With the birth of a new company comes a variety of decisions to make. The type of entity the business operates under can be one of the most important decisions a new business owner makes. Different entities have different qualities that can affect the business, including limited liability, tax status, and management and ownership characteristics.
Sole proprietorships are businesses where the owner does not operate the business under an entity. Sole proprietors are personally liable for all claims and liabilities of the business, including personal liability claims, product liability claims, employment disputes, and business loan obligations. Because a sole proprietor can be held personally liable for these liabilities and claims, a sole proprietor is at high risk of personal bankruptcy as compared to owners of entities which protect the owner from personal liability, such as limited liability companies and corporations.
C-Corporations: A c-corporation issues shares to shareholders and is managed by a board of directors and officers who serve under the board of directors. Generally, a shareholder has limited voting rights and is allocated profits and losses based on the number and type of shares owned. C-corporations generally provide limited liability protection to their shareholders, directors, and officers, except under certain circumstances such as when a director or officer fails to act in good faith acts with gross negligence or willful misconduct. Therefore, these people are generally shielded from the corporation’s claims and liabilities. Unfortunately, c-corporations are subject to double taxation. Shareholders are taxed on their distributions, and the entity itself must also pay taxes.
S-Corporations: Both limited liability companies and c-corporations can be treated as s-corporations for tax purposes when a proper tax election is filed. S-corporations are very similar to c-corporations in that they are subject to pass through taxation. However, unlike the limited liability company, s-corporations have limitations on who may be a shareholder/owner of the company.
Limited Liability Companies
Limited liability companies are considered a separate entity from the owners, and the owners are therefore shielded from personal liability for the business’ liabilities and claims, except for certain situations such as when an owner personally guarantees a loan or where an owner fails to properly operate limited liability as an independent entity separate from other entities. The benefits of a limited liability company go beyond limited liability protection. Like s-corporations, limited liability companies have the benefit of pass through taxation, although a limited liability company’s management may choose to elect double taxation. Interests are also freely transferable within a limited liability company.
On top of the already mentioned benefits of limited liability company, limited liability companies can also be structured as series limited liability companies, which are only permitted in a limited number of locations, including Texas, Nevada, Washington D.C., Illinois, Iowa, Kansas, Oklahoma, Tennessee, Utah, Puerto Rico, and the birthplace of the series limited liability company, Delaware. Under a series limited liability company, several separate limited liability companies are formed under one parent or holding limited liability company. Each series can be formed to have a different purpose, hold different assets, operate differently, be managed differently, have different members, and have a variety of other different characteristics than the other limited liability companies under the parent or holding company. The major advantage of a series limited liability company is that each series limited liability company has separate liability, and there is no need to incur any extra costs to formally file for one or more separate limited liability companies. The series limited liability company is especially beneficial for companies that have multiple locations or are based in real estate.
If nothing is filed with a governmental office and there are two or more people coming together to make a profit, then the default rule is that the entity is a general partnership. By default, partners in a general partnership manage the business equally and share profits equally, but a partnership agreement may allow for, among other things, unequal ownership and management responsibilities and an unequal share of profits and losses. Like limited liability companies, the general partnership is subject to the more favorable pass through taxation. In a general partnership, each partner has a right to participate in the management of the business, but the partners are held personally liable for any of the business’ liabilities or claims.
A limited partnership is composed of both limited partners and general partners. A limited partnership is managed by a general partner but provides limited liability to the limited partners who do not manage the business. Of course, this means the general partner can be held personally liable for the liabilities and claims of the business, and the limited partners cannot participate in the management of the business without losing their limited liability protection.
Limited Liability Partnership
As opposed to a limited partnership, a limited liability partnership is composed of only limited partners and no general partner. Each limited partner is protected against the misconduct and malpractice of the other limited partners and is generally protected from personal liability for the liabilities and claims of the business, except to the extent of their investment. However, they may be held liable for certain acts, including gross negligence or willful misconduct.
What We Offer
Organizing and maintaining a business can be extremely complicated and the consequences for running afoul of the numerous laws and rules, including federal and state tax laws, can be severe. Proper legal guidance is paramount.
Dodson Legal Group can provide you with the following services for your business’ formation:
- Provide individualized and customary preliminary and structural advice.
- File all documents necessary to register your company.
- Draft all governing documents for your company.
- Provide you with a “How To” guide for maintaining your company.
- Prepare all documents and provide support necessary to make the best federal tax election.
- Provide additional or ongoing support for a discounted hourly fee.
We hope that this material has provided you with valuable information, and if starting a new business is something you are interested in, please schedule a consultation with one of our attorneys. You can contact our firm at:
Dodson Legal Group
14850 Montfort Dr., Ste. 165
Dallas, TX 75254
Toll Free: 800-769-9249