Business Formation


The use of limited partnerships in Texas

for estate planning has been a popular and beneficial strategy employed by estate attorneys for a number of years. While there is no legal or technical difference between a limited partnership and family limited partnership, the latter is simply a partnership compromised of related persons.


Practically speaking, the older members of a family typically serve as general partners while the younger family members acquire limited partnership shares. For example, a husband and wife might form an FLP acquiring all the general and limited shares of the partnership and then transfer their personal assets (real estate, stocks, bonds, etc.) to the partnership. Each year husband and wife might give away the limited partnership shares to their children and grandchildren.


The Benefit

As limited partnership shares are typically less valuable then general partnership shares, the general partners can give away the limited shares at a discounted rate to the actual value of the assets in the limited partnership. For example, should general partners husband and wife have assets worth one million dollars transferred to the partnership, husband and wife could give away 10% of the limited partnership shares valued at $50,000 (as opposed to $100,000). Because limited partnership shares are valued at a lower rate then the actual value of the assets themselves, husband and wife can give away larger amounts of their estate by transferring the discounted partnership interests.


Conclusion

Family Limited Partnerships are a very valuable tool that can allow a family to pass assets to the younger members of the family with less tax burden. However, the IRS has scrutinized these type of partnerships in recent years. Remember that there must be a legitimate business associated with the partnership and assets should not be used in highly personal ways or the IRS will ignore the partnership structure. It is important to use a competent business or probate lawyer to navigate some of the potential pitfalls of a family limited partnership. For many clients, an attorney can handle the formation of an FLP for an affordable flat fee. Feel free to use the form on the right to request a free consultation or call our office during regular business hours.


Texas Series LLC

The Texas Series LLC (Limited Liability Company) is quickly becoming the preferred holding entity for Texas Real Estate and business assets. The Series LLC, as opposed to a traditional limited liability company allows investors and business owners to hold assets like real estate or businesses in separate "Series" or cells which effectively operate as sub-companies.


The primary benefit of the Series LLC is the ability to limit the exposure of assets to a particular Series. Should any Series face liability, then the exposure is limited to assets in that particular Series. A summary of benefits include:

  • Liability Shield Between Series
  • Ease of Management Like Traditional LLC
  • Tax Compliance For Just One Entity
  • One Filing Fee with the State
  • Pass Through Taxation

Investors with multiple real estate properties and/or businesses should consider forming a Texas Series LLC for simplicity, economy, and liability protection. Please feel free to use the form on the right to request a consultation with an attorney about a Texas Series LLC or call our office.


Company Formations Texas

While starting a business is an exciting endeavor, it can also be stressful and even disastrous if you a do not know the legal ramifications for each type of business formation. It is highly advisable you hire an experienced business law lawyer to help you determine your legal needs and priorities and figure out which type of ownership structure is best for you. Every state has different laws governing businesses and Texas is no different with how complicated the process can be. The most common types of businesses formed are: sole proprietorship, partnership, limited partnership (LLP), limited liability corporation (LLC), corporation, non-profit, and cooperative. For many new businesses, whether just starting small, or if you intend to remain small, the best and simplest choices are sole proprietorship and partnership, (if there will be more than one owner).


A simple partnership (between one or more people) or sole proprietorship may be the best choice if there is not a large risk of liability or being sued and requires no filing of papers or registering with the state. The business starts when you start it and the taxes are aligned with the owner's personal taxes. Even with a simple partnership, you may want legal advice to draw up a contract between the owners and decide whether all are equal partners or will have unequal percentages in the business dependent on amount invested and management stakes. Limited partnerships and LLPs are more costly to set up and run, but a good idea if there is a risk of litigation and acquired business debts down the road. LPs and LLPs generally have one main partner for investment and management purposes having more control over daily operations and decisions, and then other partners for investment purposes, but with limited control and therefore limited liability to business debts. Corporations and limited liability corporations (LLCs) are even more costly to set up and run, but are worth the extra cost and effort in the long run if you want to protect your personal assets, or have a much more limited liability for the business debts. A corporation is a completely separate legal and tax entity, so the corporation pays its own taxes and is completely separate from the owner's personal taxes, other than reporting the salary they draw from the corporation. A LLC is more like a partnership when it comes to tax reporting, but has the similarity to corporations in terms of its limited liability for business debts and claims. Non-profits are fairly self explanatory because of their association with charitable work and well known tax free status. Cooperatives are common for small food or book stores or work groups for artisans. While they have specific state laws that address them, they are much less common than the others.


When you consider the complexities of liability, tax, contracts, registering, permits, licensing, and capital; the need for an experienced business attorney is obvious to aid you in starting your dream rather than creating a nightmare trying to figure the laws out on your own. Contact The Pursley Law Firm to get your dream started on the right track.

Types of Business Services

  1. LLC

    Quickly becoming the most popular way to start a small business, LLCs offer the same personal liability protection as a corporation, but with great tax and management flexibility.


    A limited liability company, or LLC, is a business entity created under state law that combines characteristics of both a corporation and a partnership. Like a corporation, the owners of an LLC are generally not personally liable for company debts. Like a sole proprietorship or a partnership, an LLC has operating flexibility and is, by default, a "pass through" entity for tax purposes. This means that the LLC does not pay taxes on its profits, but instead, profits and losses are "passed through" to the owners, who must then pay tax on their share of LLC income. To form an LLC, owners must file with their appropriate state agency and pay a filing fee


      Advantages

    • Members (owners) are not personally responsible for business debts and obligations (liability protection)
    • Flexibility in management control and profit sharing
    • High degree of flexibility and simplicity in the ongoing management of the business
    • No extra tax filing requirement as profits or losses can be reported on the owner's tax return (pass through taxation) unless the LLC chooses to be taxed as a corporation (double taxation)
    • No ownership restrictions (e.g. US citizens or # of owners) which is similar to an S corporation

      Disadvantages

    • More expensive to form than sole proprietorships or partnerships and in certain situations may be more at the outset than a corporation
    • Certain types of outside investors may be less comfortable dealing with an LLC than a corporation
  2. C Corporation

    Corporations offer personal liability protection, tax savings, and increased opportunities for raising capital. Corporations are also required to perform certain formalities such as holding annual


    A corporation is a separate and distinct legal entity created under state law and owned by its shareholders, and therefore protects its owners from personal liability for corporate debts and obligations (up to the amount invested in the corporation). A corporation by default (referred to as a C corporation) is taxed at two levels (i.e. double taxation). In other words, a C corporation pays a corporate tax on its corporate income (the first tax), and then, the C corporation distributes profits to shareholders who pay income tax on those dividends (the second tax). Corporation formation requires filing with the appropriate state agency as well as a filing fee like an LLC and LP, but unlike a general partnership


      Advantages

    • Shareholders (owners) are only personally liable up to the amount invested in the corporation
    • Flexibility to allow owners to participate in the management of the business or to act solely as passive investors
    • No limits on the amount of shareholders
    • Ownership is easily transferred through the sale of shares
    • Most accepted business type for outside investors such as venture capitalists
    • Corporations continue to exist beyond the life of the owners

      Disadvantages

    • Have rigorous ongoing business requirements such as annual reports, holding shareholder and board of director meetings
    • Are subject to double taxation
    • More expensive to form and maintain than sole proprietorships and general partnerships al meetings and keeping detailed corporate records (minutes).
  3. S Corporation

    Providing many of the same benefits of a traditional C Corporation, an S Corporation provides both personal liability protection with the added flexibility of pass through taxation, avoiding double taxation of a traditional C Corporation.


    An S corporation is a corporation created under state law that elects to be treated as a pass-through entity (like a sole proprietorship or partnership) for tax purposes. Since all corporate income is "passed through" directly to the shareholders who include the income on their individual tax returns, S corporations are not subject to double taxation. Moreover, the accounting for an S corporation is generally easier than for a C corporation.


    S corporation formation requires filing with the appropriate state agency as well as a filing fee just like a C corporation. In addition an additional tax election form must be completed to designate the subchapter S status.


      Advantages

    • Special tax election allows pass through taxation directly to shareholders and the avoidance of "double taxation"
    • Accounting for an S corporation is generally easier than for a C corporation
    • Enjoys the same level of liability protection as a C corporation
    • Enjoys many of the same benefits of a C corporation

      Disadvantages

    • More expensive to form and maintain than sole proprietorships and partnerships
    • Have many of the same rigorous ongoing business requirements as does a C corporation
    • Several restrictions that are specific to S corporations including:
      • Limit of 100 shareholders
      • Shareholders must be US citizens or legal residents
      • Only permitted to have one type of stock
      • Limits on types of income (e.g. passive income from real estate, royalties etc.)
  1. Soul Proprietorship

    Although the simplest form of business, sole proprietorships are not considered a separate legal entity and do not offer owners limited liability protection. If you intend to do business under a name other than a legal name, you will need to file a DBA.


    A sole proprietorship is the simplest form of business. Although not considered a separate legal entity, by default, once you start operating a small business (i.e. selling goods or services) you become a sole proprietorship. In a sole proprietorship, there is no separation between the business and individual owner.


    Even with low start-up costs and ease of operation, factors such as unlimited liability for all business debts and liabilities can make a sole proprietorship the most expensive type of structure in the long run.


    As a sole proprietor, if you intend to do business under a name other than your legal name, you will need to file a DBA


      Advantages

    • No paperwork is required for formation
    • Lowest initial cost for formation
    • No required formalities for running the business
    • No extra tax filing requirement, as profits or losses can be reported on the owner’s tax return (pass through taxation)
    • Simple structure as all management and control of business is in one person

      Disadvantages

    • The owner is personally liable for all debts and obligations of the business
    • Generally , investors won’t invest in sole proprietorships
    • No existence of the business beyond the life of the owner
  2. Non Profit

    A special type of corporation organized to enable the ability to apply for tax exempt status with the IRS and to receive public grants and private donations.


    A sole proprietorship is the simplest form of business. Although not considered a separate legal entity, by default, once you start operating a small business (i.e. selling goods or services) you become a sole proprietorship. In a sole proprietorship, there is no separation between the business and individual owner.


    Even with low start-up costs and ease of operation, factors such as unlimited liability for all business debts and liabilities can make a sole proprietorship the most expensive type of structure in the long run.


    As a sole proprietor, if you intend to do business under a name other than your legal name, you will need to file a DBA


      Advantages

    • No paperwork is required for formation
    • Lowest initial cost for formation
    • No required formalities for running the business
    • No extra tax filing requirement, as profits or losses can be reported on the owner’s tax return (pass through taxation)
    • Simple structure as all management and control of business is in one person

      Disadvantages

    • The owner is personally liable for all debts and obligations of the business
    • Generally , investors won’t invest in sole proprietorships
    • No existence of the business beyond the life of the owner
  3. Non Profit

    A special type of corporation organized to enable the ability to apply for tax exempt status with the IRS and to receive public grants and private donations.
  4. General Partnership

    Not considered a separate legal entity, this association is formed when two or more people start operating a business together. Although easy to form, general partners are personally liable for all business debt and liabilities.
  5. Limited Partnership

    Typically used by certain investment groups such as venture capital firms, an LP consists of both general partners (who manage and run the LP) and limited partners (who contribute capital).
  6. Limited Liability Partnership

    Most often used by licensed professionals such as attorneys and accountants, LLPs afford owners the opportunity to limit their personal liability when an LLC or corporation is not an option.