How To Legally Start A Business in Texas – Part II
There are a variety of issues that you have to think about when you start your business.
- Is there a risk that your personal assets like your house and car could be at risk if you’re sued?
- How are you planning on taxing your profits and losses?
- How are you going to manage your company?
- Who is going to make the decisions in your company
- Are you bootstrapping or raising capital?
First, let’s talk about the different types of legal entities your business can take.
A sole proprietorship is the most common and simplest business form. A single individual operates a business and owns all of the assets of the business. The sole proprietor is personally liable for all debts, and business ownership is nontransferable. The life of the business is limited to the life of the individual proprietor.
A sole proprietorship is often operated under the name of the owner. The sole proprietorship makes no legal distinction between personal and business debts, and it does not require a separate income tax return.
Limited Liability Company
A limited liability company is an unincorporated business entity which shares some of the aspects of Subchapter S Corporations and limited partnerships, and yet has more flexibility than more traditional business entities. The limited liability company is designed to provide its owners with limited liability and pass-through tax advantages without the restrictions imposed on Subchapter S Corporations and limited partnerships.
The owners of an LLC are called “members”. A member can be an individual, partnership, corporation, trust, or any other legal or commercial entity. Depending on how the LLC is structured, the liability of the members is limited to their investment, they may enjoy the pass-through tax treatment afforded to partners in a partnership, and the members manage the entity.
A corporation is created when two or more individuals, partnerships, or other entities join together to form a separate entity for the purpose of operating a business. A corporation has its own legal identity, separate from its owners. The owners of a corporation are called “shareholders”. The persons who manage the business and affairs of a corporation are called “directors”.
The business owners’ personal assets are protected from debts and liabilities relating to the operation of the corporation. A corporation has centralized management, perpetual duration, and it is easy to transfer ownership interests. Taxation of the corporation varies depending on the type of corporation formed.
C Corporation: A Subchapter C Corporation is taxed as a separate entity. This has the effect of causing the earning of the company to be subject to double taxation to the extent they are distributed as salary or dividends to the owners of the company.
S Corporation: An “S” corporation status is not a matter of state corporate law. Rather, a for-profit corporation elects to be taxed as an “S” corporation by filing an election with the Internal Revenue Service. Owners of Subchapter S Corporations may deduct business losses on personal income tax returns, similar to a partnership. The Subchapter S Corporation also offers alternative methods for distributing the business income to the owners.
A general partnership exists when two or more individuals or businesses join to operate a business for profit. There is no requirement that the agreement be in writing and no state filing requirement. Under a general partnership, a separate business entity exists, but creditors can still look to the partners’ personal assets for satisfaction of debts. General partners share equally in assets and liabilities.
A general partnership must file an annual partnership income tax return separate from the partners’ personal returns. A general partnership may be operated under the names of the owners, or a different name. In addition, partners owe a high duty of care, loyalty and good faith to each other. Partners must place the interests of the partnership ahead of their own interests and act as an ordinary prudent person would act under similar circumstances.
A Texas limited partnership is a partnership formed by two or more persons and having one or more general partners and one or more limited partners. The limited partnership operates according to a writing or oral partnership agreement. General partners share equally in debts and assets, while limited partners have limited debt obligations.
Registered Limited Liability Partnership
A registered limited liability partnership is a general partnership that has been registered with the Secretary of State. Generally, a partner in a registered limited liability partnership is not individually liable for debts and obligations of the partnership arising from errors, omissions, negligence, incompetence, or malfeasance committed in the course of business by others in the partnership.
Is this helpful so far? If you have any specific questions, feel free to reach out or set up an appointment with me!