Starting a new business can be a very involved and intricate process, requiring many important considerations. Some of those considerations, to name a few, include the choice of business structure, tax implications, and licensing and permits. Because creating a business is a significant step, it is important to have an experienced attorney to advise you of your options and provide the necessary guidance to help you make informed decisions when establishing your new business venture.
One of the first steps in starting a business is determining the appropriate business structure, often referred to as "choice of entity." The decision of which structure to choose is, in general, based on tax and legal liability considerations. Texas has several different types of business structures, some of which are listed and described below:
- Sole Proprietorship: Consisting of one business owner, this is the most basic form of business that does not require registration with the state. However, if the business operates with an assumed name, then Texas law requires an assumed name certificate, sometimes referred to as a "DBA," to be filed with the county clerk where the business is located. Although this is the simplest structure for businesses, there may be local laws and regulations, such as permit laws, that one has to comply with. Further, sole proprietors are personally held responsible for the debts of the business.
- General Partnership: This is formed when two or more people agree to form a business together. In Texas, however, there is no requirement that there must be a partnership agreement in writing and no state-filing requirement of the general partnership. Additionally, under a general partnership, partners are liable for the company's debts and legal actions against the partnership. Another critical aspect is that partners equally share in the assets and liabilities of the partnership, in the absence of a written agreement which provides otherwise.
- Corporations: This entity is formed by filing a certificate of formation with the secretary of state. The main aspect of a corporation as a whole is that the corporation is recognized as a separate legal entity from the corporation's owners, which means that the corporation can shield the owner's assets from the company's debts if corporate formalities are followed. Depending on the type of corporation that is formed, Subchapter "C" or "S" corporations, a corporation can have different tax liabilities.
- Limited Liability Company: This entity is formed by filing a certificate of formation with the secretary of state. LLCs share aspects of both a corporation and a partnership. As with corporations, they offer protection to the owners from debts and liabilities. However, LLCs offer "pass-through taxation," which exists for partnerships, but not for corporations. This means that owners report their profits from the LLC on their personal income tax returns. There is no federal tax return specifically for the LLC itself.
Additional types of business entities that can be formed in Texas include Limited Partnership, Limited Liability Partnership, and Association. To find more information on these entities, please click on the following link regarding Texas business structures: http://www.texasonline.com/guide/businessstructure.jsp?lang=en
In addition to filing an assumed name certificate and a certificate of formation, there are many other issues people must consider when forming a business. Individuals might need particular licenses and permits, they certainly need to determine tax and legal liabilities, and will need the assistance of a good insurance agent to answer their insurance questions. Contracts, lease agreements or employment agreements may need to be drafted or reviewed. An experienced corporate transactions attorney can help you make the right decisions and avoid costly mistakes. For an experienced corporate transactions attorney, contact the Law Office of Philip W. Boyko today to schedule your initial consultation.