Have an idea for a business? Where do you start transforming that idea into a business? Determining business formation is one of the first and most important steps to starting a business in Texas. It can make a difference in terms of taxes, liability, profitability, growth, and more. Getting it right from the very beginning is critical.
How Do You Form a Business in Texas?
When forming a business, one of the first and most important decisions to make is the structure you will use. A business structure is the legal classification of a business that determines taxes, liability, and other legal rights and responsibilities.
A range of business structures is available, including:
- Sole proprietorship
- General partnership
- Limited partnership
- Limited liability company (LLC)
The best business structure for your business depends on a range of different factors.
What Factors Influence Business Formation in Texas
Here are some factors to consider when choosing the best structure for your business.
A major deciding factor when structuring your business is often the degree of control you want to retain over your business. This is especially true where multiple owners are involved.
A sole proprietorship allows for the fullest control. As the only owner and operator, a sole proprietor can run their business how they want to. In comparison, corporations are answerable to shareholders who elect a board of directors to manage the organization's day-to-day business.
Your business structure also determines the extent of your personal liability for the liabilities, debts, and obligations of the business. Some structures offer better protection against personal liability. However, liability and control are usually directly proportional. The less your personal liability, the less control you typically exercise over the business.
In a sole proprietorship, for example, the owner is personally responsible for the business's liabilities and debts. Their personal assets may be used to satisfy the business's debts. They can also be sued in relation to the business's activities.
In comparison, in a limited partnership, partners have a separate legal identity from that of the business and their personal liability is limited to their investment in the business.
The structure of a business determines the applicable tax regime. Many business structures – sole proprietorships, partnerships, limited liability companies, and S corporations – are pass-through entities. This means the business doesn't separately pay tax. Instead, the tax liability is passed to the owners who pay taxes on the business profits via their personal tax returns.
Other forms of incorporation, like C corporations, are treated as separate entities from their owners and taxed according to the relevant corporate rate.
The degree of administration of a business typically becomes more onerous as the complexity of the business structure increases.
Sole proprietorships and partnerships typically have the least complex paperwork, while corporations have strict reporting obligations and complex paperwork to file when forming and running the business.
Five Important Ways a Lawyer Helps Your Business in Texas
A business lawyer can advise you on a range of issues when forming a business.
1. Choosing the Right Structure for Your Business
Choosing the right structure is the key to building a strong foundation for your business and its future growth. A business lawyer can advise you on the pros and cons of each structure available to you, relevant to your circumstances.
This will help protect both your interests and your business's interests in the future.
2. Industry-Specific Advice
A business lawyer can give you advice specific to the industry in which you operate, as well as the product or service you're offering. This includes assisting you with understanding the applicable regulations and any necessary licenses or permits.
3. Drafting and Negotiating Legal Documents
Business formation typically involves the preparation of a range of documents, such as business registration papers, intellectual property registrations, and other commercial documents. A lawyer can assist you in accurately drafting these documents.
Importantly, a business lawyer can draft legally binding contracts or negotiate the terms of a contract to benefit you and your business. These are essential to many aspects of running a business, for example, partnership agreements.
4. Understanding Your Tax Obligations
Failing to properly understand your tax obligations can result in significant tax liability down the track. Taxation is a complex area so engaging a business lawyer, along with a qualified accountant, is the best way to ensure compliance.
They can also advise you about what tax breaks, credits, and deductions are available based on your business' structure and circumstances.
5. Employment Law
If you hire employees, you must comply with a suite of employment laws and regulations. A business lawyer can help you navigate these and draft effective employment contracts that protect both you and your employees.
Termination especially can be a legal minefield, so reliable legal advice on this is essential.