CHOOSING THE TEXAS BUSINESS ENTITY

1. CHOOSING THE TEXAS BUSINESS ENTITY John R. Williford Jwilliford @jw.com Jackson Walker L.L.P. 1401 McKinney, Suite 1900 Houston, Texas 77010

3. THE CENSUS • Comparing December 31, 2002 to the end of 2003, the total population of domestic business entities in Texas was:

4. ETHICAL CONSIDERATIONS BEFORE the Entity is formed: • WHO do YOU represent ? • WHO THINKS you are representing them ?

5. Beware of parts (b) and (c) of Texas Disciplinary Rule 1.06: • In...situations [other than litigation], and except to the extent permitted by paragraph (c), a lawyer shall not represent a person if the representation of that person: • involves a substantially related matter in which that person’s interests are materially and directly adverse to the interest to another client of the lawyer or the lawyer’s firm; or (2) reasonably appears to be or become adversely limited by the lawyer’s or law firm’s responsibilities to another clientorto a third person or by the lawyer’s or law firm’s own interests.

6. A lawyer may represent a client in the circumstances described in (b) if: • the lawyer reasonably believes the representation of each client will not be materially affected; and • (2) each affected or potentially affected client consents to such representation after full disclosure of the existence, nature, implications and possible adverse consequences of the common representation and the advantages involved if any.

7. ENGAGEMENT LETTERS State that you are representing only one client; name the client (ie, the entity or one of the equity owners). Documentation may materially affect interests of other equity owners. You are not representing other equity owners or their spouses. They should seek separate counsel. Client, all other equity owners and all spouses should sign and deliver copy of letter acknowledging above.

8. Proprietorship \ Division Texas Corporation Texas Ltd Partnership Texas LLC Texas LLP Texas Gen Partnership or Joint Venture Delaware Corporation Nevada Corporation Delaware LLC Nevada LLC PC, PA, and other professional entities Trust STATE LAW ENTITY BUILDING BLOCKS

9. TAX BUILDING BLOCKS • C Corporation • S Corporation • Qualified S Corp Subsidiary • Partnership • Proprietorship • Grantor Trust • REIT • Consolidation

10. ENTITY COMPARISON CHART Go to Appendix A of the Paper

12. BASIC TEXAS BUSINESS ENTITIES AND FEDERAL / FRANCHISE TAXATION ALTERNATIVES TABLE 1 Unless a single member LLC affirmatively makes an election on Form 8832 to be taxed as a corporation, it defaults to being disregarded for federal tax purposes. Thus, where the single member of the LLC is an individual, the result is that the LLC is treated as a proprietorship for federal income tax purposes; where the single member of the LLC is an entity, the result is that the LLC is treated as if it were a division of the owning entity for federal income tax purposes. 2 Unless a partnership or multi-member LLC affirmatively makes an election on Form 8832 to be taxed as a corporation, it defaults to being taxed as a partnership for federal tax purposes. 3 To be taxed as an S Corp, the entity and all its equity owners must make a timely election on Form 2553 and meet several other requirements, generally having only citizen\resident individuals or estates as equity owners (with the exception of certain qualifying trusts and other holders), no more than 75 owners, and only one “class of stock.”

13. * Assumes the entity is treated as a partnership for federal income tax purposes. # A non-managing member of an LLC may not be subject to the self-employment tax; a shareholder of an S-corporation is not subject to self-employment tax on actual or constructive dividends but would be subject to self-employment tax on compensation received. † One-half of the self-employment tax is deductible against the individual’s income.

14. JOINT VENTURE STRUCTURES EZ-Uphill Venture Partners(Tx RUPA) EZ-Uphill Venture Partners, L.L.P.(Qualify under § 3.08 of Tx RUPA) EZ-Uphill Venture Partners, Ltd. EZ-Uphill Venture Partners, Ltd., L.L.P. EZ-Uphill Corporation EZ FIND EXPLORATION CO. UPHILL GATHERING & TRANSPORTATION CO.

15. EXAMPLE 1COMMON OPERATING LIMITED PARTNERSHIP Individual Owners 100% Membership Interests New TexasLLC(4.5% Franchise Tax) (Net franchise tax of .0045) 99% LP Interests 1% GP Interests New TexasLimited Partnership(No Franchise Tax)

16. EXAMPLE 2HOLDING COMPANY WITH SINGLE OPERATING L.P. Owner Owner Owner NevadaLLC(No Franchise Tax) 100% Membership Interest TexasLLC(4.5% Franchise Tax) (Net franchise tax of .0045) 99% LP Interests 1% GP Interest TexasLimited Partnership(No Franchise Tax)

17. EXAMPLE 3HOLDING COMPANY WITH DUAL OPERATING LPS Owner Owner Owner New NevadaLLC(No Franchise Tax) 100% 100% TexasLLC4.5% Franchise Tax (Net franchise tax of .0045) TexasLLC4.5% Franchise Tax (Net franchise tax of .0045) 99% LP 99% LP 1% GP 1% GP Exploration and Production TexasLimited Partnership(No Franchise Tax) Transportation & Marketing TexasLimited Partnership(No Franchise Tax)

18. EXAMPLE 4COMMON TWO-TIER LTD. PARTNERSHIP WITH GP PROMOTE Limited Partners Promoters 1% GP 99% LP Management L.P. 90 / 75%LP Interest 10% / 25%GP Operations, L.P.

19. TEXAS BUSINESS ORGANIZATIONS CODEeffective for entities formed afterJanuary 1, 2006 Tex. H.B. 1156, availableathttp://www.capitol.state.tx.us/tlo/78r/billtext/HB01156F.HTM Existing entities at 1/1/2006 grandfathered under existing statutes until 1/1/2010 unless electing earlier application under TBO Code.

20. 2003 LEGISLATIVE HIGHLIGHTS TBCA Permits Negation of Business Opportunity Doctrine Preemptive Rights denied unless expressly reserved in Arts of Inc Cumulative Voting denied unless expressly reserved in Arts of Inc Electronic Procedures in TBCA Minimum $ 1000 capital eliminated Zero interest and capital contributions for LLC members and GP’s of LP’s