Choosing the right legal structure of your busines
Posted by jlass on May 13, 2010
Today’s discussion deals with choosing the legal structure of your business. There are many different factors to consider when making this decision, and you should carefully consider each of these when setting up your for-profit business. In Texas, there are seven different types of structures that you can choose from: sole proprietorship, general partnership, limited partnership (LP), limited liability partnership (LLP), limited liability company (LLC), subchapter S-corporation (S-Corp), and corporation.
When determining which is most appropriate for your business, one of the first things you should consider is how much legal liability each of the owners will have. In other words, if the company gets sued or if someone gets injured as a result of the company’s business, to what extent will each owner be liable for the debt or injury? In a sole proprietorship and in a GP, the owner(s) have unlimited liability for the debts or injuries incurred or caused by their company. In contrast, LPs, LLPs, LLCs, and both types of corporations provide limited liability for most or all of their owners as long as they are diligent in following the formalities of operating the company.
Another important consideration is whether or not the profits and losses of the company will “pass through” to its owners, or if these amounts will be double taxed: once at the company level and again as income to the owners. Unless elected otherwise, all of the entities provide “pass through” tax treatment with the exception of the corporation.
Finally, with an eye to the future, you should consider whether or not each of the owners will be active in operating the business and also whether or not you hope to eventually pursue venture capital. The type of entity you choose may depend on both of these, since, for instance, a limited partner in a limited partnership may not be an active participant in the operation of the business. Further, it has been our experience that venture capital firms are more comfortable in dealing with certain types of entities over others.
Which way are you leaning now? Next week, I’ll go into more detail on these seven structures–you can see whether your initial hunch is still the right type for your business.
Jonathan Lass is a shareholder at Clark, Thomas & Winters, P.C. (CTW). His postings are his own opinions and may not represent CTW’s or its clients’ positions, and shall not constitute individual legal advisement. Links to third party sites are provided for convenience and unless explicitly stated, neither Lass nor CTW is responsible for the contents of such linked sites and no endorsement is implied.
