The formation of your business is an incredibly important part of getting your business from idea to start-up. In such a competitive environment, selecting the appropriate structure for your tax goals, liability protection, operational needs, and management style, among other factors, can ease your path to success.
The basics of Texas business formation are here, but the nuances are best covered by a legal professional. Your structure depends not only on your present situation, but also on your future plans.
Entity Selection
You have a choice of six major structures as your business entity:
- The sole proprietorship: The simplest and most common business structure. This is meant for a single owner and functions informally.
- The general partnership: Two or more partners who are engaged in business together for profit. No filings or documents are necessary to form a general partnership.
- The corporation: A business that is owned by 1 or more shareholders and managed by a Board of Directors. In Texas, it is formed with a filing to the Texas Secretary of State. This also includes corporations that intend to make a Subchapter S Election (also known as an S-Corporation).
- The limited liability company (LLC): A business that is owned by 1 or more members, while offering a flexible management structure. In Texas, it is formed with a formal filing with the Texas Secretary of State. LLCs are strictly state-created entity types. Thus, while an LLC is not a partnership or corporation under state law, it is treated as either a partnership or corporation by the Internal Revenue Service.
- The limited partnership: A business structure with one or more general partners and at least one limited partner.
- The limited liability partnership: A business structure that limits the liability of the general partners in an agreement.
Choosing the right structure becomes critical as a business begins to generate cash flow and enter into agreements and contracts. Retaining the services of a business attorney with experience in business formations is the best way to choose the structure that will work best for you over time.
In some cases, you may need outside funding to start your business or to grow it. You can invite outside investors to provide capital in return for giving them a share of ownership in your business. Think Shark Tank.
The right equity financing shores up cash flow and gives room for acquisition and growth. It also keeps your company out of borrowing agreements with high interest rates.
However, you need to follow the rules in order to ensure that your funding channels remain compliant with state and federal law. You will want to ensure that you get the money you need, when and how you need it.
Equity financing is also a good alternative to traditional bank funding if you are having trouble procuring the money you need to get your business started or to grow it. Along with funding, equity investors can bring advice, connections, and potential partnerships to you to help you grow your business. The right equity investor can mean the difference between sinking and swimming, and the right attorney can help bring a partnership together.
Partnership Agreements
There are many kinds of important aspects you should consider when entering into a partnership agreement. Even though it is not filed with the Secretary of State, it’s the document that will ultimately govern how your partnership is operated. Having a well-planned and thought out partnership agreement can help protect you from unexpected circumstances in the future. The agreement also has significant legal and financial repercussions that you need to be aware of.
The general partnership, the limited partnership, and the limited liability partnership have subtle differences that you will need to understand before committing to a structure. The way that partnership agreements are structured solidify the relationship between partners, ensuring fewer arguments and higher rates of business continuity.
Depending on the type of partnership and the people involved, you’ll need to have an agreement structured that fits all parties. A business attorney can work with everyone involved to get a mutually acceptable agreement in place that puts the business on sound footing from the start.
Shareholder Agreements
Shareholder agreements help to solidify the relationship between a group of shareholders of a corporation. A shareholder agreement among the founders or among early investors can be an important tool in financing and operating your corporation. Although not often considered, having a shareholder agreement is recommended, especially if you have multiple founders or early-stage investors.
However, these agreements are generally quite in-depth. In order to create a binding agreement to protect your interests as a founder and remain in compliance with state and federal law, you will need to retain the services of a reputable business attorney with corporate experience.
Do you need help with your business?
A business lawyer’s value doesn’t end once a company is formed. The right attorney can be a valuable partner in ensuring a business’s success through operations, compliance, and more.
We are local to Plano, Texas, and we have years of experience with the local, state, and federal laws that your business must comply with in order to succeed. Contact us to learn more about all of our services.