Whether you are an established sole proprietor or starting a new business, it is essential to structure your business correctly, ideally from the start. J Nichols Law, PLLC, led by attorney Jennifer Nichols, focuses on estate and business matters. Jennifer is an attorney, CPA, and, importantly, a business owner. She understands firsthand the importance of business structure and making informed decisions about your chosen structure.
Understanding Business Structure Options in Texas
Various options are available for forming a business, each with its benefits depending on the general needs of business owners. Some of the structures available are described below.
Limited Liability Company
The limited liability company (LLC) structure is popular in Texas because it offers the same liability protection as a corporation while offering more flexibility and requiring less formality. The Members of the LLC are the owners. The LLC can be member-managed or manager-managed and can also have officers (President, Vice President, Treasurer, and Secretary) if desired. The LLC is not required to have annual meetings to maintain its formalities. The LLC structure is known for its flexibility and liability protection, which may appeal to solo entrepreneurs and companies with multiple owners. It can be taxed as either a disregarded entity, a C-corporation, or an S-corporation. Multi-member LLCs can be taxed as a partnership.
Series Limited Liability Company
The series limited liability company (SLLC) structure provides for the creation of separate, independent series within the SLLC. Each series holds its own assets and liabilities associated with those assets. If a series receives a judgment against it, it is limited to the assets owned by that specific series, insulating the assets owned by the other series from liability associated with the series with the judgment against it. The SLLC structure allows business owners to segregate liability among different assets, which may be an attractive option for those managing multiple real properties in Texas.
Corporation
Corporations are traditional structures that have existed longer than LLCs. They can be formed as for-profit or non-profit and taxed as C-Corporations or S-Corporations. Their owners are referred to as Shareholders. The main decision-makers of a corporation are the directors and the officers (President, Vice President, Treasurer, and Secretary) who carry out the corporation’s operations. Corporations require annual meetings documented by written minutes.
Professional Entity
Certain professionals, including physicians, accountants, and lawyers, must form their entity as a professional entity. Professional entities include professional limited liability companies (PLLC), professional associations (PA), and limited liability partnerships (LLP). These entities must be owned by professionals only. They can be taxed either as a disregarded entity, a C-corporation, an S-corporation, or a partnership, depending on the number of owners.
Limited Partnership
A Limited Partnership (LP or Ltd) consists of one or more general partners and one or more limited partners. General partners have active management responsibilities and are liable for their actions. Limited partners do not have active management responsibilities and have no personal liability. The general partner is often structured as an LLC to allow it to maintain limited liability. This structure is popular in Texas and nationwide among families that want to keep family assets managed together and provide asset protection for those assets.
Transfer Restrictions and Buy-Sell Provisions
For companies with multiple owners, especially those that are not married couples, including restrictions on ownership transfer and buy-sell provisions in governing documents is a common practice to help manage ownership transitions.
Restrictions on transfer of ownership provide that an owner of an interest in the company, whether represented by membership interest, stock, or partnership interest, cannot unilaterally transfer their ownership interest to just any third party for any reason. This is important because the other business owners in the company may not want to be forced to be in business with just any third party without having some say in who that party is. Transfer provisions are typically structured to allow transfer to specific persons, like other owners or family members, or under particular circumstances, depending on the preferences outlined in the governing documents.
In some cases, buy-sell provisions are designed so that, upon the death of an owner, the inheritor of the ownership interest is obligated to sell it back to the company, with the company purchasing the interest under predetermined terms. Similar provisions could require an owner who becomes incapacitated and can no longer work in the company to sell his or her interest back to the company. This allows the ownership to remain among the remaining owners and compensates the deceased owner’s estate or the incapacitated owner, as applicable, for the interest being sold back to the company.
Minority & Women-Owned Business Certifications
If a certain percentage of the ownership (typically 51%) and control of a company is held by a minority or a woman, the company may qualify for a minority or women-owned business certification, such as the Historically Underutilized Business (HUB) Certification, the Women-Owned Business (WBE) Certification, the Minority-Owned Business (MBE) Certification, the Disadvantaged Business Enterprise (DBE) Certification, and the Small Business Enterprise (SBE) Certification. These certifications can provide business opportunities for businesses providing services to governmental entities and large corporations that set aside a certain number of contracts to companies with these certifications. They can also be used for marketing purposes to attract more business to the company.
For more information on business formation services, connect with Jennifer Nichols and her team at J Nichols Law. They are also active on all major social media platforms, including Facebook.
Disclaimer: The content in this article is provided for general knowledge. It does not constitute legal advice, and readers should seek advice from qualified legal professionals regarding particular cases or situations.
Published by: Holy Minoza
