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Frequently Asked Questions
Starting a Business in the State of Texas
Do I need a lawyer to help me set up my business?
It is always recommended that you consult with an attorney and a certified public accountant prior to starting a business. The drafting of business documents is a legal matter than can drastically affect how your business is perceived, financed, insured, and protected. It is legal for you to draft legal documents for yourself but if you are not attorney it is illegal for you to draft legal documents for another person. Why is there a law against this? One of the main reasons is to protect individuals from receiving potentially bad "legal advice" from a person not trained in legal matters. The question is - if another person shouldn't rely on your advice about a legal question, should you? This isn't to say you cannot do it yourself. It simply questions whether documents drafted by a non-attorney will protect and manage the business properly and protect yourself and your own personal assets from business debts.
How do I locate an attorney to help me and how do I pick one to work with me?
There are a lot of attorneys listed in the yellow pages, most of whom deal with criminal law, personal injury law, divorce and bankruptcy. However, you need an attorney focusing his or her law practice and continuing education on business planning. One of the best ways to find a business lawyer is through a referral from a personal friend, business associate or advisor. Your insurance agent, accountant or financial advisor will likely have an attorney they can recommend. But that shouldn't be the only factor in making your decision. Interview the attorney just like you would interview a new employee. After all, you are hiring them to work for you. Find out how long they have been in practice, what areas of law they practice in and how they will assist you with your business. Did you feel comfortable speaking with the attorney? Did he or she listen to your concerns? All of these questions will help you find a capable lawyer with whom you can establish a long term relationship. And do not focus too much on the fees. You often pay for what you get and an attorney charging a low fee may not adequately take care of your legal needs.
What is a sole proprietorship and should I use it or another type of business setup?
A sole proprietorship is basically a business owned by one person. The kid in the neighborhood who mows lawns in the summer is probably a sole proprietor. The computer technician who hangs out his shingle and starts helping businesses with their computer networks is also probably a sole proprietor. Every tax year the individual who owns the sole proprietorship pays taxes on the profits from his or her own business as an individual. It is one of the simplest forms of ownership but it offers no liability protection. All of the non-exempt business assets of the sole owner are subject to the debts of the business, including loans, judgments from lawsuits and other liabilities. The sole proprietor's own non-exempt non-business assets are subject to those debts as well. The use of a corporation, partnership or limited liability company is often a much smarter way to run a business so the owners' personal assets are protected from business debts.
If I want to protect my personal assets, how can a corporation, partnership or limited liability company help me?
All of the "owners" of these types of businesses have the ability to limit their personal liability for business debts. A corporation is owned by shareholders; a partnership is owned by partners; and a limited liability company is owned by members. Incorporating a business is probably the most common way owners protect themselves from personal liability for business debts. However, each of the types of businesses offers some form of liability protection. For example, if you buy stock in a corporation as an investment and a creditor sues the corporation your personal non-business assets are not liable for the debt. In the same manner, if you pay $5,000 to purchase a limited partnership interest and the limited partnership is sued by an injured customer and loses, the only loss you may incur is the $5,000 investment - your personal assets are protected. The same theory applies to limited liability companies, which are basically a blend of a corporation and a partnership.
What types of partnerships are there and which one should I use if I am going to start a partnership for my business?
The main types of partnership are general partnerships, limited partnerships and limited liability partnerships. A general partnership is when two or more individuals go into business with an agreement that they will both share in the profits, losses and management of the business. This type can be started with a handshake between friends, or set up with actual documents. The primary problem with a general partnership is each individual partner is liable for the partnership debts (including business debts incurred by either partner) to the full extent of all of their non-exempt personal assets. A limited partnership enables owners that buy limited interests to limit their risk of liability to their investment only, although the limited partners do not have the right to participate in managing the business. Instead, a general partner is the partner managing the business. A limited partnership can only exist after a Certificate of Limited Partnership is filed with the Texas Secretary of State and the filing fee is paid. A registered limited liability partnership is a partnership that allows all partners to participate in the management of the business. Each of the partners in this type of partnership is protected from any claims based on negligence of any of the other partners. This type of partnership is generally only used by professional service providers, such as doctors, lawyers and accountants.
I hear about corporations and companies all the time. What is the difference between the two?
Corporations have been around a long time and are common in every state. Corporations are taxed on their income unless certain elections are made with the I.R.S. The income is not passed through to the individual owners as is the case with sole proprietorships, partnerships and certain limited liability companies. Because of this feature, corporations are sometimes subject to double taxation if not handled appropriately. As discussed before, stockholders in corporations do not expose their personal assets to the creditors of the corporation. A limited liability company is like a hybrid of a corporation and partnership that offers liability protection to businesses that could not qualify as an S-Corporation for federal tax purposes. It is less restrictive than a corporation and allows the members to use different ratios for sharing profits and expenses.
What is an assumed name for a business and do I have to have one for mine?
An assumed name is another name used by an individual for a business that does not include the individual's surname, and for businesses it generally includes any name used by the business that does not include the name of the business. For example, if you start the John Smith Corporation but sell shoes as the "Texas Shoe Shop" you are using an assumed name. Texas law requires anyone doing business under a name other than their own must file a statement with the Secretary of State and certain counties in the state to identify the real owners of the business. But, you do not acquire rights to a name by filing alone; you must also use the name. If you quit using it, you may lose it.
What is a trade mark or a service mark?
A trade mark can be a logo, shape, or other identifying mark for a product. You can also have a similar mark for services you provide (which is called a service mark). For example, everyone has seen the swoosh symbol for Nike and the blue and white propeller emblem for BMW. Those are trademarks. As with the assumed name, if you don't use it you don't have the trademark. For even more protection, you can file a trademark with the United States Patent and Trademark Office. If you have a trademark or service mark others cannot use it without your express permission.
My accountant has recommended I set up my business as an S-Corporation. What does that mean and how do I do it?
Certain businesses may elect to be taxed like a partnership instead of a corporation to avoid double taxation. Under Subchapter S of the Internal Revenue Code, a business may elect to be taxed as an S-Corporation, which allows income to flow through to the shareholders to be taxed on their individual returns. There are certain restrictions, including a maximum number of shareholders and the types of shareholders that are allowed to own interests in the corporation. The proper form must be filed with the Internal Revenue Service within a specified period time to be eligible for S-Corporation status.
A friend of mine is a business owner and told me to watch out for the Texas franchise tax! What is that tax and how can I minimize it?
The Texas franchise tax is a tax levied on corporations and limited liability companies doing business in the State of Texas with gross annual revenues over $150,000.00. Partnerships are not subject to the franchise tax at this time, but legislation was presented in the last session to tax partnerships with gross revenues in excess of $150,000.00 (the law did not pass). For example, if you own John Smith Corporation and your gross annual revenues are $200,000.00, the corporation will be subject to a franchise tax equal to the greater of .25% of taxable capital or 4.5% of net income.
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