The simplest form of business in Texas is a sole proprietorship.  This is when one person decides to run a business by herself and operate under a “DBA.” The advantages of this structure include the small number of filings with the state and the lack of hassle with corporate formalities in operating your business. However, if you choose to operate as a sole proprietor, you are exposed to unlimited liability for the debts or injuries caused or incurred by the business.  That means that if the business owes money or gets sued, you are liable to the full extent that the business becomes liable.

 A similar business structure is the general partnership. You can think of this as being similar to a sole proprietorship but with two or more owners. Like the sole proprietorship, there are very few filings with the state and the necessity of formalities is only what you and your partners decide. This structure is very flexible in that any combination of owners can participate in the management of the company and the profits and losses can be divided however you and your partner(s) decide.

A limited partnership has two types of partners: general partners and limited partners.  The general partners are subjected to the same liability as in a general partnership and are the only partners that may participate in the control of the company. The liability of limited partners for the debts and injuries incurred or caused by the partnership is limited to their investment in the partnership but they may not participate in the control of the partnership.

A limited liability partnership is comprised of partners in a general or limited partnership that elect to be treated as a limited liability partnership. By making this election, all of the partners are afforded limited liability for the debts and injuries incurred or caused by the company.  This structure may be more attractive than a limited partnership if all of the owners of the business will have the opportunity to manage and control the partnership. 

The limited liability company is comprised of members rather than partners or shareholders.  It is a popular choice of business structure because it provides limited liability to all of its members and all members are potentially able to participate in the control and management of the business. This structure is relatively new, so the laws governing limited liability companies are not as robust as those governing partnerships and corporations.  Because of this, you may find it more difficult to secure venture capital down the road if your business is structured as an LLC.

Corporations are probably the most recognized business structure.  They are owned by shareholders and managed by an elected board of directors. The shareholders enjoy the same limited liability as do members of an LLC but they cannot participate in the management of the company unless elected to the board. When acting in their role as a member of the board of directors, the laws generally protect a director from liability for his business decisions.  Corporations do not have “pass through” tax treatment, so any profits or losses are taxed twice: once at the corporate level and again as income tax for the shareholders. In Texas, corporations are also subject to state franchise taxes. The two primary benefits of structuring your business as a corporation are that the laws governing corporations are thorough and well-understood, and venture capital firms are therefore most comfortable working with corporations.

Subchapter S-corporations are nearly identical to “ordinary” corporations, except that s-corporations elect to receive “pass through” tax treatment.  The tradeoff for this tax treatment is that the number of shareholders is limited to 100 and only certain individuals may own shares of the corporation.

Hopefully you have a fuller picture now of these seven types of business structures. Do you see which one is the right fit 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.

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.

Working with new business owners over the past decade has made me intimately aware of the common problems entrepreneurs and small companies face in the first days and even years of a start-up venture. I plan to tackle these issues with you in this blog, taking the same practical approach to their resolutions that I take with my own clients. Here are some common topics that most businesses face and we’ll discuss those frequently: issues around corporate formation and structure, financing, employment, intellectual property and transactions. On occasion, I’ll also show you some not-so-common legal quagmires my clients, and companies like them, have found themselves in due to cascading circumstances. Though these exact conditions may never occur in your own businesses, you’ll learn what to avoid and how to set up legal scaffoldings to protect you from seeing your business fall down around you.

I look forward to an active and engaging online discussion with you. Please let me know the issues that affect your business via the comments section, and I’ll do my best to address them in upcoming posts. 

Jonathan Lass

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.