CHOOSING THE TEXAS BUSINESS ENTITY John R. Williford Jackson Walker L.L.P McKinney, Suite 1900 Houston, Texas 77010

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

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

Beware of parts (b) and (c) of Texas Disciplinary Rule 1.06: (b)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: (1)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 client or to a third person or by the lawyer’s or law firm’s own interests.

(c) A lawyer may represent a client in the circumstances described in (b) if: (1) 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.

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.

STATE LAW ENTITY BUILDING BLOCKS 1.Proprietorship \ Division 2.Texas Corporation 3.Texas Ltd Partnership 4.Texas LLC 5.Texas LLP 6.Texas Gen Partnership or Joint Venture 7.Delaware Corporation 8.Nevada Corporation 9.Delaware LLC 10.Nevada LLC 11.PC, PA, and other professional entities 12.Trust

TAX BUILDING BLOCKS 1.C Corporation 2.S Corporation 3.Qualified S Corp Subsidiary 4.Partnership 5.Proprietorship 6.Grantor Trust 7.REIT 8.Consolidation

ENTITY COMPARISON CHART Go to Appendix A of the Paper

BASIC TEXAS BUSINESS ENTITIES AND FEDERAL / FRANCHISE TAXATION ALTERNATIVES TABLE Texas Law EntityCheck-the-BoxFederal TaxationTX Franchise Tax ProprietorshipNot ApplicableForm 1040, Schedule C or E None LLC \ single individual member Disregarded 1 Form 1040, Schedule C or E (Proprietorship) Yes LLC \ single entity memberDisregarded 1 Division of Member Entity Yes General Partnership or LLPPartnership 2 PartnershipNone General Partnership or LLPCorporationC or S Corp 3 None Limited PartnershipPartnership 2 PartnershipNone Limited PartnershipCorporationC or S Corp 3 None LLC \ multi-membersPartnership 2 PartnershipYes LLC \ multi-membersCorporationC or S Corp 3 Yes CorporationNot ApplicableC or S Corp 3 Yes 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.”

ItemC Corporation S Corp or Limited Liability Company* General Partner in General or Limited Partnership* Limited Partner in Limited Partnership* Entity Level Income100 Franchise Tax Taxable Income of Entity Fed. Income Tax (at 35%) Income After Taxes Owner Level Distribution & Share of Income Self-Employment Tax02.77#2.900 Taxable Income of Owner †98.55†100 Fed. Income Tax (at 39.6%) Amount Received After Taxes * 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.

UPHILL GATHERING & TRANSPORTATION CO. 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. JOINT VENTURE STRUCTURES

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

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

EXAMPLE 3 HOLDING COMPANY WITH DUAL OPERATING LP S New Nevada LLC (No Franchise Tax) Texas LLC 4.5% Franchise Tax (Net franchise tax of.0045) Owner Exploration and Production Texas Limited Partnership (No Franchise Tax) 100% 99% LP Texas LLC 4.5% Franchise Tax (Net franchise tax of.0045) Transportation & Marketing Texas Limited Partnership (No Franchise Tax) 100% 99% LP 1% GP Owner

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

TEXAS BUSINESS ORGANIZATIONS CODE effective for entities formed after January 1, 2006 Tex. H.B. 1156, available at B01156F.HTM B01156F.HTM Existing entities at 1/1/2006 grandfathered under existing statutes until 1/1/2010 unless electing earlier application under TBO Code.

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