Carrie Campbell, J.D.

Don Campbell, J.D.


Informative Articles

Our ongoing series of informational entries.


This information is not intended to substitute for specific legal advice.  These materials should not replace a thorough reading and understanding of the applicable provisions of the Texas Business Organization Code or other applicable law.

STARTING YOU OWN BUSINESS: What are the options?

February 24, 2021

There are many options for structuring a new business. These options include sole proprietorship, general partnership, limited partnership, limited liability company (LLC), S-corporation and C-corporation. In determining which of these structures is the best fit for your enterprise, there are 6 elements to consider: (1) the startup costs, (2) management formalities, (3) liability protections, (4) tax exposure, (5) flexibility for changes and (6) termination. Each situation is different and must be carefully balanced to maximize the potential for success.


In general terms, the more formal the legal structure, the greater the bureaucratic duties – but, these additional responsibilities, are offset by considerable liability protections and tax savings. For example, corporations require the formalities of an elected board of directors, appointed officers, regularly held meetings, adopted bylaws, kept minutes, etc.… Nevertheless, most larger companies choose corporate status because of the ability to raise significant capital while protecting the stockholders’ private property.


The option of an LLC is attractive to many who are starting a new business because it reduces the bureaucratic formalities, yet still allows for liability protection and pass-through taxation. Pass-through taxation means the business’s income is taxed only once at the personal level. The LLC files an income tax return but does not itself pay income taxes. It is extremely important, however, that all legal formalities are met. If not, then there is no liability protection and individual owners can be liable for business debts and/or taxes.


It is important to consult with professionals in determining which structure works best for you. If you do some math to prepare a 3-year business plan of your expected expenses and projected income, your accountant can quickly tell you which business structure will save you the most in taxes. In addition, a visit with the right attorney can clarify your liability exposure and the relative formalities.

Sole proprietorships and partnerships - getting it right so it does not go wrong.

March 15, 2020



The simplest form of business structure is a sole proprietorship. This business style is created informally without the recognition of the state. It is a business operated by an individual who uses their own name and social security number for tax purposes, and therefore, costs are low to open and maintain the business’ accounts. In many ways it is an alter ego of the owner which often leads to confusion on the parts of owners and customers. While sole proprietorships do not need to be registered with the secretary of state, it is important that the public knows with whom they are dealing. Accordingly, it is legally required that any name (other than the owner’s name) be recorded on an assumed name certificate and filed in any county where business is conducted. It is also essential that accounts be maintained separately to properly claim tax deductible expenses. Keeping all the funds in a single account is a red flag for audits.


In contrast, a partnership is an agreement between individuals who share in the management, profits, and losses of a business endeavor. Most partnerships are general partnerships, which like sole proprietorships, are informally created without a filing requirement. Because more than one person is involved, the partnership must have its own tax identification number and file its own tax returns. However, partnerships do not pay income taxes themselves. Profits are passed through to the partners who pay income taxes individually based on their pro rata share. A written partnership agreement is necessary for opening a bank account and to avoid any misunderstandings between the partners with regards to the risks, benefits, and responsibilities of ownership.


In neither sole proprietorships or general partnerships is there any liability protection for owners and managers. Therefore, liability insurance is an essential business expense to protect the owners’ personal assets. Some more advanced partnerships, such as limited liability partnerships (LLPs) and limited partnerships (LPs) will provide some liability shelter, but these forms are more formal and must be registered with the state.


It is important to consult with professionals in determining which structure works best for you.


Starting Your Own Business:

Essential formalities of LLCs and corporations


In order to gain greater protection for your personal assets, you must be willing to comply with the essential formalities of LLCs and corporations. These formalities create a buffer between your personal property and a wholly separate, legally recognized entity. The requirements include filing a Certificate of Formation; proper adoption of bylaws or a company agreement by the owners of the new entity; and keeping written records of mandatory meetings at least once a year.

For LLCs, closely held family corporations (S-Corps) and standard corporations (C-Corps), the first step is the preparation of a Certificate of Formation. The Certificate contains basic information about the business name, type of business structure, the purpose of the business, the primary business address, who are the initial owners, etc.… The Certificate and a filing fee must be submitted to, then acknowledged by the Secretary of State.

Promptly after the acceptance of the Certificate of Formation, the owners of the business should prepare the rules by which the entity will operate. These rules are named “bylaws” for corporations and a “company agreement” for LLCs. This document is the backbone of the business and the reference for all questions and solutions that arise. The bylaws or company agreement must be formally adopted by the owners in an organizational meeting that is documented in writing. Thereafter, owners are only required to meet annually. For LLCs, owners are referred to as “members.” For corporations, owners are referred to as “shareholders.”


Additional meetings by managers of LLCs or officers of corporations are sometimes needed in the practical, day to day operations of the business. While it is not legally required for these meetings to be documented in writing, it is a good idea to do so.

It is important to consult with an attorney of your choice to determine whether all the required formalities are being met, because failure to comply may result in a loss of liability protection.


                                                                                 Starting Your Own Business:

                                                                                 Non-profits and organizations created to do good.


A non-profit corporation is any corporation in which no income is shared with members, directors, or officers. It is formed like other corporations by the filing of a Certificate of Formation with the Texas Secretary of State, then the proper preparation and adoption of bylaws. The Texas Business Organizations Code requires that all non-profits have three or more directors, a president and secretary. Different individuals must fill the role of president and secretary. A non -profit may, at its discretion, have members. Members are often involved with religious or services organizations like Rotary or Lions Club.


A non-profit organization is not automatically exempt from federal and state taxes. To become exempt, the non-profit must comply with the requirements established by the IRS and the Texas Comptroller. While it is relatively easy to process tax-exempt status, it is an additional and much more arduous bureaucratic activity to apply for and receive 501(c)(3) status with the IRS which permits gifts to the non-profit to be tax deductible for donors.


There are restrictions on political contributions by non-profits. The IRS can revoke tax exempt status for violations of federal law. Moreover, the Texas Attorney General has the legal authority to examine all corporate records and investigate dealings by non-profit charities. Greater scrutiny is given to non-profits organizations than your typical small business holdings, including periodic reports required by the Secretary of State.


Similar requirements and details apply to other business structures that are organized to do good, such as cooperatives used by educational institutions, farmers, and utility providers.


It is important to consult with professionals in determining which structure works best for your purposes.


                                                                                 Starting Your Own Business:

                                                                                 Employees versus sub-contractors for labor.


​Texas is an “at will” employment state meaning that either the employer or the employee may terminate employment at their will, with or without cause. The only restrictions are those imposed by the U.S. Constitution regarding discrimination, or Texas laws that protect whistle-blowers and those filing for worker’s compensation. While employers need not have a good reason for firing someone, the lack of a good reason will likely permit the employee to file for unemployment compensation.


Employers who have invested in training employees may want to consider a written agreement to cover a specified period of employment to recoup training expenses. Employers can also bargain with employees for non-competition clauses when the agreement is in writing. When there is an employment contract, employment is no longer “at will” but based entirely on the written employment agreement which can be enforced by either party.


It is also important to note that employers are responsible for payroll, tax withholding and worker’s compensation for all employees. They must also pay ½ of employees’ social security and Medicare taxes. For these reasons, many small businesses elect to not hire employees, but instead use sub-contractor labor.


The difference between an employee and sub-contract labor is that the company cannot control a sub-contractor’s hours or work times, and the sub-contractor must supply his or her own equipment, workspace, transportation, and tools. The courts and IRS will consider actions, not written documents, when determining whether someone is an employee or sub-contractor. If the company tells the person when to show up for work, provides the materials, and supervises the labor, then the person is an employee (even if the person signed a document saying he is a sub-contractor). If it walks like a duck and quacks like a duck, then expect the authorities to treat it like a duck.

Starting Your Own Business: A Business Plan to Maximize Success.

Few of us plan for failure when we create a new business, yet profitability is far from guaranteed. To maximize the chance of success, developing a business plan is essential. Formal business plans are required when applying for loans and/or seeking investors. Such formal presentations include (1) executive summaries, (2) mission statements, (3) detailed descriptions of products and services, (4) market analysis, (5) promotion strategies, (6) leadership team, and (7) financial projections.


Many businesses start small and without the formality of a “business plan.” Nevertheless, much of the same basic research greatly benefits ANY business endeavor, regardless of size or formality. What are your short term and long-term goals? What are your anticipated expenses? How long until you expect to make a profit, and how will you support yourself until that happens? Who will be your likely customers? What can they afford? Who are your competitors? What are the marketing options for your specific customer base and their relative pros and cons? Who are your legal and financial advisors? Who will do the labor? Will you need management assistance? Who has what duties and responsibilities? What will be your financial expectations for the next 1 to 3 years? Answering these questions will prepare you for the work that lies ahead.


As important, you must know well with whom you are partnering. Do not be embarrassed to ask for a credit report to discover if a prospective associate can handle money. You should ask about previous business experience and talk with co-workers to learn if their personality is committed or compliant. You should be aware that it is not necessarily easier to partner with an old friend or family member(s). You may “trust” them more than a new acquaintance; however, significant and meaningful relationships have been destroyed by a business gone bad. A shared plan and written agreement will minimize the potential for conflict.


                                                                                 Starting Your Own Business:

                                                                                 Future Considerations


​Assuming all goes well with your business plans, there will be future decisions to make as you age, or your business grows. There may be offers from prospective buyers or retirement at some stage; but, be aware that to convey or close a business entity requires compliance with some state mandated procedures.


Prospective buyers are more likely to make a serious offer for businesses that are formally structured and well documented. They will want to review the corporate records, accounting, receipts, etc. Therefore, it is a valuable practice to keep these items in good order. If a decision is made to sell your business, then the terms should be carefully written out and approved by all interested parties. A special meeting should be called, and minutes adopted to formalize the exchange of ownership. The Texas Secretary of State’s office must also be notified that the owners and registered agents have changed.


Should you decide to retire or for some other reason close the business, then a winding up process must be done to account for and distribute the remaining assets to the owners based upon their respective percentages of ownership. A letter of good standing must be requested from the Texas State Comptroller to verify that all taxes and returns are up to date. Then, the letter of good standing along with a Certificate of Dissolution must be filed with the Secretary of State’s office. Without following these procedures, the owner(s) will have ongoing personal liability for all outstanding taxes and penalties.


Businesses cannot themselves be gifted in Wills unless it is a sole proprietorship. However, ownership interests can be passed on to your heirs. Therefore, it is important to consider in partnerships and other entities if you want to include “buy out” provisions. Agreeing to work with Jane Doe does not necessarily mean you want to be partners with Jane Doe’s ex-husband, her children, or heirs. So, consider the various ways your business might end and ask for qualified advice.


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