Providing Tax, Litigation, & Legal Insight to New Business Owners in Travis County
Starting a new business is exciting. Good business planning requires accurate foresight. With over a decade of tax, business, and litigation experience Ferguson Law Practice provides the perspective you need to anticipate material pivot points.
We can help you make good decisions up front for certainty and financial peace in the long run. Our Austin business attorney can answer all of your questions about the various types of entities , their respective advantages, disadvantages, IRS matters , and more. Whether you are seeking venture capital for your business, hoping to be acquired someday, or simply incorporating to protect your personal assets we can help.
Business Entities in Texas
Choice of entity determines matters of liability, tax, and management. It is important to understand that the business laws of Texas allow you to form an entity to intercept liability and protect your personal assets from creditors of your business. Forming an entity to stop creditors from taking your personal property is essential. Additionally, the IRS allows you to choose your tax treatment in most situations; making the right election decreases your tax bill. Finally, different entities have unique management structures and voting processes; whether it is just you or an entire group of operational and financial partners, different entity structures can provide the flexibility or centralization you need to ensure the right people are making the crucial decisions about your business.
The most common business structures include:
- Sole proprietorship. If you are the only business owner, you are already operating, and you have not formed an entity you are a sole proprietor. Being a sole proprietor provides no liability protection at all and is never recommended.
- General partnership. If there are multiple business owners, you are already operating, and you have not formed an entity you are a general partnership under Texas law. General partners have unlimited liability for business debts. General partners share liability, profits, assets, and responsibility for one another’s actions. General partnerships are not recommended. Partners do owe one another certain duties to act prudently and loyally but these special fiduciary duties can be recreated documentarily in a better entity such as an LLC. Partnerships allow incredible flexibility in financial arrangements between partners but the same flexibility can occur within a an LLC that is taxed under the partnership rules if the Internal Revenue Code.
- Limited partnership. This structure includes a combination of general and limited business partners. Limited partners do not manage the business and are liable for losses only to the extent of their investment. The general partner will have unlimited liability but the general partner can be an LLC in order to mitigate exposure. Limited partnerships centralize management and incentivize passive investment from financial partners who should not or cannot manage the actual business. Furthermore, limited partnerships enjoy favorable pass through tax treatment and basis rules when disposing of assets or distributing income.
- S corporation. S corporations have special shareholder rules limiting the identity and number of investors. S corporations generally enjoy pass through tax treatment but may have more complex basis rules that can be problematic when disposing of certain assets. S corporations are generally used in professional service businesses (with minimal assets or inventory) to defray self-employment tax liability. The management structure of an S corporation can involve a board, officers, shareholders, or a combimnation of all three. S corporations are generally allowed only one class of stock so may not be ideal for equity raises.
- C corporation. C corporations are the most vetted entity structure in business. Because corporations have been in use for centuries, case law concerning liability and management is robust and predictable. For larger established businesses the C corporation structure can provide incredible tax and liability advantages by retaining assets and income inside the corporation itself. But, C corporations are generally not a good choice for new businesses because they are subject to double taxation meaning the corporation itself pays tax on its income and the income is taxed again when the corporation pays money or distributes property to its shareholders. Ultimately, unless you have the flexibility and the knowledge to take advantage of retained earnings and profits within a C corporation this is not a good choice of entity.
- Limited liability company (LLC). LLC’s are the modern gold standard in that they allow utmost tax and operational flexibility while still providing hefty liability protection under Texas business law. From a tax perspective, LLC’s can be treated as partnerships, corporations, or can be wholly disregarded as entities separate from their owners. Management of an LLC can be delegated to a manager or managers, it can be reserved to all the members, it can be delegated to a board or officers, or management can be accomplished by a combination of all these things where certain types of decisions are made by different people or groups. LLC’s classified as partnerships can create complex financial arrangements such as preferred payments, waterfall arrangements, and special allocations to meet the needs of investors. As mentioned above, LLC’s can establish fiduciary duties in the company operating agreement if desired. Finally, under Texas law very few circumstances disturb an LLC’s liability barrier protecting its owners. An LLC is generally the best choice of entity for a small business or start-up because of the flexibility allowed for management, financial arrangements, and tax treatment.
Each type of business structure has its own requirements, documentation, tax needs, management capabilities and financial arrangements,. We can help you choose an organizational structure that meets your needs.
Get legal guidance from our Austin business formation lawyers
At Ferguson Law Practice, PLLC, we can provide the guidance and answers you need. We can also draft and file the necessary paperwork to get your business started so you don’t have to. Our experienced Austin business formation attorneys are here to assist you with legal and tax requirements while you focus on the business.