Incorporating your business is a means to reach your growth potential and attain legal protection. In structuring your business at the onset, choosing the most fitting legal entity is crucial as each entity has its own advantages and disadvantages when it comes to: taxation; ownership structure; fundraising considerations; liability; & compensation. The key is to understand your business vision and select an entity that provides the most appropriate bounds.
Before consulting with an attorney, navigate the free resources provided by the Texas Secretary of State so you can have a more productive & knowledgeable discussion about your business decision.
Corporations, LLCs, and LPs are formed by filing a certificate of formation with the secretary of state. Corporations are owned by shareholders, managed by a board of directors, and administered by officers. LLCs are owned by members and managed by members, managers, or both. An LP is partnership of one or more limited partners and one or more general partners.[i]
An LLP is either a general partnership or an LP that registers annually with the secretary of state and carries a minimum of $100,000 in errors and omissions insurance. If an LP registers as an LLP, it can be called a limited liability limited partnership (LLLP). Maintaining the required insurance and registering as an LLP (or LLLP) offers limited protection to general partners from personal liability for any debt or obligation of the partnership arising from an error, omission, negligence, incompetence, or malfeasance committed by another partner or representative of the partnership.[ii]
Each of these entity structures shields its owners from personal liability for the debts and obligations of the entity and may offer tax advantages that are not available to sole proprietorships and general partnerships. Each of these entities must also pay Texas franchise taxes.[iii]
In order to issue preferred stock[iv] to acquire venture financing, a company will have to be arranged as a C-Corp. A C-Corp is a separate taxable entity independent from its stockholders. Thus, the earnings of a C-Corp are generally taxed twice: once at the corporate level on the corporation’s taxable income and a second time at the stockholder level on dividends and distributions.
If you are a start-up or a small business looking to expand, you should be familiar with the different types of investor funding so you can choose the best corporate form to handle the investments. There are three main types of investor funding: convertible debt; equity; & loans. According to a Statesman article earlier this year, a total of 99 Austin-area deals received $740 million last year, according to a survey by PricewaterhouseCoopers and the National Venture Capital Association. That’s a 20 percent increase from 2014, when 114 companies collected $615 million. In Texas, Austin was by far the largest venture capital recipient in 2015.[v]
Please look out for my next article which will discuss investor funding & strategy in more detail.
[iv] Preferred Stock: a class of ownership in a corporation that has a higher claim on its assets and earnings than ‘common stock’. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights.
Brett H Pavony and the attorneys at De Leon & Washburn, P.C. are available to assist clients with corporate formation & governance. For more information regarding the firm’s practice areas, please visit our Practice Areas page, and please feel free to contact the attorneys at any time.
© De Leon & Washburn, P.C. This article is provided for informational purposes only. It is not intended as legal advice nor does it create an attorney/client relationship between De Leon & Washburn, P.C. and any readers or recipients. Readers should consult counsel of their own choosing to discuss how these matters relate to their individual circumstances. Articles are not continuously updated, so information may become out-of-date. Reproduction in whole or in part is prohibited without the express written consent of De Leon & Washburn, P.C.