The decision regarding business structure is a decision that a person should make, in consultation with an attorney and accountant, and taking into consideration issues regarding tax, liability, management, continuity, transferability of ownership interests, and formality of operation. A valuable source of Information on Selecting A Business Structure is available from the website provided by the Texas Secretary of State. A valuable source of basic federal tax information for starting a small business can be found on the website provided by the Internal Revenue Service. Another valuable source for tax information in Texas can be found under Employer and Tax Information on the Texas Secretary of State website. Thomas P. Finley, Jr. does not give tax advice of any kind and clients are advised to seek a tax advisor for those issues prior to choosing the structure of the new entity. Thomas P. Finley, Jr. can recommend a Certified Public Accountant (CPA) to assist you with these issues if requested.
Below are in order of the most commonly requested Texas business entities I am requested to form in my law office.
Basic Texas Business Entities
Since the mandatory application date of January 1, 2010, the Texas Business Organizations Code (BOC) applies to all Texas corporations, partnerships, limited liability companies, and other domestic filing entities, as well as all foreign filing entities registered to transact business in Texas. The BOC applies regardless of an entity’s formation date or whether the entity has taken affirmative steps to adopt the BOC.
New business owners make many important decisions and one of the first is selecting the type of entity for the new business. Although this decision can be changed later, it is more cost efficient to make the right decision the first time. The business owner should become familiar with the types of entities and then coordinate with his or her attorney and accountant regarding the best entity choice considering the planning and the long term goals of the business owner. A good source of information for tax considerations when starting a new small business can be found in the Internal Revenue Service website under "Business Structures".
The following are the most common basic types of business entities available in Texas.
The Limited Liability Company (LLC) is formally created in Texas by filing a Certificate of Formation with the State of Texas to obtain the benefit of limited liability company status. In some ways, the limited liability company resembles a corporation and in others it resembles a general or limited partnership. The LLC combines the benefits of limited liability of the corporation for all of the owners of the LLC while retaining the tax advantages of a partnership. The operational aspects of LLC’s are very flexible under Texas law and require less formality in than a corporation. The LLC is a very popular business entity for entrepreneurs that desire a low maintenance option to the more rigid corporation structure. In some ways, the limited liability company resembles a corporation and in others it resembles a general or limited partnership. The power to run the day to day operation of the LLC can be by the members themselves or they can provide for managers to run LLC similar to the Board of Directors of a corporation. With the assistance and advice of an accountant, the owners can elect different options for tax treatment of their LLC. The LLC is a single entity in which all of its owners, called members, have liability protection from the operations of the LLC. Dallas Business Lawyer Thomas Finley works together with business clients and their accountant in the formation of Limited Liability Corporations LLC in Texas. Limited Partnership or LP or Ltd.
A limited partnership is an entity formally created under Texas law where the limited partners can receive liability protection. The limited partners can only receive liability protection by filing a Certificate of Formation of Limited Partnership with the State of Texas. A limited partnership is made up of one or more general partners and one or more limited partners. The general partner or general partners will have control of the day to day operational aspects of the partnership and any other matters allowed the general partner as set forth in the Limited Partnership Agreement. All limited partnerships should have a limited partnership agreement. Limited partnership agreements will clearly set out the rights and responsibilities of the general partner and the matters upon which the limited partners will have control or a vote regarding the operations of the limited partnership. Limited partners should not participate in active management of the partnership as a limited partner but can be employed by the partnership. The general partner accepts liability and responsibility for the partnership in exchange for the non-participatory financial backing of limited partners. In most cases, the general partner is a corporation, limited liability company (LLC), or another limited partnership because the general partner is ultimately liable for all the debts and obligations of the limited partnership. Limited partners invest in the limited partnership without risk of liability beyond their initial contribution as set forth in the limited partnership agreement. Dallas Business Attorney Thomas Finley can assist clients in the entity formation for the General Partner, the formation of the Limited Partnership, and drafting the Limited Partnership Agreement. S Corporation or Sub S Corp.
The S Corporation is a regular corporation for state law purposes except the S Corporation is a device used commonly by close corporations in which the shareholders have elected, under Subchapter S of the Internal Revenue Code, to be an S corporation and therefore treated as a partnership for income tax purposes. It is advisable this election be made by the shareholder’s accountant. Unless the corporation and its shareholders make the election to be a S Corporation, the corporation itself is subject to taxation on its income. S corporations are subject to very technical rules of federal income tax law regarding the qualification and maintenance of S corporation status. Shareholders of S Corporations are generally not liable for debts or claims against the corporation unless they have otherwise agreed to be obligated for such debts by personal guarantees. Dallas Business Lawyer Thomas Finley works together with business clients and their accountant in the formation of S corporations in Texas.
A Texas corporation is created by filing the required formation documents with the Texas Secretary of State. It is an artificial person or legal entity, created by statute and existing separate and apart from its owners or shareholders, so that it may own property, make contracts, and sue and be sued in its own name. By incorporating a business, the separation shields the shareholders from any liability for debts and other obligations of the corporation. A corporation typically has a board of directors, elected by the shareholders, which oversees the strategy and dealings of the business. The board selects officers to oversee day-to-day management of the corporation. Corporations vary widely in complexity and number of shareholders. Texas corporations vary in types and can include: (1) the individual owner corporation, in which all stock is owned by one person. (2) the close corporation, in which the stock is held by a few owners and is not publicly traded; and (3) the public issue corporation, in which shares of stock are sold to the public and held in many hands. Unlike a sole proprietorship or partnership, a corporation can have continuous existence. As a general rule, the death of a shareholder or the sale of stock by one owner to another will not affect the continuity of the business operation. As a general rule, corporate shareholders are not liable for claims against the corporation beyond the amount of their individual investment. Dallas Business Attorney Thomas Finley regularly assists small business owners in forming corporations in Texas.
General Partnership - GP
A general partnership occurs whenever two or more persons or legal entities associate to operate a business together as co-owners of the business for profit. The general partners may or may not have taken the time to have a written partnership agreement that spells out the rights and duties of the partners relative to the partnership assets, liabilities, income and losses of the business, and control of the business operations. To the extent these matters are not addressed by a written partnership agreement, Texas has enacted statutory laws to provide an overall structure for the management and operation of the general partnership. Each partner has the implied authority to bind the partnership as to outsiders by any act within the scope of the usual and ordinary activities of the particular business. Each partner individually, and the partnership as a separate entity, is jointly and severally liable for all debts and obligations of the partnership and for wrongful acts or breaches of trust by other individual partners. Dallas Business Lawyer Thomas Finley drafts Partnership Agreements for partners who choose this type of partnership.
Sole proprietorship is the least complex business structure in which the individual owner carries on his or her own business even though the business may be operating under an assumed name. Under Texas law, a sole proprietorship has no separate legal existence apart from the sole proprietor. The sole proprietor has all the control of and responsibility for the business operation and business decisions. The sole proprietor owns all the business property as an individual but also assumes unlimited personal liability for all debts and other claims against the business. Sole proprietorships are the simplest forms of business structure with the most risk in terms of liability from its operations. Dallas Business Lawyer Thomas Finley is often contacted by sole proprietors for formation of a new business entity such as a LLC, limited partnership, or corporation for their existing sole proprietorship business to allow for future growth and to offer additional liability protection.
CONTACTBusiness Formation Attorney Thomas P. Finley, Jr. for a consultation on your new business formation.
Registered Agents – What is a registered agent?
The Texas Business Organizations Code (“BOC”) requires every domestic or foreign filing entity to maintain a registered agent and office in Texas. The BOC also permits the filing of an appointment of agent for service of process by an unincorporated nonprofit association. Additionally, the Texas Finance Code permits a Texas financial institution to appoint an agent for service of process
An entity’s registered agent is an agent of the entity on whom may be served any process, notice, or demand required or permitted by law to be served on the entity. Section 5.201(b) of the Texas Business Organizations Code (“BOC”) requires that registered agents designated on or after January 1, 2010 must have consented to serve in that capacity in a written or electronic form developed by the Office of the Secretary of State. Click here to download the form provided by the Office of the Texas Secretary of State.
What is a registered office?
An entity’s registered office must be a physical address in Texas where the registered agent can be served with process during business hours. The registered office is also where the Office of the Secretary of State will mail correspondence. A registered office is the business office address of the registered agent and may be the same as the entity’s place of business. It cannot, however, be a post office box that is part of a commercial mail or message service unless that commercial enterprise is the registered agent.
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