Whether an experienced entrepreneur or a first time startup, the small businessman must address a myriad of tasks before he can open shop. The most important of these is selecting and creating a structure. Business “formation” is a necessary first step when starting a business.
I’ll provide the information you need about business structure options and help you decide which structure is right for your new business. If you’re ready to form your new business, I’ll walk you through the process. If you’re just browsing right now, schedule a “Free To Talk” initial consultation and we’ll address the essential things you need to know, like how the way in which your business is formed will determine your personal liability, how the taxes will be paid, and other important details. We’ll also cover the four main types of business formations, and about how each one has its own advantages and disadvantages.
A sole proprietorship is the simplest and least expensive type of business to form. There are no legal documents to file; although, you may have to get a state or local business license depending on your occupation. A sole proprietorship has only one owner. You can do business under your own name or apply for a “doing-business-as” (DBA) name to give your business a public image other than your own. Either way, a sole proprietorship is just an extension of you as an individual. You have no liability “firewall”, which means that your personal assets can be used to satisfy a business debt or legal judgment. Your business income and expenses are reported to the IRS on Schedule C, which is filed with your individual income tax return.
In a partnership, there are no legal documents to file with the state. But, partners should have a partnership agreement drawn up between them stating how the partnership will be operated and how the profits and losses are distributed. Liability for business debts and losses, the actions of the other partners and lawsuits can be limited to partnership assets under certain circumstances. Otherwise, general partners have unlimited liability. Business profits and losses flow through partnerships and are reported on each partner’s individual income tax return, according to the partnership agreement’s schedule of distribution. Partnerships must file a partnership information return with the IRS every year.
Limited Liability Company
In Texas, you can file a Certificate of Formation to form a limited liability company. LLCs provide their owner-members with limited liability protection. In other words, the owner’s only risk is to the extent of their financial interest in the LLC. When the business takes on debt or liabilities, the LLC is responsible for the risk instead of the individual owner-members. Profits and losses flow through the company to each member. LLC owner-members have an option whether to be taxed as a partnership or a corporation.
Corporations have the most formation requirements. A corporation is formed by filing Articles of Incorporation with the Texas Secretary of State. Corporations provide limited liability protection for their owners. C corporations retain their profits and losses at the corporate level but subject their owners to double taxation. This is because while the corporation is taxed on its earnings, the owner-shareholders are taxed on their corporate dividends. With S corporations, profits and losses flow through the business to the owners. Both C and S corporations must file corporate returns with the IRS, annual reports with the state, conduct annual meetings and meet other federal and state records requirements.
Business formation is the first major step for entrepreneurs establishing new companies, particularly since business structure if often necessary to secure financing. I can help you put a solid, healthy business structure in place so that you can provide your new small business with the best possible chance for success.