Business Formations-Your Name on the Door

Sole Proprietorships, Corporations, LLC's, and Partnerships

So, we haven't scared you off yet, so you must be ready for The Show. Well, then, here we go. What kind of business entity should you have? Lots of choices, and the definitive answer is-"it depends". Which no one wants to hear, but it really does depend on what you want and how you want things to happen. Let's look at a couple of issues for each type:

Sole Proprietorship-this type of business is essentially, well, YOU. Most are operated under an Assumed Name or d/b/a of some sort, but, yes, it is really just you. You have to file an Assumed Name Certificate with the Texas Secretary of State's Office, and in the county in which you operate the business, but then you are set to go! Just you, your check book and your ideas. But there are a few drawbacks...

As far a liability, you have no legal protection-your personal assets are at risk. You are the business, and except for the exemptions in the Texas property code, you are exposed to the world for any judgments against you. Not a pleasant feeling, huh? Of course, you can buy insurance to protect you, but that can be expensive, and if the insurer finds no coverage due to whatever action you took that caused the problem, you are back to being exposed if they disclaim coverage. The bright side is your income tax forms are MUCH easier to fill out. But, I would avoid this type of set up.

Corporations-one of the oldest forms of business entities, a corporation, whether a "C" corporation or an "S" corporation, essentially operate the same way. The rules are fairly set, but you can operate a corporation with just one person if need be. The corporation is its own "person" and operates as its own being. The corporation can buy property, incur debt, sign contracts, you name it, the corporation can do it. The advantage is that being its own "person", it can get sued and sue others, and you are personally removed from the obligations of the corporation. While the corporation can go bankrupt, you personally aren't obligated, unless you have personally guaranteed a debt, for example. A lot of lenders require personal guarantees, so you would be wise to consult an attorney before signing anything. Corporations have a lot of requirements, so you would need to decide if it is right for you!

Limited Liability Companies-LLC's are sort of a hybrid between a corporation and a partnership. A fairly recent innovation, LLC's are owned by "Members", but they operate essentially like corporations, and have similar legal protections. A favorite among start-ups because of their less formal requirements, they can be less expensive initially (and the state required fee is less than a corporation) and it is nice not to have so many formalities. One person can create a sole member LLC, and need only fill out one tax return as well.

Partnerships-Probably the oldest form of business entity, a Partnership can come in many forms, but it is essentially two entities or persons that decide to go in to business together. The base form, a "General Partnership" is just that. Unfortunately, if you are personally in a General Partnership, you are in it as an individual, and you can be sued individually, and your personal assets may be at risk. (As a side note, corporations, LLC's, etc. can be partners in a General Partnership, so they have less risk, since they have their own legal protections built in.) But they can be set up on a handshake. Of course, that is a dangerous thing to do, and it is always best to have a partnership agreement written by an attorney. You can have what is known as a "Limited Partnership", which has a General Partner and Limited Partners; these Limited Partners can only lose their investment, and nothing more. The General Partner, however, has unlimited liability, so it is always wise to be a corporation or LLC as a General Partner, rather than an individual.

Combination Entities-We briefly alluded to these before, but these are entities that have other entities as partners, shareholders, members, etc. A good example is a Limited Partnership that has one (or more) General Partners, the General Partners are LLC's or Corporations. These can be beneficial, since there are tax implications, such as the fact that partnerships do not incur franchise tax obligations. Many businesses decide to form a business this way.

So much to think about! But it is a good idea to discuss all of your options with an attorney and an accountant. One size does not fit all!