Looking to start up a business in Texas? Learn the process and get help from Wood Edwards LLP.
Staring a new business involves many critical decisions. Along with defining your mission and market, you must decide what business structure makes the most sense. Texas law provides a variety of choices: sole proprietorships, corporations, limited liability companies, series limited liability companies, and various types of partnerships.
Each has different benefits, and what is the best fit for you will depend on the type of business you are operating and what your goals are.
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Types of business structures
Most single-owner businesses start out as sole proprietorships. This is a business operated by one owner that is not incorporated. In other words, the business exists without filing a document with the Texas Secretary of State. Sole proprietorships who want to do business under a business name other than their personal name are required to file an assumed name certificate in the counties where they do business.
There is no liability protection for sole proprietors. Sole proprietors do not have to file separate tax returns for their businesses. Their business income is reported on Schedule C of their Form 1040.
If two or more people operate a business together for profit, they have created a general partnership in Texas whether they intended to or not. Like a sole proprietorship, a general partnership arises as a result of business activities and is not created by filing a document with the Texas Secretary of State.
This business structure does not provide any liability protections for the partners and can actually increase risk by making partners responsible not just for what they do, but also for what their partners do. A partner in a general partnership can be held legally liable for what the other business partners do, even if it was done without their knowledge or participation. Partners also owe each other higher obligations to act honestly and fairly with one another.
Texas recognizes different types of limited partnerships, including limited liability partnerships and limited liability limited partnerships. Essentially, this structure is most commonly used in businesses where people want to be in partnerships, but don’t want to be responsible for the acts of their partners. This business form has historically been used most by real estate investors and law firms.
A limited partnership is created by filing a certificate of formation with the Texas Secretary of State. Depending on the type of limited partnership, other documents may need to be filed as well. To preserve the liability protections, the partners must adhere strictly to the limited partnership structure. Under this structure, a general partner operates the business and assumes the liability for the business’ operations. The limited partners stay on the sidelines as passive owners and are shielded from liability for the general partner’s acts.
A limited partner who crosses the line by participating in the management of the limited partnership can erase the liability protections this structure is intended to provide. This can be done unintentionally by sending e-mails or letters out under the limited partner’s name instead of in the name of the general partner. Limited partnerships are required to file tax returns separate and apart from those of the partners.
Corporations are one of the oldest business structures recognized by Texas law. This means that Texas law governing corporations has been well fleshed out, resulting in a certain degree of legal predictability. A corporation is formed by filing a certificate of formation with the Texas Secretary of State. This business form is most commonly used by businesses whose goal is to sell their shares on a stock exchange.
A corporation is traditionally governed by a board of directors elected by the corporation’s owners, who are called shareholders. Meetings are held by both the board and by the members, and records of meetings and decisions called resolutions must be maintained by the corporation, in addition to other financial and corporate records.
Texas law allows small corporations to agree to eliminate the board of directors and be governed by shareholders. Like limited partnerships, corporations have to file their own tax returns.
Limited liability companies.
Limited liability companies (“LLCs”) are currently one of the most popular business structures. Their flexibility and simplicity make them easier to operate than other structures, regardless of the number of owners.
A Texas LLC can be managed by its owners, known as members, or by managers, who do not have to be owners. A group of business owners who plan to actively participate in the management of the business may choose to have a member-managed LLC. A manager-managed LLC may be preferable for a group of owners who want nothing to do with business operations and prefer to delegate management to a few knowledgeable decision-makers with more expertise.
One key benefit LLCs offer is that creditors are barred from seizing an owner’s ownership interest. Corporations do not provide shareholders with this protection. LLCs may elect to be taxed as partnerships, corporations or as sole proprietors.
Series limited liability companies.
This business structure is the most recent business structure created by the Texas Legislature and is designed to provide flexibility to real estate investors. A series LLC is like an LLC containing separate subsidiaries called series, each of which can operate or hold assets independently of the other series. If the series are maintained in compliance with Texas law, the assets held by a business operating under one series are protected from creditors of a business operating under another series.
This allows business owners with multiple rental properties who also act as property managers to house each property as well as its management business in separate series. Most other states do not recognize this type of business structure, so it is best used for property and services provided only in Texas.
Why work with an attorney?
Forming a corporation, limited liability company or partnership requires much more than filing a piece of paper with the Texas Secretary of State. One of the most important parts of starting a business is preparing an agreement for the owners describing how the business will be run.
Questions that should be addressed include: Who gets to make decisions, and what types of decisions do they get to make? How much money will the owners be required to contribute to the business? What happens if the business needs money in the future? What happens if an owner dies or just wants out?
The answers to these questions will be different for every business. Working with an attorney helps you get an agreement in place for your business that addresses what matters to you and protects your future. Even if you are a single-owner business, you need the protections created by an owner agreement. This is an important part of building the legal wall that separates your business activities from your personal activities for asset and liability protection.
Wood Edwards LLP is a boutique law firm based in Dallas. Our attorneys represent clients in all types of business matters, including business start-ups. The attorneys at Woods Edwards LLP understand the importance of choosing the right business structure and preparing for your venture’s future. Your business is your livelihood. We are here to support and protect your interests as you embark on this new journey. Contact our office today.