Doesn’t that sound great!
Every year there are thousands of Texans that decide to start their own businesses. Some have an easier time than others. Here are some things to keep in mind to help you as you set out:
When you start your own business, there are several factors that you need to consider as you get your business going. The first is deciding the best type of organization for your enterprise.
Types of Organizations
There are four main types of business organizations from which you can choose. Each form of business has positives and minuses—these depend a lot on which of the factors are most important to you. The type of business form that you select will impact the company’s and owners’ legal liability and its treatment for income taxes.
Let’s look at the most common options and their major characteristics:
If you choose to go with a sole proprietorship, the set-up is really pretty simple. There are only a handful of forms to file. The business is structured so that if you’re the business’s sole owner, you don’t distinguish the business from yourself. You can still use a business name that is different from your own name, but the key point is that in a sole proprietorship, all of the profits, losses, assets, and liabilities are your personal responsibility. You’ll also have to pay self-employment tax on the income.
Sole proprietorships aren’t a good idea if you are undertaking a high-risk business. That’s because they put your own personal assets at risk. So, if you’ll be taking on a lot of debt to start your business, have had credit or debt issues in the past, or if your business involves an activity for which you might potentially be sued, you should go with a legal structure that will give you protection for your personal assets.
An LLC is a limited liability company. This is a business structure that protects the owner’s personal assets from financial liability and gives some protection against personal liability, although there are a few situations where an LLC owner can still be held personally responsible. You can talk to Pam about these and discuss if an LLC is the best fit for your organization.
An LLC must elect to be taxed as an individual, a partnership, or corporation. You will need to file paperwork with the Texas Secretary of State if you want to adopt this business structure, and you will need to pay the initial fee of about $300. As an experienced business lawyer, Pam can help you prepare and file your incorporation documents and start-up business agreements.
A corporation is a business entity distinct from its owner, which can reduce personal liability. Corporations are more complex to create and to manage due to the many tax, accounting, record keeping, and industry requirements. A corporation will require you to select a name or your business, appoint directors, file articles of incorporation, pay filing fees, and comply with other Texas incorporation laws.
If you’re not going to be the sole owner of your new business, you might also consider a partnership. There are a few different types of partnerships to discuss:
A general partnership is organized so that all of the partners are personally liable for business debts. Further, any partner can be held totally responsible for the business—and any partner can make decisions that impact the entire business.
In contrast, in a limited partnership, one partner is in charge of the decision-making and may be held personally accountable for business debts. The other partner is just an investor (the so-called “silent partner”). There are different structures for limited partnerships, but typically each partner is only liable for their level of investment.
A limited liability partnership (“LLP”) is typically used by professionals like accountants, physicians, and attorneys. This type of business organization can protect the partner’s personal assets and the partners themselves from any liability created by the other partners.
Partnerships aren’t required to file separate tax returns, but they have to file information returns with the IRS. The partnership’s profits or losses pass through to its owners. As such, its income is taxed at the individual level.
The registration or renewal fee for a Texas limited liability partnership is currently $200 per partner, and there a couple of forms that must be completed and filed.
Questions to Ask
You should ask yourself what type of business will work best in your situation:
- Do I have a high-risk business?
- Am I in business alone or with others?
- Which type of business organization will best limit my liability to business creditors?
- Which type of business organization works best for taxes?
- How do I want to handle personal liability?
- Should I go with a LLP for my professional practice?
Think about these questions and then speak with Pamela Hailey-Petty about organizing your small business by contacting the Hailey-Petty Law Firm in Austin at (512) 655-2186 or email firstname.lastname@example.org.
Start being your own boss with the right type of organization for you!
Your business’ future is our business.