sean green

Business Formation

Businesses are created every day across the country for a wide range of reasons. Most business owners create them in order to make a profit. While this is certainly the driving force behind any business owner’s vision, a vast majority of these same visionaries fail to understand the proper way to form, own, and operate these businesses. Far too often, a new business is formed without thinking through the consequences of how it is owned. DUE TO PLACING ALL OF YOUR BUSINESS AND PERSONAL ASSETS AT RISK, A BUSINESS SHOULD NEVER OPERATE AS A SOLE PROPRIETORSHIP! The ease of formation, the low cost, and the benefits of creating a business organization are testaments to this. At Green Law, we have been creating, forming, organizing and helping manage various types of business entities for years. Below are the various types of business entities that we have helped create.

SOLE PROPRIETORSHIP

  • A business in which one person owns all the assets, owes all the liabilities, and operates in his or her personal capacity
  • Pros
    • Ease of organization
    • Minimal legal restrictions
    • Owner makes all decisions and retains all profits
  • Cons
    • Owner is responsible for all losses and debts
    • Difficult to raise outside capital
    • Unlimited liability
  • A BUSINESS SHOULD NEVER OPERATE AS A SOLE PROPRIETORSHIP!

PARTNERSHIP

  • A voluntary association of two or more persons who jointly own and carry on a business for profit
  • General Partnership
    • A partnership in which all partners participate fully in running the business and share equally in profits and losses (though the partners’ monetary contributions may vary)
    • Pros
      • More resources for decision making
      • More resources for creative activity
      • Easier to raise outside capital
    • Cons
      • Unlimited liability
      • Authority is divided among partners
      • Potential delays in decision making leading to disagreement
  • Limited Partnership
    • A partnership composed of one or more persons who control the business and are personally liable for the partnership’s debts (called general partners), and one or more persons who contribute capital and share profits but who cannot manage the business and are liable only for the amount of their contribution (called limited partners)
    • Pros
      • Generally, limited liability for limited partner(s)
      • More resources for decision making
      • More resources for creative activity
    • Cons
      • Unlimited liability for general partner(s)
      • Management is controlled by general partner(s)
      • Liability may be assessed against limited partner(s)

LIMITED LIABILITY PARTNERSHIP

  • A partnership in which a partner is not liable for a negligent act committed by another partner or by an employee not under the partner’s supervision
    • Pros
      • Limited liability for partners
      • More resources for decision making
      • Easier to raise outside capital
    • Cons
      • Must carry a minimum of $100,000 in errors and omissions insurance
      • Filing fees of $200 per partner
      • Added regulatory oversight

LIMITED LIABILITY COMPANY

  • A company – statutorily authorized in certain states – that is characterized by limited liability, management by members or managers, and limitations on ownership transfer
  • Pros
    • Limited liability of member
    • Extremely flexible
    • Texas allows for single member LLCs
  • Cons
    • Requires extensive operating agreement among members
    • Difficult to raise outside capital
    • Transfer of ownership restrictions

PROFESSIONAL LIMITED LIABILITY COMPANY

  • A limited liability company that is created by licensed professionals including, but not limited to, doctors, lawyers, accountants, financial advisors, and engineers
  • Pros
    • Limited liability of member
    • Extremely flexible
    • Texas allows for single member PLLCs
  • Cons
    • Requires extensive operating agreement among members
    • Restrictions on hiring “non-professional” members (i.e., non-licensed individuals may not be members)
    • Difficult to raise outside capital

SERIES LIMITED LIABILITY COMPANY

  • A limited liability company that allows a person to hold property within individual units or series
  • Particularly useful for real estate investors
  • Pros
    • Limited liability
    • Extremely flexible
    • Less exposure to lawsuits and judgment than with a traditional LLC
  • Cons
    • Extensive record keeping
    • Cannot commingle funds with other series
    • Need for an exhaustive operating agreement

INCORPORATION

  • The formation of a legal corporation under state law
  • Pros
    • Limited liability of shareholders
    • Ease of transfer (sell stock)
    • Easy to raise outside capital
  • Cons
    • “Double” taxation
    • Extensive regulatory oversight
    • Formation/compliance costs are high

SUBCHAPTER S CORPORATION

  • Authorized by the Internal Revenue Code, corporations created to provide small corporations with certain tax advantages
  • Pros
    • Avoidance of “double” taxation
    • Limited liability of shareholders
    • Ease of transfer (sell stock)
  • Cons
    • Extensive regulatory oversight
    • Limited number of shareholders
    • Formation costs are higher

 

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The information provided herein is not, nor is it intended to be, legal advice. It is for informational purposes only. No attorney-client relationship has been created and we have no obligations to you or your case.

 

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