Starting a business? Then do it the right way.
There are three professionals you need to contact at the beginning of your planning phase: an accountant, a banker, and a lawyer.
The accountant – will counsel you on immediate tax breaks, record requirements, potential tax pitfalls, and proper structure.
The banker – will counsel you on setting up accounts, maintaining financial statements, obtaining financing, and be a resource.
The attorney – will counsel you on entity formation, avoiding liabilities, protecting assets, drafting and entering into contracts, employment and independent contractor issues, and lawsuit prevention.
The first issue that you will confront, and the starting point for all of your other decisions, is the legal form of your business. A sole proprietorship is the most risky and least favored, because it leaves you personally vulnerable.
Texas has several primary forms of entities: corporation, general partnership, limited liability partnership, limited partnership, and limited liability company. The Texas Business Organizations Code, a one-stop shop for answers to most of your questions.
If you’re not up to reading the entire TBOC, then you can use the following summary as a starting point to make your decision.
Corporation – ownership by stock, limited liability for owners, management by directors and officers, capital can be raised by sale of stock, shares can be easily transferred (but are subject to state and federal securities laws), low cost of formation. Subject to Texas Margin Tax and income is taxed twice – once on receipt by corporation and once on distribution.
S Corporation – a Corporation that is taxed almost like a partnership. The “S” denotes tax status with the IRS.
General Partnership – no limitation on liability, if owned by individuals then it does not have to pay the Texas Margin Tax, the partners’ agreement controls how losses and profits are distributed, how the entity is managed, and how capital is raised. The partner’s interest may be subject to State and federal securities laws. Limited transfer of interest. This is considered the most dangerous and risky of entities.
Limited Liability Partnership – a general partnership in which the liability of some partners is limited. There is no one-size-fits-all type of LLP. It has to be filed with the Secretary of State, carry at least $100,000 of liability insurance, and is subject to the Texas Margin Tax.
Limited Partnership – has a general partner (with unlimited liability) and limited partners (with limited liability). The general partner operates the business. A written agreement is not required, but most LPs have one. Limited partnership interests are usually considered subject to the state and federal securities laws. The agreement usually restricts transfer of partnership interest.
Limited Liability Company – created to combine the best of all entities. Tax-wise, can be treated as a partnership, but is subject to the Texas Margin Tax. Provides for limited liability and centralized management. Owners of an LLC have freedom to determine the internal structure and operation of the LLC. Newly created last year – the Series LLC, which provides for segregation of management, assets and liabilities within the entity.
Too many choices? That’s where your accountant, banker and attorney come into the picture. Choose them wisely, and follow their advice.