DOING BUSINESS IN TEXAS – ENTITY OPTIONS FOR STARTUP
There are many options for Texas business structures a start-up or entrepreneur may select during launch of a new business. The choice of entity is a decision to be reached with your co-venturers, if any, and with an eye towards taxes, limiting liability, and how the entity will be governed. The choice of entity should be made prior to any business operations, and the business should have clearly defined by-laws to govern how the entity will be operated by the owners. Too often the owners neglect to adopt by-laws and there is no guidance for how to resolve disputes between the owners as far as voting, division of power and duties, and the distribution of profits and allocation of losses. You should discuss the proper entity for your new business with a Texas business attorney as the choice often depends on many fact specific considerations unique to your business plan and vision for your new business.
THESE ARE THE COMMON TEXAS ENTITIES:
- Sole proprietorship: Most common and simplest form of business. A single individual engages in a business activity without necessity of formal organization. If the business is conducted under an assumed name (a name other than the surname of the individual), then an assumed name certificate (commonly referred to as a DBA in Texas) should be filed with the office of the county clerk in the county where a business premise is maintained. If no business premise is maintained, then an assumed name certificate should be filed in all counties where business is conducted under the assumed name.
- General partnership: When two or more persons associate to carry on a business for profit. A general partnership in Texas generally operates in accordance with a partnership agreement, but there is no requirement that the agreement be in writing and no state-filing requirement. If the business of the partnership is conducted under an assumed name (a name that does not include the surname of all of the partners), then an assumed name certificate (commonly referred to as a DBA) should be filed with the office of the county clerk in the county where a business premise is maintained. If no business premise is maintained, then an assumed name certificate should be filed in all counties where business is conducted under the assumed name.
- Corporation: A Texas corporation is created by filing a certificate of formation with the Texas Secretary of State.A corporation is a legal person with the characteristics of limited liability, centralization of management, perpetual duration, and ease of transferability of ownership interests. The owners of a corporation are called “shareholders.” The persons who manage the business and affairs of a corporation are called “directors.” However, state corporate law does provide for shareholders to enter into shareholders’ agreements to eliminate the directors and provide for shareholder management.An “S” corporation is not a matter of Texas corporate law but rather a federal tax election. A for-profit corporation elects to be taxed as an “S” corporation by filing an election with the Internal Revenue Service.
- Limited Liability Company: A Texas limited liability company is created by filing a certificate of formation with the Texas Secretary of State.The limited liability company (LLC) is not a partnership or a corporation but rather is a distinct type of entity that has the powers of both a corporation and a partnership. Depending on how the LLC is structured, it may be likened to a general partnership with limited liability, or to a limited partnership where all the owners are free to participate in management and all have limited liability, or to an “S” corporation without the ownership and tax restrictions imposed by the Internal Revenue Code. Unlike the partnership, where the key element is the individual, the essence of the limited liability company is the entity, requiring for its creation more formal requirements.The owners of a LLC are called “members.” A member can be an individual, partnership, corporation, trust, and any other legal or commercial entity. Generally, the liability of the members is limited to their investment and they may enjoy the pass-through tax treatment afforded to partners in a partnership. As a result of federal tax classification rules, a LLC can achieve both structural flexibility and favorable tax treatment.A limited liability company can be managed by managers or by its members. The management structure must be stated in the certificate of formation. Management structure is a determination that is made by the LLC and its members.
- Limited Partnership: A Texas limited partnership is a partnership formed by two or more persons and having one or more general partners and one or more limited partners. The limited partnership operates in accordance with a partnership agreement, written or oral, of the partners as to the affairs of the limited partnership and the conduct of its business. While the partnership agreement is not filed for public record, the limited partnership must file a certificate of formation with the Texas Secretary of State.
- Limited Liability Partnership: In order to limit the liability of its general partners, a general or limited partnership may opt to register as a limited liability partnership.
All of these business structures have strengths and weaknesses and some are more properly suited to particulars types of businesses and ownership structures. If you are about to launch a new business and you would like to discuss the entity options with a Texas attorney, call Texas business attorney Tim Sutherland to discuss any questions you may have on organizing a startup company in Texas.