The following guest article on Types of Business Entities in Texas was written by James J. Burnett of Brownhill, Burnett & Associates, P.C. You can visit his web site at http:\\www.jamesburnett.com.
Types of Business Entities in Texas
NOTE: This article discusses business law matters of current note in the State of
Texas according to Texas law. The author is not licensed to practice law in states other than
Texas, and the following should not be taken as statements of what the law is outside that
state.
Very simply, the sole proprietorship is you, all alone, conducting your business. With all the attention paid to corporations, partnerships, limited liability companies, and the other more complex business vehicles in the commercial world, it is still true that many businesses, especially small ones, are simple sole proprietorships. This should not be all that surprising. Many young businesses are "mom and pop" enterprises, with both the decision-making and the work output resting in the hands of very few, even one, number of people. Many professionals, too, practice their work by themselves, and they avoid the record-keeping and report-filing responsibilities that the government imposes on many kinds of business entities.
There are no special requirements in Texas for forming a sole proprietorship. All one has to do is start one's business. Many sole proprietors use a business name (e.g., John Smith the programmer might want to market his services as "Smith Programming Consultants"). This is entirely legal; however, the businessman should check with the county clerk in his county to see if the name he wants to use in his business has already been registered as the assumed name (sometimes called a "doing business as") of another company. If so he will need to choose a different name. If the name he wants to use is not registered to someone else, he can register it himself to protect his rights in the name as his business grows and develops its own reputation.
A sole proprietorship has no legal status in Texas apart from its owner; the two are one. This means that a sole proprietor will be personally responsible for all debts and obligations of the business as well as all claims made against it. There is no "shield" to protect the sole proprietor from creditors or claimants. On the other hand, since by nature a sole proprietorship has only one owner, although the owner will be personally liable, creditors and claimants should not be able to obtain joint and several liability against other family members, etc., who are not owners of the business.
The sole proprietor may represent himself in court. However, court proceedings can be very complicated. There are sophisticated procedural rules that govern how a case is run, and these procedural rules can cause a case to be won or lost before the judge or jury even considers the facts of the case or the law that should control it. When one adds in the constantly changing nature of the law itself, it is easy to see how overwhelming it could be to handle one's own case.
There are no shares of stock or certificates or other papers to confer ownership of a sole proprietorship. The owner simply owns all of the assets and liabilities of the business. He may buy, sell, swap, trade, or give away those assets and liabilities freely, although certain kinds of property often have to be registered (for example, motor vehicles). Tax considerations and the application of special laws dealing with the liquidation of a business, for example, the Bulk Sales Act, may also affect how one goes about acquiring or selling a sole proprietorship.
Since there is no stock in a sole proprietorship, the provisions of the Securities Act of 1933 do not apply.
Income is taxed at the owner's personal level. Similarly, the deductions that the business would be allowed to take pass through to the owner.
Another state may have special rules for how a foreign business man may do business there. If you plan to do business outside of Texas, you need to know what those qualification provisions are and how to satisfy them.
If you decide to have a sole proprietorship, you should stay alert to these important points:
1. Remember that you have "no" protection from creditors or claimants of your business. You are personally liable for the consequences of your venture. While many people tout a number of devices such as "living trusts" as a means to protect your assets from those creditors and claimants, you need to remember that in Texas an asset-saving device utilized principally to shield assets from creditors may be declared void.
2. Maintain proper records. While what you spend on your business may be deductible for tax purposes, not everything you spend is necessarily a business expense. You cannot depend on the IRS to take your word for it when it comes to any particular deduction. You should maintain separate bank accounts and sets of records for your business and your personal endeavors and document the transfer of money or property between them. When in doubt, keep a record of it!
3. Pay your taxes! The Internal Revenue Service imposes a 100% penalty on unpaid payroll taxes and it can assess this tax against any "responsible person" in the business. Just what a "responsible person" is, is too broad to discuss here, but this is the IRS's term, and you can imagine how broadly they apply it.
To look at the other kinds of business entities that are available, click on one the following: