Business Formation: Understanding the different types of business entities in Texas and how to form
Sole Proprietor - One person shop or business. Many owners still operate their business without a DBA (“doing business as”) or EIN number. This means the owner uses their own name and social security number in aspects of the business and files personal taxes. No filings with Secretary of State.
Limited Liability Company (LLC) – Owned by one member or members (partnership). Company is managed by the members or managers in a corporation style business. LLCs are formed with Secretary of State filing.
Limited Partnership – Owned by limited group of partners and managed by a general partner. LPs are formed with Secretary of State filing.
Corporation (Corp. or Inc.) – Owned by shareholders and managed by a board of directors. Corporation also formed by filing with Secretary of State.
Non Profit – Incorporated organization which is formed for mainly educational or charitable purposes. Managed by a board of directors and also is filed with the Secretary of State.
The most common form business is a LLC. Almost all business owners should form their company as an LLC.
There are two primary purposes for forming an LLC.
Liability Protection – Your personal assets (home, personal bank account, retirement, and any other personal property) are protected from any contractual liability if the contract is through your LLC and you do not guarantee any debt of the company. You and your personal assets are also protected from any tort liability as long as you didn’t commit the tort.
Tax Treatment – If you are the only member of the LLC, you can have the LLC disregarded by the IRS for tax purposes. This means the LLC is basically a pass through and you file your business on your personal tax return (1040) by filling out a Schedule C. If there are two or more members in the LLC it is treated as a partnership and all taxable income or losses are split between the partners as determined by the Company Agreement. All LLCs also may treat taxes as a corporation.
Steps in forming an LLC.
To become an LLC you must file a Certificate of Formation. The form can be found on the Secretary of State’s website.
If your LLC has more than one member you will want to form a Company Agreement. This is a written agreement which governs the operation of the company. It should discuss each member’s percentage ownership in the LLC, tax treatment, voting requirements of the group, as well as other issues. If you do not form your own Company Agreement your company will follow the default provisions of the Texas Business Organizations Code.
If you have an LLC but are operating the business under a name other than the LLC you should file an Assumed Name Certificate. This form can be found on the Secretary of State’s website and should be filed with the Secretary of State and the County Clerk of the county where your business is located.
Steps in Forming a Non Profit
To form a Non- Profit organization you must file a Certificate of Formation. Again this form can be found on the Secretary of State’s website.
In order to get tax exempt status an organization must file a 501c3 (1023 form). This form can be found on the IRS website. When filing the 501c3 the organization your organization will need to draft bylaws and appoint directors for the organization. When electing directors make sure to choose someone who has the best interest of the organization and that they are dedicated to assume the duties of being on the board. This is very important as the board makes the policy and financial decisions for the non-profit.