Should I form a company or not?

The main advantage of forming and properly operating a business inside of a corporation, limited liability company, or limited partnership is to protect personal assets such as personal bank accounts, stocks and bonds, recreational vehicles, and real estate other than your homestead. Businesses operated as a sole proprietorship or as a general partnership do not shield personal assets from the obligations, debts or judgments of the business.

Do I need a lawyer to establish a business entity?

Over the years, we have seen many business entities formed by individuals, CPAs and through online software. More importantly, we have litigated issues related to whether such entities were established and operated in a manner which provide the asset protection sought. When a business entity is not properly formed or operated, it is possible to “pierce the corporate veil” which causes the owners to lose any asset protection. If you decide to form an entity, have our lawyers aid you so that you get all the possible advantages.

What is an LLC?

An LLC is a limited liability company. If certain formalities are followed, the personal assets of the owners are shielded from liability for the LLC’s obligations, debts and judgments. Unless the owners choose otherwise, profits and losses of an LLC are “passed through” the entity to the owners in the same way as in a general partnership or sole proprietorship. Therefore, there is no income tax at the business level and no double taxation. Limited Liability Companies formed under the laws of Texas have another important advantage which is that an ownership interest in an LLC can not be taken to satisfy a judgment against an owner. A creditor of an owner can obtain a “charging order” related to the ownership interest but not the ownership interest itself. In contrast, a creditor of an owner can take stock of a corporation to satisfy a judgment.

What is a Subchapter S Corporation, S-Corp?

An S-corp has elected a special federal tax status so that it will be treated like a partnership, LLC or sole proprietorship for tax purposes: business profits and losses “pass through” the corporation directly to the owners, who in turn report the profits and losses on their individual tax returns. The election is made by filing Form 2553 with the Internal Revenue Service.

What are the disadvantages of forming a business entity?

The maintenance and formality of an S-Corp, limited liability company, or limited partnership may be somewhat inconvenient compared to a sole proprietorship in that monetary transactions should properly flow through the entity and once a year, minutes of major activities should be written. Further, a separate tax return will have to be prepared for the LLC or corporation in addition to the owners’ personal tax returns. However, the peace of mind of asset protection provided by an S-corp or LLC is generally worth the paperwork.