Choosing an Entity for Your New Business
With several options to choose from, picking an entity type for your business requires a careful consideration of personal preferences, tax consequences, and future opportunities for growth. In Texas, the most popular form of incorporated entity is the limited liability company (LLC), which offers the limited liability protection formerly offered only through corporations but also the flexibility in management formerly offered only through partnerships. But, even though the LLC is the most common incorporated entity, this does not necessarily make it the best one for you. This post explains many of the entity forms available, as well as some of their most notable pros and cons.
Unincorporated entities—sole proprietorships and general partnerships
Generally speaking, the unincorporated entities—sole proprietorships and general partnerships—are the riskiest entities to use to conduct business. That’s because unincorporated entities do not offer any inherent liability protection for their owners. A sole proprietor and his or her business are considered the same legal “person.” Any obligations or debts of the business are the obligations or debts of the owner, automatically, and any lawsuit against the business can (and will) easily attach to the owner’s personal assets, such as a home. General partnerships work in much the same way. To avoid these situations and shield yourself from liability, the attorneys at Mejias Lindsay recommend that most business owners form incorporated entities.
Incorporated entities—LLCs, corporations, and limited liability partnerships
Incorporation separates the business owner(s) from the legal entity that is their business. This separation allows the debts and obligations of the business to remain separate from that of the people behind the business. It also provides a shield against most lawsuits. If a client trips on a rug in your workplace, and sues your business, only the assets of your business are at risk. Your personal assets, such as home, checking and savings accounts, and personal belongings, cannot be garnished to pay a plaintiff. Or, for example, imagine that your business enters into a lease for office or warehouse space but must break the lease early. The landlord in this situation can only sue the business and recover from business assets—the landlord cannot reach your personal assets to recover on a judgment. Incorporation gives you the peace of mind that, with certain exceptions, the personal assets of you and your family won’t be called upon to satisfy a business debt.
In addition to a liability shield, incorporation can offer many tax benefits. The best way to catalogue and determine the potential tax benefits of the different incorporated entity forms is to talk to a trusted CPA. If you don’t have one, the attorneys at Mejias Lindsay PLLC are happy to refer you to some of the trusted CPAs that our firm and our clients work with. They can discuss how to best maximize your profits while simultaneously reducing your tax liability.
There are many reasons the LLC is currently the most-formed entity in Texas. Most of the tax benefits available to corporations are also available to LLCs, as well as some that are not. For example, LLCs offer pass-through taxation so that profits are not double-taxed at both the entity and owner levels. In addition, the rigid management structure of corporations is not required of an LLC. LLCs can have as little as a single owner, and in cases of multiple owners the LLC structure allows immense flexibility when drafting the operating agreement.
There are just a few areas where forming a corporation offers opportunities that are not available to LLCs. The one most often discussed is when the owners of the business want to be able to raise capital funds from outside investors. Investment into LLCs is generally limited to the owners’ contributions, but corporations can sell stock in order to raise funds. There are also some businesses and situations where forming a corporation may lead to increased tax savings; talk to your CPA about this if you think a corporation may be right for your business.
Finally, there are limited liability partnerships and limited liability limited partnerships. These entities are both registered with the Texas Secretary of State. If you previously entered into a general partnership, you can still register to transform it into a limited liability partnership. The benefit to operating as either a limited liability partnership or a limited liability limited partnership is that one or more partners can shield themselves and their personal assets in the event that the business is sued or faces debt problems.
Professional services entities—Professional Corporations and Professional Limited Liability Companies
Professional services entities are formed exclusively for the purpose of providing a professional service. These are services which require a license to offer, such as those of attorneys, veterinarians, physicians, and dentists. If you intend to offer professional services, you will want to incorporate as a professional corporation (PC) or professional limited liability company (PLLC). The Texas Secretary of State and the Texas Business Organizations Code closely regulate the formation and operation of these types of entities. If you are thinking of forming an entity in Texas, whether it is a professional services entity, an LLC, or another entity type, the attorneys at Mejias Lindsay PLLC are standing by with expertise to guide you through the process.