Business Formation
If you are contemplating about starting a business or if you are already in business, you need to understand the rights and the liabilities that are attached to the different forms of business entities. The experienced business attorneys at Smith & Garg, can help you to determine the best type of business formation to fit your needs.
In general, there are four types of business entities:
Sole Proprietorship
A sole proprietorship is a business form that is owned by an individual. That is, it is not owned by a corporation, a partnership, or a limited liability company. There is no legal distinction between the business and the sole proprietor. Sole proprietorship is a simple form of business; there are no filing formalities such as filing fees or franchise tax. However, if you want to do business using a name other than your personal name, you must file a DBA "Doing Business As." This is a "Fictitious Name" that must be filed in the county in which you are operating.
One of the benefits of a sole proprietorship is management flexibility. There are no restrictions as to how the business is to be managed. The income of the business is considered personal income; therefore, the owner does not need to file a separate return. However, a separate schedule must be used.
All of the assets of the sole proprietorship, whether tangible or intangible, belong to the individual. Consequently, the owner is personally liable for all debts and liabilities incurred by the business. In other words, there is no limited liability protection for a sole proprietor. This is a major drawback because the owner's personal assets are at risk. Furthermore, if a tort is committed by an employee, the owner will be liable under the theory of vicarious liability.
If you need the assistance of a qualified business attorney to assist you in setting up your new business or business entity, call the experienced business attorneys at Smith & Garg today!
Partnership
A partnership is an association of two or more persons working together in a business for the purpose of generating profits. "Persons" in the partnership context can also be a business entity such as a corporation. The filing procedures of a partnership are similar to those of a sole proprietorship. A Partnership is not a separate taxable entity; the creation or termination of a partnership is not a federally taxable event. That is, there is no recognized gain or loss at the creation or termination of a partnership. The profits flow directly through the partnership and are treated as personal incomes for the partners.
Unlike an owner in a sole proprietorship, a partner in a partnership may limit his liability if he is a limited partner. However, not all partners can be limited partners; the law requires that there be a least one general partner in any partnerships. Accordingly, limited partners' liabilities extend only to the extent of their investments in the partnership. For example, liabilities do not extend to limited partners' personal assets. Conversely, a general partner is personally liable for the acts of the partnership.
The Texas Business Organizations Code defines a limited partnership as having one or more general partner(s) and one or more limited partner(s). To formally exist as a limited partnership, there must be a partnership agreement, and there must be a certificate of formation which is filed with the secretary of state.
A unique advantage of a partnership is that income and loss of a partnership may be allocated to the partners in any manner the partnership deems appropriate. This could result in a substantial tax benefit for particular partners.
If a partner sells his interest in a partnership and there are unrealized receivables, for federal income tax purposes, the unrealized receivables are normally treated as ordinary income instead of capital gains. This is a disadvantage because capital gains are taxed at a rate of up to 15%, whereas, ordinary income is taxed at a rate of up to 35%.
Although a partnership offers management flexibility, decisions in the ordinary course of business are usually governed by the majority vote of the partners. Therefore, the decisions of the majority partners bind the partnership unless there is a partnership agreement which provides otherwise. In a limited partnership, the general partner participates in the control of the business, the day-to-day activities, while the limited partner acts more like an advisory partner. Limited partners are ordinarily confined to activities such as receiving distributions, preventing the transfer of assets, examining partnership records, and attending meetings to receive information from the general partner.
If you need the assistance of a qualified business attorney to assist you in setting up your new business or business entity, call the experienced business attorneys at Smith & Garg today!
Corporation
A corporation can only be created under the authority of the state. The corporation is subject to the law of the state of its incorporation. This principle is referred to as the "internal affairs" doctrine. As a result, when there is a conflict of law, the state of incorporation is the controlling authority.
The formation of a corporation requires that an incorporator, the person who initiates the filing of a corporation, submits the articles of incorporation to the secretary of state. The articles must contain the following: the name of the corporation, the initial directors, the purpose, the duration, the stock structure, the name and address of the corporate agent, and the name and address of the incorporator. If all of the statutory requirements are met, the secretary of state will issue a certificate of incorporation.
One of the significant advantages of a corporation is the "corporate shield." Hence, shareholders have limited personal liabilities. That is, they have no obligations to the corporation except to pay full consideration for the number of shares they purchased. For example, if a person owns one share and the value of that share is one dollar, he is only liable to the extent of one dollar.
Another advantage is that a corporation is considered a legal person; it has the legal rights to enter into contracts and to sue and be sued. Because a corporation is a separate legal entity, it is perpetual.
A major disadvantage of a corporation is that it is double taxed. It is taxed the first time when the corporation generates profits, and the shareholders are taxed again, as personal incomes, when the corporation distributes its profits. In particular circumstances, a corporation may avoid double taxation by electing to file under Subchapter S of the Internal Revenue Code. However, in order to do so, the corporation must have fewer than seventy-five shareholders, and there are restrictions as to who can be shareholders under an S corporation. For example, nonresident aliens cannot be shareholders.
Another disadvantage of a corporation is the statutory formality requirement. A corporation must hold annual corporate meetings, take minutes at the meetings, issue stock certificates, and elect directors.
If you need the assistance of a qualified business attorney to assist you in setting up your new business or business entity, call the experienced business attorneys at Smith & Garg today!
Limited Liability Company
A Limited Liability Company (LLC) is a hybrid business entity; it is in fact the best of both worlds. It offers members limited personal liability similar to that of a corporation; and, for tax purposes, the members are treated as partners in a partnership. Consequently, double taxation is eliminated. Like corporations, LLCs have separate legal existence apart from their members; the articles of organization must be filed with the secretary of state. The organizer, the person initiating the formation of the LLC, must include the following in the application: the name of LLC, the duration, the purpose, the registered office, and the name and address of the organizer.
One of the premiere advantages of an LLC is that it is a flow-through entity. The profits are taxed only once as personal incomes for members. Another advantage is that all members have limited personal liabilities. Moreover, LLCs are not as strictly regulated as corporations. For example, under an LLC, acts requiring the consent of members may be performed without an actual meeting of the members.
A disadvantage of a LLC is the franchise tax. In Texas, the franchise tax is currently at 0.25% of the net taxable capital, plus 4.5 of the net taxable surplus. However, for tax reports due on or after January 1, 2008, the rate will be 1%. Furthermore, if the LLC is engaged mainly in retail or wholesale, the rate is 0.5%. Companies that net in less than one thousand dollars ($1,000.00) are not subject to the franchise tax, neither are companies with total revenues that are less than or equal to three hundred thousand dollars ($300,000.00).
The Uniform Limited Liability Company Act stipulates that a limited liability company must contain some wordings that indicate that the company is a limited liability company. For example, the LLC must contain such words as "limited liability company," "LLC," or "L.C."
If you need the assistance of a qualified business attorney to assist you in setting up your new business or business entity, contact the experienced business attorneys at Smith & Garg today!
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