Forming a business is a complex legal undertaking that requires a great deal of time and effort on your part. From raising the funds you need to start your business to choosing the right business entity, getting the required licenses, and hiring the right people, there are so many things you need to do in order to get your business off the ground.
The decisions you make while starting your business can have a huge impact on your business’s day-to-day operations and growth down the line. This is why it is critically important for you to have a seasoned Texas business formation lawyer on your side.
In this guide, we will take an in-depth look at how you can turn your business idea into a reality with the help of a business formation lawyer.
Choosing the Right Business Entity
Choosing the right structure for your business is one of the most important decisions you will make as an entrepreneur. The structure you choose can impact every aspect of your business – from how you raise capital for your business to how you are taxed, how you operate your business, whether you can be personally held responsible for your business’s debts and liabilities, and many more.
A hard-working and reliable Texas business formation lawyer can assess your needs and goals, understand how you want to operate your business, and help you choose the right structure for your business.
Different Types of Business Entities in Texas
A sole proprietorship is by far the simplest and the most informal structure you can choose for your business. As a sole proprietor, you are both the owner and the operator of your business. There is no need for you to formally register your business since it is merely an extension of yourself and not a separate legal entity. Depending on the nature of your business and the kind of products or services you offer, you might have to get a local business license, occupational license, or permit.
If the name you choose for your business is different from your legal name, you are required to file what is called an Assumed Name Certificate (also referred to as Doing Business As or DBA) with the office of the country clerk.
If you wish to hire employees, you are required to get an employer identification number (EIN), which you need to use to report taxes. If you are a solopreneur, you are not required to get one, since you can use your own social security number to report taxes.
Advantages of a Sole Proprietorship
- It is extremely easy to set up and costs almost nothing.
- It does not involve any complicated paperwork.
- You can deduct all your business expenses from your income.
- You can have complete and total control over your business.
- You get to retain 100% of the profits since there are no partners or shareholders to share it with.
Limitations of a Sole Proprietorship
- You do not enjoy any kind of protection against business debts and liabilities, since you and your business are one and the same. If someone sues your business, your personal assets – including your home – could be at risk.
- It can be difficult for you to raise funds to expand your operations or for any other purpose since lenders and investors prefer to finance formal business entities like limited partnerships, limited liability companies, and corporations over informal business entities like a sole proprietorship.
A general partnership is an arrangement under which two or more parties join hands to form a business. It’s quite similar to a sole proprietorship, as there is no need for you to register the business formally. If your business’s name is different from your own name (which is usually the case with general partnerships), you need to file an assumed name certificate with the office of the county clerk.
The day-to-day operations of a general partnership must be conducted in accordance with the partnership agreement. Under a general partnership, each partner has an equal say in how the business is operated and gets their own share of the profits generated.
Advantages of a General Partnership
- It’s very easy and inexpensive to set up.
- It does not involve any complicated paperwork, as the only thing you need is a partnership agreement.
- Each partner can deduct their share of the business expenses and losses from their income.
Limitations of a General Partnership
- The biggest disadvantage of a general partnership is that you can be personally held responsible for your partnership’s debts and liabilities as well as the negligent actions of other partners.
- You have less control over the business since other partners can be actively involved in the day-to-day operations.
- Any dispute between you and the other partners can impact the day-to-day operations of the business and can unravel the partnership itself.
- It is just as much of an informal business structure as a sole proprietorship, as a result of which it can be harder for you to get the funds you need to expand your business.
A limited partnership – just like a general partnership – involves two or more partners. The difference is that a limited partnership requires at least one general partner – who is in charge of the day-to-day operations – and at least one silent or limited partner – who only invests their money and does not have any decision-making authority.
Under Texas law, a limited partnership is considered a legal entity in and of itself. So, you need to formally register it by filing a certificate of formation with the Texas Secretary of State.
Advantages of a Limited Partnership
- It is easy to raise funds since it is a formal business entity and interested parties can invest their money without being directly involved in the day-to-day operations.
- General partners can have complete control over the business while getting the funds they need from the limited partners.
- Limited partners cannot be held personally responsible for the partnership’s debts and liabilities, as their liability is limited to the extent of their interest and involvement in the partnership.
Limitations of a Limited Partnership
- General partners do not enjoy any kind of protection against business debts and liabilities.
- Under certain circumstances, limited partners can also be held liable if they play an active role in the day-to-day operations, apart from investing their money.
Depending on your needs, you can also choose to form a limited liability partnership (LLP), which can provide more protection for the partners against business-related liabilities. However, under Texas law, only certain types of businesses can be structured as LLPs. These include law firms, doctor’s offices, accounting firms, and certain other professional service firms.
A corporation offers you the highest level of protection against business debts and liabilities since it is considered an independent legal entity under the law. Depending on your needs, you can choose to establish a C corporation or an S corporation. The biggest difference between a C corporation and an S corporation is that the former is taxed twice (corporate tax as well as personal income tax) whereas the latter is taxed only once at the individual level.
Advantages of a Corporation
- The biggest advantage of a corporate structure is that it offers complete protection against business-related liabilities.
- You can raise the capital you need by issuing stock.
- It is eligible for more tax deductions compared to any other type of business entity.
Limitations of a Corporation
- It’s more complicated to establish compared to other types of business entities and involves a lot of paperwork.
- There is a wide range of formalities to be followed – from appointing a registered agent to creating bylaws, holding board of directors and shareholders’ meetings, and many more.
Limited Liability Company
A limited liability company – more commonly referred to as an LLC – is a business entity that combines the best features of a sole proprietorship, partnership, and corporation. Depending on how you want to be taxed and the level of liability protection you want to enjoy, you can choose to structure it like a partnership or a corporation.
Advantages of an LLC
- You cannot be held personally liable for the LLC’s debts and liabilities.
- You can structure it as a pass-through entity so that you are taxed only once – at the individual level.
- There are not as many formalities to be followed as a corporation.
- There is no cap on the number of members an LLC can have, so it is easier to scale and expand your business.
Limitations of an LLC
- It is more expensive to establish compared to a sole proprietorship.
How Your Business Formation Attorney Can Help You Choose the Right Business Structure
Your business lawyer will take a wide range of factors into account to determine the right structure for your business. These include:
- Ease of setup
- Cost of setup
- Risk of personal liability
- How much information you are legally required to share with the state and the public
- The level of control and decision-making authority you want to have
- Whether it might be easy for you to raise capital if and when you need it
- Your tax obligations
- Ability to expand your business operations
Business Licenses and Permits
Depending on how you structure your business and the nature of your business, you might have to get a number of licenses and permits. These might include:
- Business license (not required at the state level, but required in many cities)
- Professional license
- Sales tax permit
- Building permit
- Zoning permit
- Signage permit
- Certificate of occupancy
Apart from this, if you engage in business activities that are regulated by the federal government, you might have to get a federal license or permit. The most common types of businesses that might require a federal license or permit include:
- Alcoholic beverages
- Firearms and ammunition
- Transportation and logistics
- Commercial fisheries
- Radio and television broadcasting
- Maritime transportation
A seasoned Texas business formation attorney can assess the nature of your business operations, determine what kind of licenses and permits you might require, and guide you through the process to make sure you get all the licenses and approvals you need as quickly as possible.
Drafting and Negotiating Contracts
As a business owner, you might have to sign contracts with a number of third parties – from financial institutions to partners, employees, vendors, and many more. These contracts tend to be filled with legal jargon and can be extremely hard for a layperson to understand. If you sign a legally binding contract without actually knowing the terms, you might not only get taken advantage of by the other party but might also face legal issues down the line.
A skilled Texas business formation attorney can draft contracts for all your business needs. They can also review the contracts offered by third parties and make sure the terms do not harm your business interests in any way.
An experienced attorney can also negotiate the terms of the contracts on your behalf with the other party and make sure your rights and business interests are protected. For instance, depending on the circumstances, your lawyer might convince the other party to include an arbitration clause into the contract, so that disputes can be settled out of court. In the absence of such a clause, your only option might be litigation, which can not only take a lot of time but can also be expensive.
Some of the contracts your business formation lawyer can help you with include:
- Loan and financing contracts
- Commercial lease agreements
- Sales contracts
- Operating agreements
- Employment contracts and incentive plans for employees
- Vendor contracts
- Non-disclosure agreements, non-compete agreements, and confidentiality agreements
- Contracts for business-related real estate transactions
- Contracts related to acquiring a new business, merging your business with another business, or selling your business
How Your Texas Business Formation Lawyer Can Help with Contract Disputes
Apart from drafting, reviewing, and negotiating contracts, your lawyer can also play a vital role in enforcing the terms of these contracts. If the other party violates or refuses to abide by the terms of the contract, your lawyer can take legal action against them for breach of contract and recover damages.
Depending on the terms of the contract you signed, the severity of the violation, and the extent of losses you suffered, you might be entitled to recover the following damages.
- Compensatory damages (compensation for any losses that might have been caused by the breach of contract)
- Liquidated damages (compensation for non-quantifiable losses due to a contract breach or triggered by a stipulation in the contract)
- Consequential and incidental damages (compensation for losses that you stand to incur due to the breach of contract)
- Damages for the loss of credit reputation (if the breach of contract negatively impacted your credit score or forced you to file for bankruptcy, you can be compensated for the loss of credit reputation)
- Specific performance (the party that breached the contract might be ordered by the court to perform a specific action – as stated in the contract)
- Loss of use (compensation for the time it might take for you to repair the damages caused by the breach of contract)
Employment Agreements, Policies, and Laws
Unless you are a ‘solopreneur’, you need to hire employees in order to run your business. There are strict laws in place at the state level as well as the federal level to protect the rights of employees and to make sure they are not discriminated against. As a business owner, it’s paramount for you to make sure your hiring practices are in compliance with these laws and regulations.
Your business formation lawyer can tell you what kind of laws and regulations you need to follow while hiring and terminating employees and what actually constitutes a violation under the law.
One of the common mistakes that employers in Texas make is that they mislabel and misclassify their employees as independent contractors. Misclassifying employees – even if done unintentionally – is against the law and if the employee in question decides to sue you, you might have to pay a substantial amount of compensation.
Your lawyer can review the contract and the nature of the contractor’s duties and tell you whether you are right to classify them as independent contractors.
Your lawyer can also help you prepare an employee handbook, which can serve as a reference guide for all employee-related issues. Your lawyer can also help you institute robust anti-discrimination, anti-bullying, and anti-harassment policies in the workplace so that your employees can work safely and you can protect your business and yourself against potential legal issues stemming from workplace discrimination or harassment.
Providing Advice on Business-Related Issues
A business formation lawyer can provide you with the legal advice you need from time to time so that you can make the right decisions and avoid making mistakes that could harm your business interests. From hiring and firing employees to entering into agreements with third parties, your lawyer can advise you on a variety of different issues and provide you with the guidance you need.
Sometimes, despite your best efforts, you might not be able to settle or resolve disputes through mediation or arbitration. If and when it happens, your lawyer will stand by your side, take the case to court, and try their best to achieve a positive outcome.
Factors to Consider While Choosing a Texas Business Entity Formation Lawyer
The key factors you need to consider while choosing a business entity formation lawyer include:
- Expertise in relevant fields (tax law, employment law, bankruptcy law, real estate law, intellectual property law, personal injury law)
- Knowledge about the most recent regulations of the Internal Revenue Service
- An understanding of your specific industry or a willingness to learn about your industry
- Experience in representing, guiding, and fighting for businesses like yours
- A track record of successfully resolving business-related disputes through arbitration and litigation
- Courtroom experience
- Financial resources, manpower, and connections
- Whether the business attorney has ever faced disciplinary action
- Reviews by business owners whom the lawyer has represented in the past
Looking to Start Your Own Business? Our Skilled and Experienced Texas Business Formation Lawyers are Here to Help
Starting your own business can be a daunting task, especially if you have never started a business venture before. Any mistake or oversight on your part can impact your business’s growth down the line and affect your chances of succeeding as an entrepreneur.
At Kelly Legal Group, we have a team of board-certified attorneys who have decades of combined legal experience in representing a wide range of Texas business organizations – from a sole proprietorship to a limited liability company (LLC) and corporations.
We can make sure your business is properly structured and in compliance with all the relevant laws and regulations at the local, state, and federal levels. We can guide you through every step of the business formation process, provide you with the information you need to make the right decisions, and protect your rights and business interests.
If you have any questions about business formation, call our law firm today at 512-505-0053 or get in touch with us online using our contact form and schedule a free initial consultation with one of our capable and accomplished Texas business attorneys.