CHOOSING THE BEST BUSINESS ENTITY FOR YOU
Congratulations! You’ve taken the first step and deciding to start your own business. Let Dorman, Bell & Kramer LLP assist you by setting up your business entity correctly. Setting up a business entity is more than just filing a piece of paper with the Texas Secretary of the State, there are many legalities and government regulations which if not followed, may subject you to fines and penalties, or may endanger the way you’re able to run your business. A new business owner must consider issues regarding tax, liability, management, continuity, and transferability of ownership interests. Consulting with attorney first may prevent any legal problems down the road.
What are your options?
There are various basic types of business entities in Texas. They include:
- General Partnership
- Limited Partnership
- Limited Liability Company
- Small Business Corporation
- Sole Proprietorship
Each entity has its own unique characteristics. Whether your planning on remaining a small business or creating the next industry giant, correctly structuring your business from the beginning is vital.
A general partnership exists between two or more individuals (or entities) where all partners share ownership in the business. Although a partnership generally operates in accordance with a partnership agreement, there are not any formal management requirements nor are there any state-filing requirements to form a partnership. If the partnership does business under an assumed name that does not contain the surname off all partners, then a DBA (“Doing Business As”) certificate should be filed with the county clerk in the county. Each partner contributes varying skills or resources needed to start and run the business. Each partner shares in the profits and losses of the business and any partner may bind or obligate the partnership. There is no limit to liability under a general partnership and any partner may be liable for any other partner’s debts. There is a pass-through tax treatment so taxes are paid at each individual partners’ level. As long as a partnership agreement exists and addresses the guidelines regarding the death of a partner the business continues.
A Texas limited partnership is formed between two or more individuals (or entities) where there is at least one general partner and a least one limited partner. Just like it sounds, a limited partnership limits the liability of a limited partner to the percentage of each limited partner’s investment. However, there is no limit to liability for any general partner. In order to limit the liability of a general partner, a general or limited partnership may opt to register as a limited liability partnership (“LLP”). Texas does not require a limited partnership agreement to be filed on public record, but Texas does require all limited partnerships to file a certificate of formation with the Texas Secretary of State.
Limited Liability Company
A Texas limited liability company (“LLC”) is formed by filing a certificate of formation with the Texas Secretary of State. An advantage of an LLC is that it combines the best aspects of both a partnership and a corporation. Operations under an LLC are flexible and a certificate of formation must state whether the LLC will be manager or member managed. Members enjoy limited personal liability for debts and legal actions of the business similar to a corporation. Members can be an individual, partnership, corporation, trust, and any other legal or commercial entity. Generally, members receive the same pass-through tax treatment associated with a partner in partnerships. LLCs have a continuity of life and are very flexible regarding transferability of ownership interests. However, unlike a Corporation, a LLC may not be publically traded.
Corporation or Small Business Corporation
A Texas corporation is created by filing a certificate of formation with the Texas Secretary of State. A corporation is an independent legal entity, separate from the people who own, control, and manage it. A corporation’s operations and activities are governed solely based from its charter. Owners of a corporation are called “shareholders” and persons who manage the business are called “directors.” A corporation is considered a legal person and therefore shareholders enjoy the liability protections similar to that of a member of an LLC. Most corporations are subject to “double taxation”, the corporation first pays taxes on profits and then it pays taxes again on distributions to its shareholders.
However, a business may avoid double taxation by forming a small business corporation (“S-Corporation). S-Corporation’s profits are passed directly to each shareholder who then pays income tax based on their individual shares of the profits.
Both types of corporations have rigorous management and governance structures.
A sole proprietorship is the simplest form of business structure recognized under Texas law. There is no formal organizational requirement and sole proprietorship exists when an individual is doing business under his own name. A sole proprietor is the sole decision maker of the business and does not have to share profits. However, a sole proprietor assumes all of the risks, debts, and liabilities associated with the business. It’s important to keep in mind, there is no limit or cap regarding liability under a sole proprietorship. The duration of a sole proprietorship lasts as long as the sole proprietor runs the business. If the sole proprietor passes, the business ceases to exist as well.
Setting up a business entity is more than just filing a piece of paper with the Texas Secretary of the State, there are many legalities and government regulations which if not followed, may subject you to fines and penalties, or may endanger the way you’re able to run your business. Contact us today. We are committed at Dorman, Bell & Kramer LLP to building a partnership with our clients and helping them achieve success.