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A Legal Entity Primer

KAREN M. NEELEY

NDERSTANDING THE BASICS OF LEGAL ENTITIES has always been important when setting
up procedures to get the correct documents and the right parties to sign account or loan
Udocuments for legal entities—but it just got a lot more important! On May 11, the FinCEN
Customer Due Diligence Rule regarding identifying and verifying beneficial owners of legal enti-
ties goes into full effect. Bank Secrecy Act anti-money laundering policies and procedures must
be updated to ensure that there are systems to identify beneficial owners of 25 percent or more
equity interest in legal entities, as well as at least one managerial/executive person. The follow-
ing discussion provides you with the ABCs of Texas legal entities.

CORPORATIONS. Under the new rule, the for - formation. Officers are not required by law,
mation document is now a certificate of for- but may be appointed unless the governing
mation, previously known as articles of documents prohibit them.
In May, the FinCEN incorporation, and is filed with the sec- GENERAL PARTNERSHIP and JOINT VENTURE. There
Customer Due Diligence retary of state. After filing, the secretary must be at least two partners. A written agree-
of state issues a certificate of incorpora-
Rule goes into full tion. In addition, there are bylaws that ment is not required. Each party is jointly and
effect. IBAT’s general govern operations. The sharehold- severally liable for the partnership or joint
venture obligations and is authorized
counsel provides the ers of a Texas “close corporation” to manage and conduct business for
can enter into a shareholders’
ABCs of identifying agreement in lieu of bylaws the entity. Unless provided other-
legal entities. to govern the management wise in an agreement, each par-
ty is presumed to have an equal
and business of the entity.
One or more shareholders own interest.
the equity, which could be in the LIMITED PARTNERSHIP, LIMITED LIA-
form of common, preferred or hy- BILITY PARTNERSHIP and LIMITED LI-
brid instruments. S-corporations ABILITY LIMITED PARTNERSHIP. There
are limited to 100 shareholders. must be at least one general partner
Corporations are governed by a board who is responsible for management and at
of directors with one or more on the board least one limited partner. Limited partner-
(at least three for nonprofits). A director must ships file a certificate of formation with the
be a natural person. Corporations must have secretary of state. LLLPs must file an appli-
at least a president and secretary, appointed cation to register with the secretary of state.
by the board. For business corporations, the There should also be a limited-partnership
same person can hold both positions. For non- agreement. Partners may be individuals, part-
profits, there must be two different officers. nerships, corporations and any other type of
legal entity. Limited partners have no right to
LIMITED LIABILITY COMPANIES. The formation control the activities of the entity and their li-
document is now a certificate of formation, ability is limited to their investment.
which is filed with the secretary of state. In
addition, there is a company agreement—or PROFESSIONALS. Certain professionals, such
possibly regulations—that governs its opera- as doctors and lawyers, may form a profes-
tions. Also, it can provide for more than one sional corporation, professional association
class or group of members or membership or professional LLC. All the equity owners in
interests. Members may be individuals, part- these entities must be appropriately licensed.
nerships, corporations or any other type of le- They also use a certificate of formation,
gal entity. which is filed with the secretary of state. Old-
An LLC is managed by its members or by er entities may have articles of incorporation/
manager(s) as specified in the certificate of association.

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