Austin Business Lawyer

Business Organizations Center - Texas Limited Liability Company

Whether your business is best suited to operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company depends on various factors. You should remember that as your business develops its needs may change.

Perhaps the most important factor that business owners must consider is how susceptible the business will be to liability. If, for example, a business owner predicts a relatively high potential for accrual of debt or for tort suits against the company, a business structure that provides protection from liability is suitable. Such a business should probably not be run as a sole proprietorship or partnership because neither entity protects owners from liability for the business's debts. Additionally, the business's assets could potentially be seized to satisfy the personal debts of the owners.

On the other hand, if a business owner does not predict a high potential for liability, the sole proprietorship or partnership structure could be appropriate and offer certain advantages. These two types of entities avoid the problem of "double taxation" that corporations face because the owners simply account for business profits and losses on their personal income tax returns. This is called "pass through" taxation. Nevertheless, owners should still maintain the business's accounting records separate from their personal records in order to accurately identify the expenses and income that are allocable to the business. Such distinctions are crucial, for example, for calculating deductions that the IRS allows for various business expenses. In addition to "double taxation," the sole proprietorship and partnership forms avoid many of the statutorily mandated formalities with which corporations must comply.

Taxation is another important factor for business owners to consider. The "double taxation" problem is one of the primary disadvantages of operating a business as a C corporation-first the corporation itself is taxed, then the owners are taxed when the corporation pays distributions to them. This is sometimes actually advantageous because it may prevent owners from entering a higher tax bracket. Usually, though, business owners simply prefer to pay as little taxes as possible, opting for a business entity that allows "pass through" taxation.

The limited liability company (LLC) is currently the most prevalent structure for new businesses. The LLC provides some liability protection to its owners, or "members," allows "pass through" taxation, and does not require adherence to most formalities and regulations that corporations must follow. Business owners should keep in mind that, since the LLC form only came into existence relatively recently, the laws that set the requirements for forming an LLC vary widely from state to state. Consultation with an attorney is recommended before attempting to form an LLC in order to ensure a solid understanding of the laws that regulate LLCs and to assure adherence to them.

Sometimes the LLC form is not an option. For example, some states do not allow single-owner businesses to organize as LLCs. In those cases, the best alternative is typically the S corporation. S corporations enjoy "pass through" taxation, but they also carry certain additional restrictions. Some of those restrictions are discussed in more detail in the corporations section.

Finally, business owners must also consider how they plan to finance the business. For example, the limited partnership, corporation, and LLC structures allow investors to become partial owners of the business without accepting personal liability or taking on any responsibility for managing the business.

Understanding the available options for business organization is one of the most important concerns of business owners. An experienced attorney who is knowledgeable in the area of business entity formation is invaluable in explaining these options and the applicable laws regulating business formation.

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Centrally located in the Arboretum area of north Austin, the Slater & Kennon law firm represents clients in Travis County, Bastrop County, Burnet County, Williamson County, and Hays County, including the cities of Austin, San Marcos, Bastrop, Burnet, and Georgetown.