Updated: Feb 1, 2021
When starting a business, one of the first decisions you should make is what type of entity you will form. Why? Because your goal should be to separate your business assets and debts from your personal assets and debts by limiting liability.
There are several types of business entities to choose from including a Sole Proprietorship (DBA), a General Partnership, a Limited Partnership (LP), a Limited Liability Partnership (LLP), a Limited Liability Company (LLC), and a Corporation. Each one has their pros and cons.
Sole Proprietorship (also known as a dba) is made when one individual is doing business under their own name. This is the easiest and least expensive to form, but there is no liability protection for your personal assets.
General Partnership (GP) is made when two or more individuals have shared ownership in a business. Again, this is easy and inexpensive to form as there is no formal organizational requirements. There is no requirement to be called a partnership to be considered one. Evidence of a partnership includes profit sharing, control in the business, names on the door, names in a tax return, names on a lease agreement etc. But like the Sole Proprietorship above, there is no liability protection and each partner is personally liable for business debts and wrongdoings.
Limited Partnership (LP) is a partnership where certain partners have limited liability (limited partners) and at least one partner has unlimited liability (general partner). The general partner(s) have managerial rights and personal liability for debts and wrongdoings while limited partner(s) have a passive role and limited liability. There is a requirement to file a Certificate of Formation with Texas Secretary of State (SOS) and enter into a Limited Partnership Agreement for a fee $750.
Limited Liability Partnership (LLP) is a general partnership in which the individual liability of partners for partnership obligations is limited. A LLP is a pre-existing general or limited partnership that takes an additional step or registering as LLP. You must file an Certificate of Formation and pay $200 per partner with Texas SOS. You must also carry at least $100,000.00 of liability insurance.
Limited Liability Company (LLC) is one of the most common as all owners (called members) have liability protection and they are relatively easy to manage. A LLC can be member-operated or manager-operated. The articles of organization must specify which the LLC chooses. You must file an Certificate of Formation and pay $300 with Texas SOS.
Corporation (Corp.) is the another common entity. Generally, the shareholders of a corporation are not liable for the debts and obligations of the corporation. The corporation itself is liable, but no other person is automatically liable. In a corporation, the Board of Directors manage the corporation and there is a more rigorous management structure. You must file an Certificate of Formation and pay $300 with Texas SOS.
What is best for your business will depend on the specifics for your business such as the type of business, the number of owners, the growth plan for the business, etc. Regardless of the type of entity, it is important to have agreements drafted from the beginning to ensure proper management and governance of the business.
If we can help you start your business, or draft agreements or other governance documents, give us a call at 903-347-3060.