Professional Corporations, Partnerships, & Other Business Entities
Overview of Business Organizations
One of the most important decisions that face business owners is choosing the type of business entity to create. The type of business organization is key to essential considerations such as tax planning and preventing exposure to personal liability. When selecting a business organization structure, business owners should weigh several factors, including: the size of the business, the activities of the business, the business's profitability, and the business's insurance. An experienced business attorney can explain the relevant considerations and consequences in order to choose the proper type of business organization. Be sure to contact one before forming your business.
The three main categories of for-profit business entities are incorporated entities, unincorporated entities, and limited liability companies (LLCs). C corporations and S corporations are the common forms of incorporated businesses. Unincorporated businesses include sole proprietorships and partnerships. A limited liability company (LLC), on the other hand, is a hybrid of the unincorporated and incorporated form, blending some of the benefits of each.
The Sole Proprietorship
As the name suggests, a sole proprietorship is an unincorporated business that has a single owner. It is the easiest type of business to form because, unlike corporations and LLCs, no paperwork has to be filed with the government. The drawbacks are that the owner must report the business's income or loss on his or her own taxes, and the owner is liable for the business's debts and other legal liabilities. Similarly, the assets of the business can be seized to satisfy the owner's personal liabilities. LLCs and corporations offer more protection against liability, both for the business and for the owner.
Partnerships
Partnerships are similar to sole proprietorships in many aspects, but they have more than one owner. Typically, no paperwork needs to be filed with the government to form a partnership, but partners will usually want to draft a written agreement to lay out the structure of the business and the partners' rights and duties with respect to each other. When preparing the partnership agreement, it is vital that the partners consider and decide how to deal with such potential issues as distributing profits and debts, resolving disagreements between them, and continuing the business if a partner dies or leaves the partnership.
Corporations
Corporations are treated by the law as separate entities from the individuals who own the corporation, called stockholders or shareholders. The biggest advantage of operating a business in the form of a corporation is that owners are generally protected from personal responsibility for the corporation's liabilities, and vice-versa. The Texas state law regarding corporations controls many corporate activities, including what steps must be taken to create and maintain a corporation in the state, the requirements for corporations from other states to do business within the state, and various accounting and disclosure requirements, depending on the type of corporation. Licensed professionals, such as dentists, will typically form a "professional corporation," or "P.C."
Limited Liability Companies (LLC)
The limited liability company (LLC) is a fairly new business entity that affords business owners the most important advantages of both corporations and unincorporated businesses: protection from liability together with flexibility and relatively little regulation. The LLC is considered a separate entity from its owners, called "members," so, like corporations, the members are generally not personally liable for any of the company's debts or torts. One advantage that LLCs have over corporations is that they avoid the problem of double taxation. The owners report profits and losses of the LLC on their personal tax returns, as do owners of unincorporated businesses. LLCs do not pay federal income taxes, but some states charge their own taxes on LLCs.
Choosing a Business Structure
Whether your business is best suited to operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company depends on various factors. You should remember that as your business develops its needs may change. The right business entity selection will give your new business a solid foundation for growth. The optimum entity for your business depends on the nature of your business, your objectives and goals, the people involved, and the risks involved. The most frequent entities recommended for Texas businesses are an LLC (limited liability company), a corporation, or a partnership. Other available entities include sole practitioner, LLP (limited liability partnership), small business S corporations, traditional business C corporations, family closed corporations, and nonprofit corporations. Talk to Boyd W. Shepherd, D.D.S., J.D., about the right entity for you.
Setting up operations
Your new business needs corporate by-laws for corporate governance, policies and procedures, and related documents. If you are incorporating a business in Texas, if you require partnership agreements or shareholder agreements, if you want a lawyer who can advise you on every area of business law, contact Boyd W. Shepherd, D.D.S., J.D.
Forms to Create a Texas Business Entity:
The Texas Secretary of State has promulgated certain Texas Business Organizations Code forms designed to meet statutory requirements and facilitate filings with the office; use of the forms is permissive.
Forms may be obtained from the Texas Secretary of State web site.
Access to the business entity and UCC databases is available via the Internet through the SOSDirect System. For information on SOSDirect or to subscribe for the service, call (512) 475-2755.
For more information and advice on how to set up your legal entity of choice, please contact:
Boyd W. Shepherd, D.D.S., J.D.
Boyd W. Shepherd, P.C.
Office: 281.304.1000
eFax: 832.201.8717
email: boyd@legaldental.com
www.legaldental.com
