As your business works to get through these hard times, you may wonder if you have structured your company in the most advantageous way. The question requires attention to the same issues you originally considered: your management style, your taxation preferences, and your tolerance for risk.
You can change the structure of your business, in many cases, if it would be an advantage to do so. Most business owners are interested in doing so to prevent personal liability for business debts.
There are many types of entities that are permissible in Texas, such as:
- Sole proprietorships
- General partnerships
- Limited partnerships
- Limited liability partnerships (LLPs)
- Limited liability limited partnerships (LLLPs)
- Professional associations
- Limited liability companies (LLCs)
- Professional LLCs (PLLCs)
- Nonprofit LLCs
- Series LLCs
- Close corporations
- Nonprofit corporations (501(c)(3) corporations)
- Professional corporations (PCs)
- Public benefit corporations
These all have different benefits and challenges. For example, with a sole proprietorship, taxation is relatively easy because the business’s income is taxed directly to the owner. It’s easy to manage and operate. However, you are personally responsible for business debts and liabilities.
What are the considerations?
The differences between the entities are largely 1) how they are taxed; 2) how they are operated; and 3) whether the owners have personal liability for business debts and losses. In some cases, such as professional entities and nonprofits, the membership or purpose of the organization is limited.
You can form any type of entity for which you are qualified no matter how small your business. For example, if you are a single person, you don’t have to operate as a sole proprietorship. You could form a corporation in which you are the sole shareholder, director and officer. Or, you could be the sole member of a limited liability company (LLC). You could also set up as a corporation with an existing LLC as the sole shareholder.
A mixed-entity setup could offer benefits
What many people don’t realize is that many of these entity types can be owned by other entities. For example, a professional limited liability company or a professional corporation can be owned by a professional organization rather than simply by the people involved. This is often done as a form of asset protection.
The key to protecting yourself from personal liability for business losses and debts is to ensure that your company is a separate legal entity from yourself. When the organization is a separate legal entity, it takes on its own responsibility for its debts and losses. An additional entity being involved can set up another level of separation between the business and its owners.
You can’t undertake business entity changes in an effort to avoid existing debt or to commit fraud. Therefore, if you want to take advantage of the asset protection available through entity formation, you will need to act before you go into debt or receive a court judgment against you.
For more detailed information about entity selection, changing your business entity or asset protection, contact Kaplan & Cruz, PLLC.