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Notes on Business: Why Should I Form a Texas Business Entity?

Congratulations!  You have decided to start a business.  You can certainly just get started – it is always possible just to start working – which is generally called a sole proprietorship. However, as business continues, most people will want to somehow formalize your business into one of the legal entities you can form in Texas. This may be a General Partnership, Limited Partnership, Limited Liability Company, Corporation, or one of several other more specialized types of Texas business entity. 

So, why would you want to formalize a business entity? 

#1 Working with Others –

It is one thing to go into business for yourself – and work with yourself – but what about when you start bringing in other people?  Most importantly, creating a Texas business entity allows you to write a rulebook for how you and other owners will run the business, get paid, pay expenses, and undertake any other action needed.  It can also define how, when, and if owners can sell or exchange their interest in the entity.  A formalized structure can also help define what each owner’s responsibility to the company is. Finally, formalizing the Texas business entity can prevent persons running a business together from inadvertently ending up in a partnership, subjecting themselves to rules they may not even be aware of!  

Creating a Texas Business entity can also make it much easier to work with investors and other business partners. Most outside parties want the assurance of the rulebook so they know how the company will be run and can predict outcomes related to their transactions.

#2 Protecting Assets –

One of the biggest advantages is that certain types of business entities, such as LLCs or Corporations allow owners protect their personal assets from any liabilities of the business entity. This is often the number one reason that business entities are formed. Any liability incurred in the name of the business entity can only be paid out from the assets of the entity –  the owner’s personal assets should be protected.

#3 Tax Flexibility –

There can be certain tax advantages associated with certain business entities.  While a new Business Entity often means a new tax return, becoming an entity can often present substantial tax planning opportunities. These might include the ability to separate salary and profit interests, the deductibility of certain expenses, and many other flexible tax planning options.

#4 Continuing Existence –

A business entity will continue beyond the time one owner is involved in the work itself!  That can be a substantial advantage for many businesses.  If an owner dies or retires, the same business entity can continue operations under the same name and any contracts the business entity has with other parties may continue in place. This is quite an advantage!  A formalized business entity can also allow for change in ownership while the business itself stays the same. 

#5 Enhanced Credibility/Perception of Stability –

Finally, in relation to the item above, customers and parties contracting with a business entity give credence to and appreciate the perceived stability of a business that has taken the time and put in the effort to formalize their business structure. This perception of stability in turn enhances a businesses credibility.

Obviously, this is just a brief overview of the many complicated reasons why any one owner or group might decide to formalize their existence as a Texas Business Entity.  Each situation will require careful consideration of the many factors involved and the wishes of the owner or owners.

Redding Law, PLLC intends this educational article to be an overview of a legal document, idea, or theory. The reader should note that this overview is specific to Texas and Texas laws and is not intended to be legal advice for any person or situation. To receive additional copies of this newsletter or permission to reprint any portion please contact Redding Law, PLLC.

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