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.