September 2, 2016
Business Entities and Formations in Texas
Texas is one of the best states for entrepreneurs and startups for a variety of reasons. The affordable cost of living, low taxes and healthy economy lead to the success of all types and sizes of businesses. Investors and venture capitalists in the Dallas-Fort Worth Metroplex are often looking to fund startups and growing businesses, and it is important to form and maintain a proper business entity. When a business is formed through proper agreements and corporate formalities, a new legal entity is created. The advantages of proper business formation include protection from personal liability and pass-through taxation.
The Michael Kim Law Firm, PLLC works with business owners, partners and investors to form the proper corporate entity to meet the needs of the business. The type of business, number of owners and employees, how the owners are paid and taxed on earnings, may be evaluated when choosing the proper business form.
There are several forms of businesses recognized in Texas:
- Sole Proprietorship
When one person is doing business and owns all the assets they are a sole proprietor. There are no corporate formalities required to form a sole proprietorship, however if the business operates under a name other than that of the owner, it may be necessary to file a “Doing Business As” (DBA) form with the local county clerk. Sole proprietors are taxed directly on their personal income tax filing for business income, and there is no separate business tax return because there is not a separate legal entity. Because there is no separate legal entity, if the business is sued, the owner is personally liable and their assets are not otherwise protected.
One or more people engaged in business may create a corporation, a separate legal entity, by completing the proper required documentation and filing necessary forms with the Texas Secretary of State. The liability of owners and shareholders of corporations is generally limited if claims and lawsuits are made against the company. Most corporations are S-corporations and shareholders are taxed upon the distribution of profits. There are also C-corporations, taxed when the business file a required corporate income tax return, in addition to taxes on shareholder distributions. When forming a corporation, officers and directors are appointed and bylaws and articles of incorporation are required.
- General Partnership
When two or more people are doing business as partners they are a general partnership. Like a sole proprietorship, there are no corporate formalities required to form a general partnership. The partners have an equal right to profits and an equal liability for losses, including the expenses and outcomes of claims and lawsuits against the business. In a general partnership, the partners pay taxes based on their income and the partnership is not taxed separately. A DBA may also be filed and required by banks and other businesses and agencies. The rights and duties of partners may be identified in a general partnership agreement.
- Limited Partnership
Two or more people doing business who want protection from liability may form a limited partnership (LP) comprised of general partners and limited partners. While the general partners participate in the management of the business and have unlimited liability for debts and losses, the limited partners have no control in management and their personal liability is limited by the amount of their capital contribution to the limited partnership. Partners are taxed individually on their share of partner income. In addition to a partnership agreement, corporate formalities are required in LP formation and there are required filings with the Texas Secretary of State.
- Limited Liability Partnership
The partners in a limited partnership may elect to form a limited liability partnership (LLP) to achieve the benefit of limited liability for debts and losses, but without the LLP being required to file its own tax return. In an LLP all the partners may participate in the management of the business, unlike the LP where limited partners may not participate in management or they can lose their limited liability protection. A general partnership or a properly filed LP is required before an LLP can be formed to convert the business entity to an LLP.
- Limited Liability Company
Blending the tax savings benefits of a partnership and the limitation of liability of a corporation, a limited liability company (LLC) is a popular business entity selection for startups and growing businesses. Instead of being called shareholders, the owners of an LLC are referred to as members. The members of an LLC have a broad range of allowances with respect to the management and structure of the business and their interests within. In addition to business agreements among the members, there are specific corporate formalities and state filings required to form an LLC.
During the lifetime of a business entity there are many things that can happen, requiring experienced legal guidance. From the formation of new business entity to the winding down or sale of another, The Michael Kim Law Firm, PLLC, can advise and represent your interests in the success of your enterprise.
About us: The Michael Kim Law Firm, PLLC, in Dallas, Texas, is a full service business transaction and litigation law firm of experienced attorneys serving the Dallas-Fort Worth Metroplex.
The Michael Kim Law Firm, PLLC, represents individual clients and organizations with business and commercial law needs. The firm also represents both plaintiffs and defendants in general civil litigation, injury, property, employment and consumer matters.
To speak to an attorney please dial (214) 357-7533. Additional information about our attorneys and practice areas is available on our website.