How do I Incorporate a Business?
You’ve got a creative idea and you’re ready to venture into entrepreneurship. What now? You probably want to know how to incorporate a business – but did you know not all business entities are incorporated? Learn about the different types of Texas business entities below and find out which is right for your venture.
Incorporated or Unincorporated?
When someone asks whether your business is incorporated, they are probably asking whether the entity is created through a formal process. Some entities are, and some are not. Corporations, limited liability companies, and limited partnerships are “filing” entities. These entities exist by filing documents with the Texas Secretary of State. Non-filing entities may come to exist based on agreements or even just by virtue of being in business.
Sole proprietorships and general partnerships are unincorporated entities. Sole proprietorships exist when one person enters into a business enterprise under his or her own name and identity. The act of doing business creates the sole proprietorship. A partnership exists when two or more people agree to do business together as partners. Whether the agreement is in writing or verbal, it is the agreement itself that creates the partnership entity.
Sole proprietorships and partnerships often do business under trade names. This trade name is known as a DBA. DBA stands for “doing business as.” A non-filing entity that does business under a trade name needs to file that DBA in the county where it keeps an office. If no office is maintained, the non-filing entity needs to file the Dba in all the counties in which it conducts business.
Corporations, limited partnerships, limited liability companies, and limited liability partnerships are incorporated entities in Texas. Their existence is created when they file specific documentation with the Texas Secretary of State.
A corporation is a familiar entity to most people. It is owned by shareholders and shares are generally easily transferrable. A corporation also enjoys flexibility in the way it’s managed and taxed. These options should be discussed with the help of an experienced attorney and tax professional. Corporations are often so designated in their name’s suffix: “ABC Corporation,” “ABC Incorporated,” “ABC Inc.” or “ABC Corp.”
A limited partnership is a structure in which one or more persons are limited partners and one or more persons are general partners. The limited partners do not control the business and they are not liable for its debts and obligations. The general partners control the business and are liable for the debts. Usually there is one general partner which is itself an entity. This structure provides limited liability to the limited partners, but at the cost of control over the enterprise. A limited partnership can be recognized by its suffix: “ABC, LP.”
A limited liability company is a hybrid of a corporation and a general partnership. It offers limited liability to the people who own its membership interest, but it can be controlled by them if proper elections are made. There is also flexibility in how the entity can be taxed. Specifically, the members of a limited liability company can elect to pay taxes as if the entity were a partnership or as if it were a corporation. These are usually named something like “ABC, LLC” or “ABC Ltd.”
A limited liability partnership is an incorporated partnership that provides limited liability to its partners. These are designated with the suffix “LLP.”
Which is Right for You?
The common theme among incorporated entities is that someone in the entity has limited liability. Unincorporated entities do not offer limited liability. In order to shield yourself from becoming personally liable for your business venture’s debts and obligations, you must choose the appropriate entity and file the proper documents with the Texas Secretary of State. However it is important to talk to an attorney because the incorporated entities do not provide the same ownership, taxation, or liability structures. Choosing the right structure is a case-by-case decision. The descriptions provided above are very general, and are insufficient to determine what type of entity is best (or even an option) for any particular enterprise.