Questions to Consider When Deciding on a Business Entity Type
Deciding on an entity type for your business is incredibly important. Selecting the right entity type helps to define your business and how it will be legally structured and taxed, as well as its capacity for growth. It’s important to make these decisions earlier rather than later, as the entity you choose could impact your business and both your corporate and personal liability exposure down the road.
How will my business be taxed?
Taxation can sometimes be a sore point for many companies. For instance if your business is a C Corporation, your company’s revenue is subject to a tax from both the state and federal government; however, you must also pay taxes on whatever personal income you receive from the company.
In the event your business is an S Corporation or an LLC, you can actually avoid these taxations entirely via pass-through taxation. Pass-through taxation means that rather than imposing taxes on both the business and the owner’s income, taxes are only levied against the income the owners and investors receive from the business.
Unfortunately, the downside of this is that S Corporation owners are subject to self-employment taxes for the amount they take in salary. LLC owners are also subject to self-employment taxes, but for the entire amount of profit they take home.
Will I be able to raise capital?
Methods of raising capital are crucial to any business model, but they are also subject to significant regulation depending upon your chosen business entity. C Corporations typically offer the greatest flexibility in this regard, but raising capital as a partnership is subject to particularly stringent rules. An S Corporation provides some of the flexibility of a C Corporation, but the number of shareholders is typically restricted to 100.
Will my business have limited liability protection?
No business owner wants to be held personally liable for a lawsuit that could be potentially filed against his or her business. Therefore, it is essential to protect your personal assets from any business liabilities. This is often the reason business owners choose to incorporate as a C Corporation, S Corporation, or an LLC, as these entity types come with limited liability protection. Sole proprietorships and general partnerships unfortunately do not include this kind of asset protection.
How easily can I form my business entity?
Though no business can be fully formed overnight, the ease of establishing an entity is a factor many business owners consider when forming a new company. Sole proprietorships are often the least difficult to create, as they only require you to register the business with the appropriate agency in your state, county, and city. For the Houston area specifically, if the business is operating under a name other than the name on file with the Secretary of State, then it must file an Assumed Name Certificate (DBA) with the clerk’s office in the specific county where business will be conducted.
On the other hand, however, all other entities must be registered with the Texas Secretary of State, and they must adhere to a set of record-keeping rules in order to retain limited liability protections. It’s important to note that filing the name with the Texas Secretary of State will only protect the businesses name within the state of Texas. Meaning, no other business in Texas can use your specific business name. Maintaining these records and ensuring the business remains in good standing can be costly and time-consuming; however, the protection from liability exposure is worth the hassle.
What if I need to transfer ownership of my business?
Transferring ownership of a business is relatively simple for those in a C Corporation or an S Corporation. This is because ownership is based wholly off of shares held, meaning the owner would only need to sell their stock to a new owner for the transfer to be complete. However, other business entities do not offer the same ease of transfer. Partnerships must be terminated and sole proprietorships require the business be sold to transfer ownership.
Houston Business Formation Attorneys
At Adair Myers Graves Stevenson, we help businesses make strategic choices from the outset. Our business formation attorneys work with both established entrepreneurs and startups throughout the Houston area. We believe innovation is critical to a flourishing economy, and to that end, we invest in a hands-on approach to help local businesses succeed. If you would like more information on how an experienced business formation attorney can assist you through the process of business formation, contact us today.