of Governing Persons are not the same as those in effect for either corporations or partnerships, so traditional exculpatory provisions cannot be directly copied. In addition to statutory formulations, and the growing body of case law on limited liability companies, common law on agency must be considered. Further, the management of the LLC as an entity can be accomplished by at least three separate groups, the members, the managers and the officers, depending on how one determines to organize the entity. Management contracts by affiliated entities add another level of complexity. The multiplicity of choices for daily management requires a translation of traditional corporate and partnership formulations. This paper will raise the questions and suggest possible responses in this ever fertile field of legal controversies.

Compensation Strategies for the LLC

An LLC taxed as a partnership is one of the most flexible entity forms available today for allocating ownership interests. Unlike the corporate model, where profits are allocated strictly pro-rata on the basis of the number of shares owned, management and owners of an LLC have virtually complete freedom to allocate profits among members so long as the allocation has "substantial economic effect" under IRC Sec. 704(b).

Ethical Issues Associated With Law Firm Acquisitions: How to Resolve the Ethical Issues Between Confidentiality and Conflict of Interest Rules

Law firm acquisitions and matters related to the movement of lawyers from one law firm to another law firm generate difficult ethical issues on which all parties to the movement of lawyers between firms must pay attention. The purpose of this article is to assist Texas lawyers in the identification and resolution of the potential dilemma between the ethical rules related to confidential information and the ethical rules related to the avoidance of conflicts of interest.

Acquisition Structure Decision Tree

Buying or selling a closely held business, including the purchase of a division or a subsidiary, can be structured as (i) a statutory combination such as a statutory merger or share exchange, (ii) a negotiated purchase of outstanding stock from existing shareholders or (iii) a purchase of assets from the business. The transaction typically revolves around an agreement between the buyer and the selling entity, and sometimes its owners, setting forth the terms of the deal.

Choice of Entity Decision Tree

In selecting a form of business entity for an oil patch deal in Texas the organizer or initial owners can consider the following five business entity forms: Corporation; General Partnership; Limited Partnership; Limited Liability Partnership (“LLP”); and Limited Liability Company (“LLC”). The form of business entity most advantageous in a particular situation depends on the business objectives for which the entity is being organized. In most situations, the choice of entity focus will be on how the entity and its owners will be taxed and the extent to which the entity will shield the owners and managers of the business from liabilities arising out of its activities. An increasingly important factor in choosing the form of entity, and its state of domicile, is the extent to which the fiduciary duties and personal liability of the entity’s governing persons may be limited in the entity’s governing documents.

Tax Considerations in Entity Choice and Acquisitions, Including Federal Tax Law Changes That Go Into Effect in 2015 and Developments in 2015 Texas Legislative Session

This outline discusses certain relevant federal income and Texas state tax considerations relating to the selection of an entity for engaging in business or investment. The outline begins with a discussion of the classification of entities for federal tax purposes and, in particular, the check-the-box regulations. It then provides a summary of some of the principal tax considerations relating to sole proprietorships, C corporations, partnerships, limited liability companies and S corporations. This outline does not address the taxation of trusts and estates, regulated investment companies, real estate investment trusts, real estate mortgage investment conduits, cooperatives, exempt organizations or insurance companies.

The Demise of the Shareholder Oppression Doctrine in Texas: Pursuit of Claims By Minority Shareholders (And LLC Members) After Ritchie V. Rupe

Until 2014, courts of appeals in Texas had recognized the availability of various equitable remedies, including a court-ordered buyout, where a minority shareholder established that the majority shareholder engaged in “oppressive” conduct. “Oppressive” conduct was defined by the courts as: (1) majority shareholders’ conduct that substantially defeats the minority’s expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder’s decision to invest; or (2) burdensome, harsh, or wrongful conduct; a lack of probity and fair dealing in the company’s affairs to the prejudice of some members; or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely. Davis v. Sheerin, 754 S.W.2d 375, 381-82 (Tex. App.—Houston [1st Dist.] 1988, writ denied) (awarding minority shareholder an equitable buyout at fair value as determined by the jury based upon the majority’s refusal to recognize the minority’s ownership in the corporation). The seminal case in this area was Davis v. Sheerin. In the years after the Davis case, oppression cases in Texas appeared with increasing frequency. Some courts also applied the shareholder oppression doctrine in the context of limited liability companies. In a landmark 6-3 opinion in 2014, the Texas Supreme Court disapproved of the manner in which courts of appeals had been applying the oppression doctrine and significantly limited the reach of the oppression doctrine. In Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014), the court: (1) rejected the “reasonable expectations” and “fair dealing” tests for oppression that courts of appeals had been applying in Texas since 1988 and adopted a definition requiring abuse of authority by management with intent to harm an owner in disregard of management’s honest business judgment; (2) held that a rehabilitative receivership is the only remedy for oppression under Section 11.404 of the Business Organizations Code; and (3) declined to recognize a common-law cause of action for oppression.

Overview of Fiduciary Duties, Exculpation, and Indemnification in Texas Business Organizations

Statutory developments beginning in the 1990s have impacted the analysis of fiduciary duties in the business organizations context. The duties of general partners are now defined by statutory provisions that delineate the duties without referring to them as “fiduciary” duties and specifically provide that partners shall not be held to the standard of a trustee. Whether limited partners in a limited partnership have fiduciary duties is not well- settled, but the Business Organizations Code (BOC) clarifies that a limited partner does not owe the duties of a general partner solely by reason of being a limited partner. While the fiduciary duties of directors are still principally defined by common law, various provisions of the corporate statutes are relevant to the application of fiduciary duty concepts in the corporate context. Because limited liability companies (LLCs) are a relatively recent phenomenon and the Texas LLC statutes do not specify duties of managers and members, there is some uncertainty with regard to the duties in this area, but the LLC statutes allude to or imply the existence of duties, and managers in a manager-managed LLC and members in a member-managed LLC should expect to be held to fiduciary duties similar to the duties of corporate directors or general partners. In each type of entity, the governing documents may vary (at least to some extent) the duties and liabilities of managerial or governing persons. The power to define duties, eliminate liability, and provide for indemnification is addressed somewhat differently in the statutes governing the various forms of business entities.

Amendments to the Texas Business Organizations Code in 2015 Session of Texas Legislature

This article summarizes two pieces of legislation passed by the Texas Legislature in its 2015 Regular Session that amend the Texas Business Organizations 2Code (the “Code”). As of the date of this paper, these bills have not yet been signed by Governor Greg Abbott, but are expected to be so signed by the Governor.