Owners face many risks in creating and operating businesses – but by formalizing your business with the Texas Secretary of State, you can gain limited liability. Setting up a separate legal entity between you and your business means that you can’t be held personally liable simply because you own the business. Sole proprietorships don’t have this protection, and the person who “runs” the business is the business – which is why people use the phrase “d/b/a,” short for “doing business as.” This means that if a sole proprietor’s business fails (or is sued), the sole proprietor may personally have to pay its debts. Worse still is a general partnership, where every partner of the business can be held personally liable – including for debts owed by other partners! This can be fatal not only to your business, but to your livelihood.
Three types of entities can protect you from being held to account for your businesses’ debts. The first is the corporation, where the business is a separate “person” owned by its shareholders. Most people think of corporations as giant, billion-dollar enterprises – but small business can be corporations too! The ability to resell shares and ensure steady management can assist a new business in finding its footing so long as securities laws restricting fundraising are satisfied. Corporations usually have the disadvantage of double taxation – the corporation’s income gets taxed first, and then any money the corporation pays its stockholders (called “dividends”) or employees (salary or wages) gets taxed again. However, some corporations (called “S” corporations) avoid this problem, as their owners can report all income from the corporation as personal income for tax purposes.
Two other entities offer similar advantages to small business owners. In a limited partnership, some partners are “general partners” that run that business and absorb any liability; the rest are “limited partners” that can’t be held liable but can profit. Limited liability partnerships are limited partnerships that also limit the general partner’s liability to a certain amount. These partnerships are created by a partnership agreement – the agreement that binds all partners to certain rules. Like “S” corporations (and unlike double-taxed “C” corporations), income from a limited partnership is taxed as personal income to a partner. Unlike corporations, the general partner of a limited partnership normally owes fiduciary duties to all other partners – and if these duties are broken, the general partner may be in serious legal trouble.
Finally, limited liability companies (LLCs) are a mix of corporations and limited partnerships. Like partners, members of an LLC only have their LLC income taxed once; also like partners, members of an LLC may owe fiduciary duties to the other members. Unlike partnerships, every member of an LLC can take part in the business – an LLC can either be managed by managers (who can be elected or selected) or by its membership. Thus, just as a corporation has bylaws, an LLC is governed by a company agreement that describes how the LLC will work.
All of these types of businesses start the same way: by filing key documents with the Texas Secretary of State. All of these businesses have the advantage of a formal set of rules that bind you and your business partners, to ensure that everyone lays by the same rules. We can help you determine what type of entity is right for you , draft governing documents to keep your company in business, and let you know what rights and obligations you may have under any company agreement. Contact us by email or call The Spencer Law Firm at (713) 961-7770 today for a free consultation with our attorneys, to find out if our legal services can help your next venture.