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"The good lawyer is not the man who has an eye to every side and angle of contingency, and qualifies all his qualifications, but who throws himself on your part so heartily, that he can get you out of a scrape."

- Ralph Waldo Emerson

BUSINESS FORMATION: BASICS OF BEGINNING A BUSINESS

Beginning A Business

Are you considering starting a small business? No matter what kind of small business you start, a restaurant, a home-cleaning service, a consulting firm, a landscaping company or anything else, you need to decide what form your business will take.

Business Formation

Business formation is essential to every business. Some familiar examples of business “forms” include the corporation, partnership, or limited liability company. The business formation process will have an impact on a number of things, including how taxes are filed, how liability is proportioned, and what documents need to be filed with the Secretary of State. It is best to speak with an attorney to determine which business formation strategy is best for your specific needs.  Below is a brief look at the very basics of some of the entity forms available in Texas.

Sole Proprietorship

This is the most basic sort of business. Nothing formal is filed with the State of Texas. There is no liability protection in a sole proprietorship, if someone chooses to sue company, they will sue the owner personally and all the owner’s personal assets may be at risk.

General Partnership

A general partnership must have at least two partners. The partners generally come to an agreement on how they want to business to be handled. If the partners do not have an agreement in place then Texas law dictates many of the partnership terms. There are no filings needed to have a General Partnership. There is no liability protection and the personal assets of the partners may be at risk for any liability the business incurs.

Limited Partnership

A limited partnership must have at least one limited partner and one general partner. The general partner is the person who runs the day-to-day operations of the business. The general partner has no liability protection. The limited partner’s involvement is normally limited to investing money. The limited partner is only liable up to the amount of their contribution to the partnership; the personal assets of the limited partner are protected. It is important that the limited partner not become overly involved in the operations of the partnership. If they do, a court may consider them to be a general partner and the liability protection could disappear. A limited partnership must make a filing with the Secretary of State to ensure liability protection for the limited partner.

Limited Liability Company

The limited liability company is a very popular choice for small businesses. A limited liability company (LLC) can have one person involved or it can be a large company. An LLC provides significant asset protection. As a general rule, if the company is sued or incurs other debts, the creditor cannot reach the personal assets of the owners of the LLC. Please note that this is just a general rule. Depending on how the company is managed and even depending on how documents are signed, that asset protection may not hold up in court. It is very important to discuss these issues with an attorney. The people running the LLC, called either the “members” or “managers”, can dictate most of the terms of their relationship. Texas law includes some hard and fast rules which must be observed.

Corporation

The owners of a corporation are called the shareholders, those are people who have bought stock in the corporation. Under the corporate form, the shareholders have personal liability protection. Most corporations are run by a group of people called the board of directors. The shareholders elect the board of directors. As long as the behavior of the board members conforms to proper standards, then the board members have liability protection as well. While a business does not have to be large to be a corporation, there are a number of rules and regulations involved in starting a corporation and in how the corporation must be governed. There are specific tax rules for corporations.  Most small businesses do not need to take on the corporate format.

Business Formation Caveat

It is important to note that while there are a number of services which say they will help form a business for a fee, often, the actual business formation is not terribly difficult. Where the real work happens is in creating an agreement which will govern how the business is run. When that sort of agreement is drawn up, the advice of an attorney is invaluable. There are rules as to what can and cannot be done and an attorney will help you to foresee the potential problems that may be present. If you are starting a small business, it is best to contact an attorney to assist you with the entire business formation process and to help set you up for success.

 

ABOUT THE AUTHOR

Shannon Brandt

Attorney and Counsellor at Law

Shannon primarily practices in the areas of business law and estate law.  She focuses her practice on small businesses and how she can help them with their unique situation.

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