Factors to Consider When Choosing Your Business Form

Sole Proprietorships | Partnerships | Limited Liability Companies | Corporations

Starting a new business enterprise is often complicated. You need to identify a focus, put together a business plan, secure financing, and put legal measures in place to protect yourself and your investment. One of the most important decisions you’ll need to make involves the specific business form under which you’ll operate. Sole proprietorships, partnerships, LLCs, and corporations all have different features and potential drawbacks. Let’s look at the factors to consider when choosing a business form.

What’s Your Exposure to Risk?

Perhaps the most significant motivating factor when evaluating a potential business form is the impact on your personal liability. Technically, in Texas and many other states, you can start conducting business as a sole proprietorship without filing any paperwork or documents. There’s a downside to doing that, though. With a sole proprietorship, you are personally liable for any debts or obligations of the business, and your personal assets can be at risk to pay those debts or obligations.

A partnership does not offer much more protection than a sole proprietorship. In a general partnership, each partner can be held jointly and severally liable for the obligations of the partnership. That means that a creditor may seek full payment for a partnership debt from a single partner or from all partners.

One of the most attractive features of both corporations and limited liability companies is that they limit your personal liability for the debts and obligations of the business. With both forms, a person is liable only to the extent of their investment in the business. With a corporation, that generally means that the most you can lose is the amount you paid for company stock. With an LLC, you stand to lose only whatever amount you contributed to become a member.

What Are the Potential Tax Ramifications?

Currently, the income generated by most companies is considered “pass-through” income and is reported only on the owner’s personal income tax return. A subchapter C corporation is the only exception—the corporation itself is subject to a corporate-level tax, and shareholders must also pay taxes on dividends or earnings, thereby leading to what is commonly referred to as “double taxation.”

How Easy Is It to Go Into Business?

Ease of setup is also another important consideration—

• With a sole proprietorship, you don’t need to do anything. You can simply hold yourself out as doing business. You can apply for an “assumed name certificate,” which can help you establish a separate bank account and do other things in the name of the business, but it’s not necessary in Texas.
• As with a sole proprietorship, there’s no document that must be filed in Texas to create a general partnership. However, you’ll want to obtain a separate federal Employer Identification Number (EIN) for the partnership, and it’s in your best interests to draft and sign a partnership agreement in order to protect your rights.
• With both corporations and limited liability companies, you must file documents with the state. A corporation requires the filing of articles of incorporation, whereas LLCs are formed by submitting articles of agreement. In addition, corporations typically have a number of annual filing requirements.

Contact MCIS Law

At MCIS Law, PLLC, in Stafford, we provide comprehensive counsel to businesses and business owners throughout southeast Texas, handling all matters related to business formation. For a confidential consultation with an experienced and knowledgeable lawyer, email us or call our office at (346) 297-0121. We accept all major credit cards.