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Choice of Entity

Business in Texas is conducted in many forms. Each form has advantages and disadvantages. The business purpose, availability of capital, goals of the initial owners, taxation, liability protection and other factors determine which type entity form is the appropriate form.


Individual or Sole Proprietorship

No doubt the easiest and quickest way for an individual to start and operate a business is the sole proprietorship or the individual form. Often referred to as a “D/B/A” or Doing Business As, this form provides no personal creditor protection nor does it offer any significant tax advantages other than the avoidance of the Texas Franchise Tax. Simplicity is the cornerstone of the sole proprietorship.


General Partnership

The general partnership is essentially a sole proprietorship consisting of more than one proprietors with each partner liable for the actions or inactions of the other general partner(s). As with the sole Proprietorship, the general partnership provides no creditor protection. A general partnership is not obligated to pay Texas Franchise Taxes.


Limited Partnership

A limited partnership consists of at least one general partner and one or more limited partners. The general partner operates the partnership and thus is liable for his or her actions or inactions. The limited partners do not operate the business and, so long a they remain inactive, are only subject to losing the money each has invested in the partnership. A limited partnership is normally treated as a partnership for federal income tax purposes. A limited partnership must file a certificate of limited partnership. While a little more cumbersome than a sole proprietorship or a general partnership, a limited partnership provides the non general partners a greater level of liability protection than does a sole proprietorship or general partnership.


Limited Liability Partnership

A limited liability partnership is similar to a general partnership but with certain creditor protections. A partner in a limited liability partnership is normally liable for his or her own negligence but not the negligence of the other partners. A limited liability partnership does not pay franchise taxes.


Corporation

The general corporation, often referred to as a “C” corporation, is the most widely used entity form. It is the most disadvantageous from a federal taxation point but highly flexible in the subjects of employee benefit and retirement plans. Owners or shareholders are protected from creditors but must pay taxes on dividends, thus creating a “double taxation” problem. “S” corporations are corporations that have qualified for, and elected to, pass through income to the shareholders in order to avoid the “double taxation” problem. In order to qualify as an “S” corporation the corporation must meet certain restrictions in numbers of shareholders, ownership and have a single class of stock. Like its big brother, the “C” corporation, “S” corporations protect its shareholders from personal liability and may, depending upon its gross receipts, avoid the Texas franchise tax.


Limited Liability Corporation (LLC)

The limited liability corporation is a hybrid type entity. Similar to a partnership the limited liability corporation provides the protective shield of a corporation with the flexibility and tax structuring of a partnership. Like a corporation, the limited liability corporation must pay franchise taxes. Texas does allow for single member or solely owned limited liability corporations.

Other Types of Legal Assistance Available

Asset Purchase Agreements

It is not uncommon for a business to change ownership. Generally, this is accomplished by either a stock purchase or an asset purchase. Stock purchases can be extremely risky. Stock or shareholder purchases carry with them the underlining liabilities. Asset purchases normally do not. Thus, most businesses are “sold” using an asset purchase rather than a stock purchase.


Commercial Leases

Most businesses lease space. The Texas property code protects residential tenants to a significant degree but not the commercial tenant. The residential landlord is statutorily obligated to provide the tenant with a certain minimum standard regarding the leased premises and the tenant is protected from landlord abuse. These protections do not extend to the commercial tenant. The reason for this is due to the presumed equal bargaining power between the business tenant and the landlord. Accordingly, protection for the commercial tenant is generally only what the tenant can acquire through lease negotiations.


Buy/Sell Agreements

Small businesses are frequently started by a core owner group and resist any ownership transfer outside the core owner group. Restricting this transfer can be accomplished with a shareholder of Buy/Sell agreement.

  • Entity Formation
  • Asset Purchase Agreements
  • Commercial Lease Agreements
  • Buy/Sell Agreements

 

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