At the Austin, Texas Law Firm Of AttorneyBritt, our business formation attorneys will help you turn your vision of a healthy and thriving company into reality by providing you with the legal tools you need to thrive well beyond tomorrow. We can help in most areas including
- Business Operating Agreements
- Governance Requirements
- Family Business Issues
- Formation of corporations, limited liability companies, partnerships, limited liability partnerships, professional limited liability companies, and sole proprietorships
- Officer-Director liability issues
Step 1: Review And Select The Appropriate Type Of Organization For Your Business.Given the tax and legal implications when choosing your business structure, new business owners should always seek the guidance of a highly qualified attorney with a professional background in both business law and tax law, an attorney such as the dual professional attorneys and CPAs at the Austin, Texas law firm of AttorneyBrit. We can verify all legal requirements are properly considered before you choose a business structure. The business structures in the State of Texas, and in most other states as well, are as follows:
A sole proprietorship is not legally separate from its owner. The law does not distinguish between the owner's personal assets and the business' obligations.
A sole proprietor's assets can be (and often are) used to satisfy the business' debts. Consider this before selecting a sole proprietorship as your business form. Accidents happen. Businesses go out of business all the time.These unfortunate circumstances may quickly become a nightmare for its owner.
A general partnership offers no liability protection to its owners-the general partners are all liable for the debts and obligations of the general partnership. This means that a general partner's personal assets can be used to satisfy the business debts of a general partnership.
In an LP, at least one partner must be a general partner with unlimited liability, and at least one partner must be a limited partner whose liability is limited to the amount of his or her investment. Limited partners enjoy liability protection much like the shareholders of a corporation or the members of a limited liability company (LLC).
An LP allows for pass-through taxation, as its income is not taxed at the entity level. Limited partners can use losses to offset other passive income on their tax returns. General partners' losses can be used to shelter other income up to the value of their investment in the partnership, since their losses are not usually considered passive. LPs have been largely eclipsed by the development of the more versatile LLC.
To form an LP, the LP organizers must file appropriate formation documents with their state's business chartering agency and must pay a required filing fee. The LP organization is especially appealing to types of businesses where a single, limited-term project is the focus (such as real estate or the film industry). LPs can be used as a form of estate planning in that parents can retain control of their business while transferring shares to their children.
Limited Liability Partnership (LLP)
The LLP form is appealing to licensed professionals that are prohibited from operating under an LLC or corporation-professionals such as accountants, attorneys, and architects. An LLP also allows for pass-through taxation, as its income is not taxed at
the entity level.
To form an LLP, the LLP's organizers must file appropriate formation documents with their state's business chartering agency and must pay a required filing fee.
A corporation's shareholders, directors, officers, and managers must observe particular formalities in a corporation's operation and administration. For example, decisions regarding a corporation's management must often be made by formal vote and must be recorded in the corporate minutes. Meetings of shareholders and directors must be properly noticed and must meet quorum requirements. Finally, corporations must meet annual reporting requirements in their state of incorporation and in states where they do significant business.
Taxation is a significant consideration when choosing a business structure. A C corporation is taxed as a separate legal entity (i.e., no "pass-through" taxation like a partnership). If the corporation distributes profits to the shareholders in the form of dividends, shareholders pay income tax on those distributions; thus, commentators criticize C corporations as imposing "double taxation."
As with any business entity that offers liability protection to its owners, a corporation must file a charter in its home state. A corporation begins its life by filing articles of incorporation (sometimes called a certificate of incorporation) in the appropriate state and paying the necessary filing fee.
S corporations file an informational tax return (much like a partnership) but the entity pays no tax. The shareholders report their share of the S corporation's profit or loss on their individual tax returns.
Limited Liability Company
LLCs enjoy pass-through taxation-thereby sidestepping the double taxation burden borne by C corporations. LLCs file an informational tax return (much like a partnership) but the entity pays no tax. The members (owners) report their share of the LLC's profit or loss on their individual tax returns. A note-of-caution, some states including Texas have reformed their tax laws to include a Franchise Tax for LLC's and PLLC's on profits over a certain amount.
LLCs can be formed only through filing a charter document (typically called articles of organization) in the appropriate state and paying the required filing fee.
Professional Limited Liability Companies
Some State laws generally require PLLCs to maintain generous insurance policies or cash reserves to pay claims brought against the corporation.
PLLCs are formed in a similar manner to standard corporations and LLCs by filing formation papers with the appropriate state agency and paying the necessary filing fee.
Professional Corporations And Professional Associations
Not all states recognize the PC or PA business form. Some State laws require PCs and PAs to maintain minimum amounts of professional insurance or cash reserves to pay claims brought against the corporation or association.
PCs and PAs are formed in a similar manner to standard corporations and LLCs, by filing formation papers with the appropriate state agency and paying the necessary filing fee.
To pursue tax-exempt status, nonprofits must apply for federal and state (if applicable) tax-exempt status. Tax-exempt status is not automatically granted upon formation. To apply for federal tax-exempt status, a nonprofit must file Form 1023 with the IRS. For state requirements, it is best to contact the department responsible for taxation in the non-profit state of formation.
Like standard for-profit corporations, nonprofits provide limited liability protection. The personal assets of the directors, officers and members typically cannot be used to satisfy the debts and liabilities of the nonprofit.
The most common type of nonprofit is the 501(c)(3), meaning it is formed in compliance with Section 501(c)(3) of the Internal Revenue Code. These nonprofits are organized and operate for a religious, educational, charitable, scientific, literary, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals or children purpose as permitted under this section of the Internal Revenue Code. Nonprofits may also be formed for other purposes pursuant to different sections of the Internal Revenue Code. For example, business leagues, chambers of commerce, and real estate boards are formed under Section 501(c)(6) of the Internal Revenue Code, and a cooperative hospital service organization is formed under Section 501(e).
Step 2: Federal, State, Austin and Employment Tax Responsibilities
(i) Federal Tax
(ii) State Tax
(iii) City Taxes
(iv) Employment Tax
Step 3: Business Licenses and Permits by Business Type
Step 4: Business Employer Requirements
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