One of the first decisions to be made in business formation is choice of entity.
Economic indicators are trending in the right direction in the Dallas area, so 2016 will likely see the establishment of new business ventures in the Metroplex. The relocation of Toyota and several other major companies to the area will bolster economic growth, along with significant expansion of local commercial enterprises. Dallas real estate development is up and joblessness down, according to a January 2016 report by the Society for Human Resource Management.
Entrepreneurs are likely to decide that this economic environment is the right one in which to start new businesses. One of the first steps to take for an entrepreneur is to consult with an attorney to understand all the legal issues that must be resolved in light of short- and long-term goals of the business. Before the business can get off the ground, the basic decision must be made of which business entity is optimal for the particular commercial endeavor.
The available business entities depend on state law and Texas offers several. The main concerns that can be significantly impacted by choice of entity are those related to taxation, personal liability of the business owner for business debt and obligations, and business control and management.
The simplest and most common business entity is the sole proprietorship, which is automatically created when one person goes into business for him or herself. The owner has complete control of business management, handles business income and loss on his or her personal tax returns and is personally responsible for business liabilities.
Another basic business entity is the general partnership that comes into being when two or more people go into business together for profit. Broadly, management authority, profits and losses, and business and tax liability are all shared equally by the partners personally. Tax matters are handled on their individual tax returns.
If the partners choose to draft a partnership agreement, they can agree to modify these arrangements.
Of course, the corporation is a favorable, common business entity choice mainly because an artificial entity is created that absorbs business debt and obligations, protecting the personal resources of owners from business liability. The corporation is owned by those who purchase stock in it, called shareholders or stockholders, and managed by directors elected by the shareholders and officers chosen by the directors. Taxation on business profit is the responsibility of the corporation itself, but when owners receive dividend payments, they are personally taxed on that income.
The limited liability company or LLC is a contemporary hybrid of the partnership and the corporation, combining the pass-through taxation of the partnership and the shielding of personal liability of the corporation. Owners are called members and management can either by the members or by hired managers. An operating agreement establishes and lays out the working rules of the LLC.
Several other legal entities are available in Texas, but these are the more well known and typically used.
When the entity choice is made, legal counsel will draft and file any necessary documents to establish the business such as shareholder, operating and partnership agreements. Creating the content of these documents will involve many important operational and strategic decisions about which the attorney can provide insight and guidance.
The Arlington, Texas, attorneys of Kaiser Legal Solutions, PLLC advise clients in the Dallas-Fort Worth Metroplex and beyond about entity choice and other legal issues involved in opening new businesses.