Starting a Business?

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There are few things in life more satisfying than starting and building a profitable business.  But before you jump into business with both feet, take a moment to consider the following:

General Considerations in Starting Your Business

Sole Proprietorship

Limited Liability Company

Partnership

Corporations

Additional Resources for Small Businesses

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General Considerations in Starting Your Business

What kind of business entity should you have? 

Texas law provides you with a lot of options when it comes to the form of your business.  The most popular business forms in Texas are sole proprietorships, partnerships, corporations and limited liability companies (LLCs).  Each of these business forms are treated differently for tax purposes, and each of them are treated differently for liability purposes, too.  Before you choose, you should take the time to consult with an experienced attorney and accountant; they can help you choose the right form for your business.

Do you have enough money to get your business started and to keep it operating until it is profitable? 

The biggest hurdle a business faces is to have a cash flow that can keep the business running.  Most people starting a business do not have enough cash from the start to do this.  So most people look for money from a bank, investors, friends, family, etc..  To get money from others you will have to explain what your business is all about and how you will eventually generate enough cash flow and profit to pay them either back or a reasonable return on their investment in you.  Usually these lenders and investors are going to want to see your “business plan.”

What is a business plan? 

A business plan explains what your business is all about, how it will work, how you will pay off your debts, how you will grow your business, and how you will make it profitable.  It will include many things: an explanation of what services your business will be engaged in, long-term and short-term financial budgets, where your business will be (i.e., whether at home or in a store front), how it will find customers, how it compares to similar businesses in the area, how your business will adjust to the changing needs over time, equipment needs, and other items unique to your business.  There are many sources on the internet, and computer software, available to help you put your business plan together, as well as many sample business plans for the type of business you are considering; see http://www.sba.gov/category/navigation-structure/starting-managing-business/starting-business/writing-business-plan.

The Pounders Law Firm: Lawyers for Growing you Dallas & Collin BusinessAbout Sole Proprietorships

What do I need to do to be a sole proprietor?

There is nothing required to be a sole proprietor.  If you are conducting business by yourself in your own personal name, you are a sole proprietor.

What if I use a trade name?

You are allowed to conduct your business in your own name.  However, if you are using a business name other than your own, Texas law requires you to file a certificate of assumed name with the County Clerk of each county in Texas you will be doing business in.  This certificate gives notice to the people in your county the identity of the person running the business under that business name; you will be required to disclose your name and address.  Usually there is a small fee ($8-15) due with each certificate filed; forms and filing fees differ from county to county.  If you are using your name along with an industry or location, such as “Jack Smith Plumbing” or “Jack Smith Plumbing of Smithville”, you may not have to file a certificate of assumed name, but whether or not you do depends on the circumstances.  If in doubt, ask your lawyer or file an assumed name certificate.

How are Sole Proprietorships taxed?

The income and losses of your business are reported on Schedule C in your annual Form 1040 tax return.  Any income is also subject to self-employment tax.

Do I need to get a Federal Employer Identification Number (“EIN”) from the IRS?

No, but you should still get one.  Your social security number can serve as your EIN.  However, you may apply for a EIN if you wish, and I highly recommend it.  This is a good idea if you don’t want to share your social security number with the world.  You can apply for an EIN directly from the IRS, at no cost, from their website (currently, https://sa2.www4.irs.gov/modiein/individual/index.jsp).

How does being a sole proprietor compare to being a LLC?

In several ways, there isn’t much difference between operating as a sole proprietor or as a LLC.  By default, the tax treatment for a sole proprietor and a LLC with one owner are essentially the same, unless the LLC has made certain tax elections.  Likewise, in some circumstances, such as with many professional services providers and consultants, even if you are operating in a LLC you may still be personally liable for what you do.  Often the owners of LLCs, like sole proprietors, are going to be personally liable (as guarantors) for the debts and other liabilities of the LLC.  And you can always form an LLC later when your business gets more profitable.

However, I still recommend that you form your business as a LLC from the beginning.

Why?

·         And LLC separates your business liabilities from your personal ones (except where there is a guarantor on the loan).

·         Your personal creditors are often prevented from taking the LLC from you to satisfy personal debts (“charging order protection”) though they may still go after your part of the LLC’s income.

·         Forming a LLC later on will incur additional expenses in transferring assets, contracts and other items to the LLC.

·         It’s a pain – you’ll have to get a new EIN, new bank accounts, and new insurance in the name of the LLC.

Setting up your business right, right from the start, is the right way to go — saving you time, money and headaches in the long run.

About Limited Liability Companies

The Pounders Law Firm Building Texas Businesses in Dallas & Collin Counties

"As a Sole Proprietor or Business Partner, you enjoy all of the profits derived from your business ownership. Unfortunately, you are also personally responsible for all of its debts and other liabilities. A simple change in the structure of your business, to a Limited Liability Company (LLC) may limit that risk..."

 

Lawyers for growing Dallas & Collin Co. Businesses

Limited Liability Companies are often called "legal chameleons" because they combine the limited liability aspects of corporations, with the income-loss pass-through aspects of partnerships and sole proprietorships.

What is a LLC?

A Limited Liability Company is a legal entity created pursuant to Chapter 101 of the Texas Business Code. LLCs receive special tax treatment by the IRS and provide its owners (called “members”) limited liability from the operations of the LLC, similar to the limited liability shareholders in a corporation enjoy. For IRS purposes the income of LLCs flows through to its owners, by default, like a sole proprietor in the case of single member LLCs and a partnership in the case of multi-member LLCs. For this reason LLCs are often called “Legal Chameleons” because they combine the best elements of corporations (limited liability) and sole proprietorships/partnerships (special IRS tax treatment). Please note though that not all businesses may operate as a LLC – I strongly recommend that you consult with an attorney to determine if your business is prohibited from operating as a LLC.

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Why should I form a LLC?

The main reason for forming your business as a LLC is limited liability. If at all possible, it is a good business practice to keep your business life and your personal life separate from each other. If the line between the two isn’t distinct, you may lose your home, your kids’ college money and other personal assets for things that happen at your business.

Bad things happen to good business people. For instance, commercial liability insurance is a must-have; but if your business has significant contact with the public (example: retail businesses, insurance offices, residential real estate offices, etc.) your commercial liability insurance may not fully protect your personal assets from those who sue you for injuries they receive while on your property. Additionally, if your business has any significant debt (example: lease obligations, vendor accounts payable, lines of credit, etc.) and you default on them for any reason, your creditors may come after your personal assets to satisfy their claims.

The best practice is to clearly separate your business operations and property from your personal assets. The members of a LLC are not required to be personally liable for the liabilities of the LLC. Properly transferring the assets and liabilities of your business to a LLC is a great way to limit your personal liability, protecting your personal assets from the bad things that happen in business.

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How do I form a LLC?

Forming a LLC is very easy, and is done in this order:

  • Perform a name search with the Secretary of State to determine if your proposed name is available. I strongly recommend that you have a lawyer do this for you. If your proposed name is close to the name of another business in Texas it may be ineligible. If you form your LLC with an ineligible name you may be personally liable for violating the trade names and trademarks of existing companies. Additionally you will have to file expensive amendments with the Secretary of state to fix the problem. Plus there will be expenses related to changing your letterhead, advertisements, and signage. It’s just better to get it right the first time. I have a direct account with the Texas Secretary of State, so I can do this check for you quickly and inexpensively. Whether you hire me or not, please have a lawyer review this for you.
  • Prepare and file Articles of Organization with the Secretary of State. As a minimum the Articles of Organization must have the following:
    • A statement that the entity is a LLC
    • The name of the LLC, which must include an indication that it is a LLC (i.e., “My Business, LLC”)
    • The street address of the LLC’s registered office and the name of its Registered Agent; and
    • The identity of the LLC’s members

Management of the LLC is presumed to be vested in all of its members. If special management arrangements are being made, such as management by only a few of the members, this needs to be specified in the Articles of Organization, and these “Managers” must be identified.

  • If the Texas Secretary of State accepts the Articles of Organization it will provide you with a Certificate of Filing, containing a file number for the LLC. This file number is used by the State of Texas for all of its official business.
  • At this time if you are going to operate your business under a different name than its legal name it will need to apply for an assumed name with the Texas secretary of State. Like your LLC’s legal name, I strongly recommend that you let a lawyer take care of this for you, and for the same reasons. Additionally you may need to apply for assumed names in those Texas counties in which the LLC will conduct its business or own property.
  • Shortly after receiving the Certificate of Filing from the Texas Secretary of State, the Texas Comptroller will provide you with a Texas Franchise Tax number for state tax purposes.
  • You will then need to get a Federal Employer Tax Identification Number (known as the “FEIN” or “EIN”) from the IRS. This can be done for free online at http://www.irs.gov/businesses/small/article/0,,id=102767,00.html or manually using IRS Form SS-4. This application has a lot of industry specific questions. I strongly recommend that you fill out this application either with your lawyer or your CPA because the IRS uses this information to determine how to deal with your business. If you get it wrong up front it will cause you a lot of headache and cost you a lot of lawyer/CPA time in the future to fix it.
  • Hold a meeting of the “members” (even if it just you) to approve the LLC’s “operating agreement”, appoint officers, authorize signators on checking accounts, authorize the opening/closing of checking accounts, authorize the sale/transfer of assets from your sole proprietorship/partnership to the LLC and other business. This is where your lawyer can really help you out. Your LLC won’t do much good for you if you keep all of the bank accounts, leases and business assets in your personal name – these have to be transferred to the LLC. This can be done using Bills of Sale and Affidavits of Transfer of Assets, but are legal instruments that affect your property rights and should at the very least be prepared for you by an attorney. Although you can find sample documents on the internet or on LegalZoom and the like, you will not know if you’re doing these transactions correctly unless you have an attorney help you with it.
  • Finally, you’ll need to:
    • transfer financial accounts and insurance policies to the LLC’s name and EIN
    • assign leases and accounts payable to the LLC
    • have your lawyer help you have your business licenses transferred to the LLC as appropriate or required by law

These steps are meant for informational purposes only. Depending on your business and its industry or special circumstances, more steps may be needed.

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Do I need a lawyer to form a LLC?

No. But I strongly recommend that you let a lawyer handle this for you, whether you hire me or not. As I’ve outlined above there are a lot of situations that you just simply need a lawyer for. But beyond these minimum requirements, if you’re going to be in business, and you want to succeed in your business, you simply need to have a relationship with a lawyer from the beginning.

A lawyer will do three things for you: (1) tell you what you must do to comply with law, plus other options to make your business better, (2) inform you of the risks of only doing a few of those things, and (3) let you know if it is worth doing all of those things. With this information you may decide to do all or just a few of the things on your legal checklist. You may decide to have the lawyer do all of these things for you, or you may decide to take care of some of these details yourself. But the bottom line is that a lawyer can help you make informed decisions. And if you have a good relationship with your lawyer, he will contact you periodically to make sure that your past decisions are still the best ones for your business.

 

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Can I form a LLC on my own? With others?

Yes, you can form a LLC by yourself. And you can form it with as many other persons as you want. There is no limit. However, be aware that Texas law provides that if one member dies or withdraws from the LLC, the LLC legally ends its existence. If your LLC is going to have more than one member let your lawyer know so that he can provide for the comings and goings of its members in the LLC’s operating agreement.

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Can my existing business be “incorporated” as a LLC>?

Absolutely! Most of the LLCs I’ve set up have been existing sole proprietorships that wanted to take advantage of the limited liability and special tax treatment that LLCs provide to their owners.

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Do LLCs have “bylaws?”

LLCs are governed by “operating agreements” rather than bylaws. An operating agreement is essentially a contract between the members of the LLC. Texas law does not require an LLC to have an operating agreement. However, I strongly recommend to my clients that they adopt an operating agreement because they will control most aspects of the LLC’s business and management to the extent they do not conflict with law.

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What is a Professional Limited Liability Company (PLLC)?

Some businesses, such as law firms, CPA firms, and medical offices, owned and run solely by licensed professionals, may operate as a PLLC. PLLCs operate substantially similar to a LLC, but the members and managers of the PLLC are limited to those licensed in that profession. Like Professional Corporations and Professional Associations, specific requirements and limitations on PLLCs, such as who may own them or who may manage them, are contained in Title 7 of the Texas Business Organizations Code. Since all of these entities require professional licenses, I strongly recommend that you consult with an attorney if you are contemplating the forming of a PLLC.

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Can a LLC be an IRS “S Corp?”

Absolutely! In fact most of my clients have formed a LLC to take advantage of S Corp treatment. There really isn’t such a thing as a “S Corp.” A “S Corp” is simply a business that has elected to be taxed as a small corporation under the Internal Revenue Code. The S Corp election is made with IRS Form 2553, although in some instances a LLC may also have to file IRS Form 8832 (election to be taxed as a corporation). To qualify as a S Corp, the LLC must meet the following minimum requirements:

  • Be a domestic (United States) limited liability entity
  • Have only allowable owners
    • including individuals, certain trusts, and estates and
    • may not include partnerships, corporations or non-resident alien shareholders
  • Have no more than 100 owners
  • Have one class of ownership
  • Not be an ineligible entity (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

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How does a LLC differ from a corporation?

A LLC differs from a corporation mainly in its treatment by the IRS. By default a single member LLC is taxed like a sole proprietorship, and a multi-member LLC is taxed like a partnership. This treatment allows all income and losses to pass-through to the LLC’s owners. This avoids the double taxation problem (the corporation pays tax on its income, and its owners pay taxes on the distributions from the corporation) that plague corporations.

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How does a LLC differ from a partnership?

Both General Partnerships and Limited Partnerships require that there be general partners with personal legal liability for the operations of the partnership. An LLC does not have this requirement – the LLC statutes do not require the members or managers of the LLC to be personally liable.

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How much does it cost to form a LLC?

Forming a LLC is relatively inexpensive. If you are filing the Articles of Organization on your own, the Secretary of State charges a $300 filing fee. However, I would be honored to help you with all or some of the details of your filing. For your convenience I charge a fixed fee for most of my LLC formation services – please contact me for further for a quote.

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How are LLCs taxed?

By default the IRS taxes a single member LLC like a sole proprietorship, and a multi-member LLC like a partnership. This treatment allows all income and losses to pass-through to the LLC’s owners. A LLC can elect however to be taxed like a C Corporation (regular corporation) by filing IRS Form 8823. And a LLC can elect to be taxed like a S Corp (small corporation, providing a pass-through of income/losses to its owners) by filing IRS Form 2553 (plus IRS Form 8823 in some situations).

Texas LLCs are also subject to the Texas Franchise Tax. For more information about this tax see the following on the Texas Comptroller’s website: http://www.window.state.tx.us/taxinfo/franchise/


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Partnerships

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What is a general partnership?”

A general partnership is a business relationship between two or more owners of a business, governed primarily by Title 4 of the Texas Business Organizations Code.  Think of it as two or more sole proprietorships that are put together by contract.  A partnership is usually governed by a partnership agreement; in the absence of a partnership agreement, Title 4 controls.

What kind of formalities are required of general partnerships?

One of the great things about general partnerships is that few formalities are required.  Unlike corporations, there is no need to meeting minutes, corporate filings, or the like.  Because it isn’t a separate entity from its owners, like corporations or LLCs, it doesn’t have to file anything with the state to be formed.  Because of this, partnerships can be kept fairly private.  However, in many instances if not most, the partnership will need to file an assumed name certificate with the county clerk in each county it operates in, especially if it operates under an assumed name.

How is a general partnership taxed?

Another great thing about general partnerships is that they are not double taxed like corporations.  The earnings of general partnerships is taxed to the individual partners.  IRS Form K-1 is used to report the earnings of each partner.

What are the disadvantages of a general partnership?

General Partnerships have several key disadvantages to them.

·         A General Partnership dissolves upon the death or incapacity of a partner.

·         Each general partner has unlimited personal liability for the obligations of the business.  For example, if one of your partners creates debt to purchase assets in the name of the partnership, you may be held liable for that debt.  Another example: if one of your partners commits malpractice and hurts someone, you may be equally responsible for the associated damages.

·         All profits are shared equally unless the partnership agreement says otherwise.

·         Ownership in the general partnership is not easily transferred.

What is a Limited Partnership (“LP”)?  What is a Limited Liability Partnership (“LLP”)?

LPs and LLPs are different kinds of partnerships:

·         A Limited Partnership creates two classes of partners: general partners and limited partners.  There must be at least one general partner.  The general partner has unlimited liability for the partnership.  The limited partners however, have limited liability for the partnership.  The partnership agreement is not made public; however, LPs must be registered with the state.

·         A Limited Liability Partnership where each Partners’ liability for the acts of the Partnership can be limited.  Like LLCs, LLPs must be registered with the state.  LLPs are particularly useful when joining several professionals together because a partner in an LLP is not personally responsible for any liability created by the negligence of another partners.  However, LLPs are required by law to maintain significant levels of liability insurance, or self-insure by maintaining large cash balances to satisfy liability claims against it.

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Corporations 

What is a Corporation?

A corporation is a separate legal entity created by the state at the request of individuals.  Think of a corporation as a person, independent of its owners.

What is the main advantage of incorporating?

The main reason why corporations are formed is the limited liability afforded to the owners of a corporation.  A corporation is a separate “person” under the law, so the personal assets of its owners (i.e., “stock holders”) can be protected from the corporation’s creditors and lawsuits.

What is a “S Corporation”?  A “C Corporation”?

There isn’t really any difference between a S Corporation and a C Corporation.  Both are formed the same way, but are treated differently by the IRS.  By default a corporation is a C Corporation, taxed independently from its owners.  Because of this C Corporations are sometimes said to be “double taxed” – first as a C Corporation, then again when profits (“dividends”) are distributed to its owners.  A qualified corporation may elect to have the IRS treat it as a S Corporation though.  S Corporation treatment solves the double taxation problem by “passing though” the income of the corporation to its owners as if they were partners in a partnership.  However not all corporations will qualify for S Corporation treatment.

Should I form a LLC or S-Corporation?

LLCs are, by default, taxed like a sole proprietorship or partnership.  Because of this, both LLCs and S-Corporations offer the same benefits or pass through taxation.  However, LLCs are designed to be more flexible and have less restrictions on them than S-Corporations.

What are the advantages of forming a Corporation.

  • As mentioned above, the main advantage of a corporation is the limited liability it offers its shareholders (owners). The corporate structure provides shareholders with a means of limiting their liability for business debts beyond what they have invested in the business.
  • A corporation is a separate legal entity and will continue to exist if one or more of the owners die.
    • The ownership of a corporation can be easily changed by the sale of shares.
    • Employees can be given a share of the business via stock options.
    • Tax deduction benefits and employee benefits.

What are the disadvantages of forming a Corporation?

  • Double taxation, the income that a corporation generates is taxed at two levels (unless you elect for an S-corporation):
    • Corporate income tax is paid at the corporation level.
    • Personal income tax is paid on the income that is given to shareholders on dividend.
  • Corporation structures, by their very nature, are complex.
  • A number of restrictions are imposed on an S-corporation.
  • Complex corporate formalities must be maintained to maintain the corporations limited liability and to comply with state law.
Like insuring your car and your house reduces your risk at home, these five kinds of insurance, listed generally in order of importance, can reduce the financial risks of running your business.
  • LIABILITY INSURANCE.  If someone is injured at your business or because of something done as part of the business, having liability insurance in place can protect you.  The most common example is if someone slips and falls in your business.  But if you make and sell a product that hurts someone, or if someone suffers financial loss in reliance on your professional advice, liability insurance can also cover these situations.  If your business is on that is open to the public consider a no fault medical payment coverage option.  If someone is hurt on your premises, it’s good business to take care of their medical costs whether or not you are at fault.
  • AUTOMOBILE INSURANCE.  Your personal automobile insurance, and the automobile insurance of your employees, may not cover business trips or when the vehicle is used in business.  Consequently it is important for you to have insurance to cover the vehicles used in business.
  • PROPERTY INSURANCE.  You’ve invested a lot into your business property.  General property coverage can cover both the inside and the outside of your business if you own the premises.  But if you don’t own the premises, like most small businesses, you can still insure your tenant improvements.  Tenant’s insurance coverage can be set up to replace the interior of the building and any other improvements you have made to the leased premises.  When looking at property insurance consider both “business interruption” and “important papers” coverages.  “Business interruption” coverage replaces income lost if a covered loss forces you to close your business.  “Important papers” coverage covers the cost of replacing damaged documents and to recreate damaged data (however such coverage is not a substitute for good backups!).
  • LIFE INSURANCE.  Your business should plan ahead to make sure that it will continue even if you or your business partners die.  The beneficiary of this insurance should be the business.  When looking at this type of insurance consider covering all or that partner’s portion of the company debt and the costs of buying the business out of his or her estate.
  • “KEY PERSON” INSURANCE.  This insurance pays yours company if a key employee or owner dies or becomes disabled.  Examples of key persons are your business partners and key team members (i.e., a very talented salesperson who generates 50% of your sales).  Listing team members that are not truly “key” to your business will only cost you more money, so you should probably limit the names on your “covered” list.  This type of insurance replaces income lost due to the loss of that key person and continues until the person is replaced.

These are just a general discussion of insurance programs available to you, and is provided for discussion purposes only.  Every business is different. This post is no substitute for a detailed discussion of your business and its risks with both your attorney and your insurance agent.

 

 

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