At the Austin, Texas Law Firm Of AttorneyBritt, our business formation attorneys will help you turn your vision of a healthy and thriving company into reality by providing you with the legal tools you need to thrive well beyond tomorrow. We can help in most areas including
Given the tax and legal implications when choosing your business structure, new business owners should always seek the guidance of a highly qualified attorney with a professional background in both business law and tax law, an attorney such as the dual professional attorneys and CPAs at the Austin, Texas law firm of AttorneyBrit. We can verify all legal requirements are properly considered before you choose a business structure. The business structures in the State of Texas, and in most other states as well, are as follows:
The sole proprietorship is the simplest business form under which one can operate a business. A sole proprietorship is not a legal entity. It is simply an enterprise that is owned and operated by an individual. It is the easiest type of business to establish-no state filing or agreement with other owners is required. By default, once an individual starts selling goods or services, he or she has created a sole proprietorship.
A sole proprietorship is not legally separate from its owner. The law does not distinguish between the owner's personal assets and the business' obligations.
A sole proprietor's assets can be (and often are) used to satisfy the business' debts. Consider this before selecting a sole proprietorship as your business form. Accidents happen. Businesses go out of business all the time.These unfortunate circumstances may quickly become a nightmare for its owner.
A partnership is a business form created automatically when two or more persons engage in a business enterprise for profit. A general partnership is the simplest variety of partnership. By default, a business that begins with a verbal agreement or handshake is considered a general partnership. In a general partnership, all partners share in the management of the entity and share in the entity's profits. Matters relating to the ordinary business operations of the partners are decided by the partners. A formal, written partnership agreement that sets forth all the partners' rights and responsibilities is always highly recommended; oral partnership agreements are fertile ground for disputes among partners.
A general partnership offers no liability protection to its owners-the general partners are all liable for the debts and obligations of the general partnership. This means that a general partner's personal assets can be used to satisfy the business debts of a general partnership.
A limited partnership (LP) is a variety of partnership owned by two classes of partners: general partners and limited partners. General partners manage the enterprise and are personally liable for its debts. Limited partners contribute capital and share in the profits, but typically do not participate in the management of the enterprise. Another notable distinction between the two classes of partners is that limited partners incur no personal liability for partnership debts beyond their capital contributions.
In an LP, at least one partner must be a general partner with unlimited liability, and at least one partner must be a limited partner whose liability is limited to the amount of his or her investment. Limited partners enjoy liability protection much like the shareholders of a corporation or the members of a limited liability company (LLC).
An LP allows for pass-through taxation, as its income is not taxed at the entity level. Limited partners can use losses to offset other passive income on their tax returns. General partners' losses can be used to shelter other income up to the value of their investment in the partnership, since their losses are not usually considered passive. LPs have been largely eclipsed by the development of the more versatile LLC.
To form an LP, the LP organizers must file appropriate formation documents with their state's business chartering agency and must pay a required filing fee. The LP organization is especially appealing to types of businesses where a single, limited-term project is the focus (such as real estate or the film industry). LPs can be used as a form of estate planning in that parents can retain control of their business while transferring shares to their children.
A limited liability partnership (LLP) is a hybrid business form that shares attributes of partnerships and limited liability companies (LLCs). An LLP is an entity comprised of licensed professionals, such as attorneys, accountants, and architects. The partners in an LLP may enjoy personal liability protection for the acts of other partners (but each partner remains liable for his or her own actions). State laws generally require LLPs to maintain generous insurance policies or cash reserves to pay claims brought against the LLP.
The LLP form is appealing to licensed professionals that are prohibited from operating under an LLC or corporation-professionals such as accountants, attorneys, and
architects. An LLP also allows for pass-through taxation, as its income is not taxed at
the entity level.
To form an LLP, the LLP's organizers must file appropriate formation documents with their state's business chartering agency and must pay a required filing fee.
The standard corporation, also called a C corporation, is the most common and reliable business structure. A corporation is a separate legal entity owned by its shareholders. As a result, it protects its owners from personal liability for corporate debts and obligations.
A corporation's shareholders, directors, officers, and managers must observe particular formalities in a corporation's operation and administration. For example, decisions regarding a corporation's management must often be made by formal vote and must be recorded in the corporate minutes. Meetings of shareholders and directors must be properly noticed and must meet quorum requirements. Finally, corporations must meet annual reporting requirements in their state of incorporation and in states where they do significant business.
Taxation is a significant consideration when choosing a business structure. A C corporation is taxed as a separate legal entity (i.e., no "pass-through" taxation like
a partnership). If the corporation distributes profits to the shareholders in the form of dividends, shareholders pay income tax on those distributions; thus, commentators criticize C corporations as
imposing "double taxation."
As with any business entity that offers liability protection to its owners, a corporation must file a charter in its home state. A corporation begins its life by filing articles of incorporation (sometimes called a certificate of incorporation) in the appropriate state and paying the necessary filing fee.
An S corporation is a standard corporation that has filed for S corporation status with the Internal Revenue Service (IRS). The S corporation's tax election adopts
pass-through taxation-thereby sidestepping the double taxation burden borne by C corporations.
S corporations file an informational tax return (much like a partnership) but the entity pays no tax. The shareholders report their share of the S corporation's profit or loss on their individual tax returns.
The limited liability company (LLC) is often described as a hybrid business form. It combines the liability protection of a corporation with the tax treatment and ease of administration of a partnership. The LLC is America's newest form of business organization; the great bulk of laws authorizing LLCs in the United States were passed in the 1980s and 1990s. The watershed event in the rise of the LLC was a 1988 IRS ruling that recognized partnership tax treatment for LLCs. Within 6 years, 46 states authorized LLCs as a business form.
LLCs enjoy pass-through taxation-thereby sidestepping the double taxation burden borne by C corporations. LLCs file an informational tax return (much like a partnership) but the entity pays no tax. The members (owners) report their share of the LLC's profit or loss on their individual tax returns. A note-of-caution, some states including Texas have reformed their tax laws to include a Franchise Tax for LLC's and PLLC's on profits over a certain amount.
LLCs can be formed only through filing a charter document (typically called articles of organization) in the appropriate state and paying the required filing fee.
Professional limited liability companies (PLLCs) are specialized entities organized and operated solely by licensed professionals such as attorneys, accountants, and architects. The members (owners) of a PLLC may enjoy personal liability protection from the acts of other members, but each member remains liable for his or her own professional misconduct. Not all states recognize the PLLC business form.
Some State laws generally require PLLCs to maintain generous insurance policies or cash reserves to pay claims brought against the corporation.
PLLCs are formed in a similar manner to standard corporations and LLCs by filing formation papers with the appropriate state agency and paying the necessary filing fee.
Professional corporations (PCs) and Professional Associations (PAs) are specialized entities organized and operated solely by licensed professionals such as attorneys, accountants, and architects. The shareholders of a PC or PA may enjoy personal liability protection from the acts of other shareholders, but each shareholder remains liable for his or her own professional misconduct.
Not all states recognize the PC or PA business form. Some State laws require PCs and PAs to maintain minimum amounts of professional insurance or cash reserves to pay claims brought against the corporation or association.
PCs and PAs are formed in a similar manner to standard corporations and LLCs, by filing formation papers with the appropriate state agency and paying the necessary filing fee.
A nonprofit corporation is an entity formed for purposes of pursuing a matter of public concern for non-commercial purposes. Nonprofit corporations are authorized by different statutes than standard for-profit corporations; however, the process of forming a nonprofit is closely parallel. Nonprofit corporation organizers must file nonprofit articles of incorporation or a certificate of incorporation with the appropriate state agency and pay the required filing fee. The formation documents must include certain clauses and information, such as a very detailed business purpose statement, in order for the entity to qualify for tax-exempt status.
To pursue tax-exempt status, nonprofits must apply for federal and state (if applicable) tax-exempt status. Tax-exempt status is not automatically granted upon formation. To apply for federal tax-exempt status, a nonprofit must file Form 1023 with the IRS. For state requirements, it is best to contact the department responsible for taxation in the non-profit state of formation.
Like standard for-profit corporations, nonprofits provide limited liability protection. The personal assets of the directors, officers and members typically cannot be used to satisfy the debts and liabilities of the nonprofit.
The most common type of nonprofit is the 501(c)(3), meaning it is formed in compliance with Section 501(c)(3) of the Internal Revenue Code. These nonprofits are organized and operate for a religious, educational, charitable, scientific, literary, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals or children purpose as permitted under this section of the Internal Revenue Code. Nonprofits may also be formed for other purposes pursuant to different sections of the Internal Revenue Code. For example, business leagues, chambers of commerce, and real estate boards are formed under Section 501(c)(6) of the Internal Revenue Code, and a cooperative hospital service organization is formed under Section 501(e).
An equally important step in the development of your business is your determine and comply with the various overlapping tax responsibilities of your new business. The following information will guide you to the appropriate Federal, State and Austin agencies who administer business taxes.
The Internal Revenue Service (IRS) governs all things related to tax collection at the federal level. In addition, the IRS provides a wealth of business tax related information for small business owners. Simply click on the link below and you will soon be on your way to understand your federal tax responsibilities.
The local IRS Taxpayer Assistance Center provides walk in face-to-face assistance.
Some states impose a state income tax upon businesses. All states have sales and use taxes that can apply to businesses. In some states the agency handling such taxes is referred to as the Department of Revenue. In Texas there is no personal income tax and technically no corporation income tax, although corporations are subject to a franchise tax that basically applies to corporations with more than a million dollars in assets or more than a million dollars in annual gross revenues. The franchise tax is very low even in the situations where it does apply. The Texas Comptroller of Public Accounts is the agency responsible for the administration and collection of the franchise tax and state and local sales tax for businesses operating in the State of Texas. The following link provides an informative guide that will educate you on the what, when, where, why and how of sales and franchise taxes. Texas Comptroller of Public Accounts 111 East 17th Street Austin, Texas 78711 512-463-4600 or 800-252-5555
In some states city income taxes exist along with city and/or county sales taxes, personal property taxes, and other fees. Texas has no city income taxes. However, most cities or counties will impose city and/or county sales taxes and a business personal property tax upon businesses that own tangible personal property and use that property to produce income.
Internal Revenue Service - Provides specific information regarding your federal employment tax responsibilities.
Texas Workforce Commission - Provides specific information regarding your state and local employment tax responsibilities.
According to Texas Wide Open for Business, the State of Texas does not require a general "business" license; however, there are a number of regulatory agencies that have licensing and permitting requirements based on the type of service, or products associated with your business. To ensure that all permitting requirements are met, you should contact the local county and/or city government in which you plan to conduct business to determine if there are any additional requirements. To determine state occupational licensing and permitting requirements, please visit the Texas Department of Licensing and Regulation (TDLR), specifically the TDLR Licensed Programs tab, for more information. Other states and many cities and/or counties, including Texas, do often require a general business license be obtained from the local city and/or county administration building or clerk’s office.
Texas Wide Open for Business section on employer requirements is a one stop shop for small business owners. The information provided will help entrepreneurs understand and comply with federal and state employer requirements. There are a number of labor, safety, and reporting laws relating to employment of personnel, thus it is vitally important for small business owners to increase their knowledge and ensure they are in compliance. Click here for more information. Additionally, the Texas Workforce Commission publishes a great resource for employers. The Especially for Texas Employers is a step by step guide that walks employers and employees thru every aspect of Texas employment law.
Workers’ compensation is a state-regulated insurance system that provides covered employees with income and medical benefits if they are injured on the job or have a work-related injury or illness. Except in cases of gross negligence, workers’ compensation insurance limits an employer’s liability if an employee brings suit against the employer for damages. In Texas, unlike in most other states, private employers can choose whether or not to carry workers’ compensation insurance coverage. Visit Texas Department of Insurance for more info.
Note: That the failure to carry workers compensation insurance means the business/employer has additional potential liabilities not and the loss of some defenses in situations where an employee is injured on the job. A business should not elect to do without workers compensation insurance without first consulting a qualitied business attorney.
Note: New business owners should always seek the guidance of a professional tax and business lawyer. A business attorney can verify all legal requirements are met before operating a businessa, and make sure the structure of the business and the agreements between the owners of the business provide for smooth operations well into the future in a manner that allows for the non-judicial resolution of disputes between the owners, etc. A little effort now can save you a lot later!
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