HOUSTON BUSINESS TRANSACTION ATTORNEYS

HOUSTON EXPERIENCED BUSINESS FORMATION LAWYERS ON YOUR SIDE

Starting and managing a new business can be overwhelming at times; and yet, be it a new high-tech company, a local convenience store, a new mechanic shop, a medical or dental office, or a construction company, we all have taken the bold step in moving forward with our endeavors. When starting a new business entity, a prudent entrepreneur must consider many issues when starting a business or when reforming one. Of premier importance is the type of business entity (a corporation, a company, a partnership, DBA, etc.) that will best suit your type of business. The experienced Houston business formation lawyers at the PHAM CLOVES, PLLC have assisted numerous clients in preparing corporate documents and filing their certificate of formation and articles of incorporation with the Texas Secretary of State. Further, the Houston Contract Attorneys and the Houston Business Drafting Lawyers have assisted clients in drafting various operating and business documents, including operating agreements, By Laws, buy/sale agreements, bill of sale, financing addendums, financial statements, corporate organization charts, real estate closing statements, and business plans.

The following information may assist you in determining which type of business entities may best fit your business model. Please contact the Houston Commercial Transaction Attorneys and the Houston Business Formation Lawyers for a personal consultation. We welcome your calls and our Houston Business Lawyers can be reached at 713-492-0337.

CORPORATE FORMATION AND TYPES OF BUSINESS ENTITIES

Sole Proprietorship

A sole proprietorship is a business form that is owned by an individual. The business is not a corporation, a partnership, or a limited liability company. There is no legal distinction between the business and the sole proprietor. Sole proprietorship is a simple form of business; there are no filing formalities such as filing fees or franchise tax. However, if you want to do business using a name other than your personal name, you must file a “dba” (doing business as). This is a "fictitious name" that should be filed in the county in which you are operating so that another business may not use the same or similar name to your business, taking away your business identity.

One of the benefits of a sole proprietorship is management flexibility. There are no restrictions as to how the business is to be managed. The income of the business is considered personal income; therefore, the owner does not need to file a separate return. However, a separate schedule must be used. Further, all of the assets of the sole proprietorship, whether tangible or intangible, belong to the individual. As the result, the owner is personally liable for all debts and liabilities incurred by the business. The owner is not shield (protected) by a corporate entity (an artificial entity) and will be personally liable. The owner’s personal properties and assets are at risk. Finally, if a tort is committed by an employee, the owner, as an employer, will be liable under the theory of vicarious liability.

Partnerships (General & Limited Liability Partnerships)

A partnership is an association of two or more persons working together in a business for the purpose of generating profits. "Persons" in the partnership context can also be a business entity such as a Limited Liability Company (LLC), a corporation (Corp. or Inc.), or by another partnership. The filing procedures of a partnership are similar to those of a sole proprietorship.

One of the advantages of a Partnership is not a separate taxable entity. The creation or termination of a partnership is not a federally taxable event. That is, there is no recognized gain or loss at the creation or termination of a partnership. The profits flow directly to the partners and are treated as personal incomes. Consequently, unlike a corporation, the partnership does not have to pay its own tax and avoid double taxation.

A partner is a limited liability partnership (LLP or PLLP) has limited liabilities for the partnership. This can be an advantage, as well as a disadvantage for the partners. The advantage for a limited partner is that the partnership’s liability is limited to his percentage shares of the LLP. However, the general partner in any partnerships may be liable for the entire partnership. Accordingly, limited partners' liabilities extend only to the extent of their investments in the partnership. Conversely, a general partner is personally liable for the acts of the partnership. The disadvantage of a partnership is that the partner is not shielded from personal liabilities. That is, if the partnership commit a tort (a negligence action or an omission) or a breach of contract, the partners’ personal properties may be affected as the result of a law suit. Again, the liability may be limited to the partner’s percentage in a LLP but that general partners of the LLP or a general partnership (an Ltd.) may be liable for all of the partnership’s action.

Corporations (Co., Corp., Inc., or a P.C.)

A corporation can only be created under the authority of the state, by the Texas Secretary of State. To form a corporation, the Texas Business Organizations Code requires that an incorporator, the person who initiates the filing of a corporation, submits the articles of incorporation to the secretary of state. The articles must contain, at minimum, the following: the name of the corporation, the initial directors, the purpose, the duration, the stock structure (whether there is a “par value” or not), the name and address of the registered agent, and the name and address of the incorporator. The name of the corporation must have one of the designated classifications, such as corporation, Corp., Inc., Co., Professional Corporation, or P.C. The registered agent must be a person who resides in Texas or a service corporation that is a Texas entity. If all of the statutory requirements are met, the secretary of state will issue record the articles of incorporation. The entity then becomes an artificial person, has its own tax identifications, tax liabilities, and all the legal rights afford by any other person, including the right to file suit or be sued.

One of the significant advantages of a corporation is the "corporate shield." Hence, shareholders have limited personal liabilities. That is, they have no obligations to the corporation except to pay full consideration for the number of shares they purchased. For example, if a person owns 100 shares and the value of that share is $1.00, he is only liable to the extent of $100.00. Therefore, if the corporation is liable for a judgment of $100,000.00, the shareholder described above is not personally liable for the judgment, other than the value of his investment may be diminished to satisfy the judgment.

Traditionally, corporations can be disadvantageous, especially for small, privately owned corporations, because it can be taxed; and thus, creating double taxation (at the corporate level and at the personal level for shareholders). Tax law has changed over the past 30 years so that a small corporation may avoid double taxation by electing to file under Subchapter S of the Internal Revenue Code. However, in order to do so, the corporation must have fewer than 25 shareholders, and there are restrictions as to who can be shareholders under an S corporation. For example, non-permanent resident aliens (green card holders) cannot be shareholders. In addition, a corporation is the statutory formality requirement. A corporation must hold annual corporate meetings, take minutes at the meetings, issue stock certificates, and elect directors. By Laws must be drafted at the formation stages and any major action by the corporation requires Board of Director’s resolutions.

Limited Liability Company (LLC or a PLLC)

A Limited Liability Company (LLC) is a hybrid business entity. An LLC is being taxed as if it is a partnership with less formality than the corporation in its management and operations; and yet, it has the protection of a corporation (corporate shield). As such, LLC’s are very popular due to its advantages. Particularly, an LLC offers members protection to that of a corporation, shielding from personal liabilities. For tax purposes, the members are treated as partners in a partnership. Consequently, double taxation is eliminated. Like corporations, LLCs have separate legal existence apart from their members; the Certificate of Formation must be filed with the secretary of state. The organizer, the person initiating the formation of the LLC, must include the following in the application: the name of LLC, the duration, the purpose, the name and address of the registered agent, and the name and address of the organizer. Finally, the LLC is less formal in its operations and management. Under an LLC, acts requiring the consent of members may be performed without an actual meeting of the members.

The Uniform Limited Liability Company Act stipulates that a limited liability company must contain some wordings that indicate that the company is a limited liability company. For example, the LLC must contain such words as "limited liability company," "LLC," or "L.C."

COMPANY OPERATING AGREEMENTS & CORPORATE BY-LAWS

Company operating agreements are put in place to govern the way a company (an LLC) functions. Conversely, a Corporate By Laws serves as a Board of Directors' Resolutions with respect to how a corporation functions and how it conduct its day to day business operations. Central to the operation of a limited liability company (LLC) is the company’s operating agreement (Texas Business Organization Code §101.52) whereas the An LLC’s operating agreements control the relationships among the members of the LLC, the relationships between the members and managers of the LLC, the relationships between the company managers and officers and the company’s internal dealings. The same can be said with respect to a Corporate By Law regarding a corporation (Inc. or Corp). Other important operating agreement provisions include the manner in which how members’ shares are purchased and sold and the method of withdrawal or expulsion of a member. If an LLC has no operating agreement, or a corporation does not have a By Law, Texas statutes, including the Texas Business Organizations Code, the Business Corporation Act, the Texas Business and Commerce Codes, and the Uniform Limited Liability Company Act) control the business’s activities, which may be drastically different from what the members of the LLC or the shareholders of a corporation intended. Please contact the Houston Business Agreement Lawyers and the West Houston Corporate Formation Lawyers at PHAM CLOVES, PLLC for assistance in drafting or amending company's Operating Agreements, corporate by By Laws, Board of Director's Resolutions, Company and Corporate Minutes of Meetings, Certificate of Formation, or the Certificate of Amendment with the Texas Secretary of State.

As stated above, an Operating Agreement for a company and the By Laws for the corporation are central to how the business will be operated, management, dtermining share memberships or stock shares, as well as the rights and obligations of all members, officers, and shareholders, and the Board of Director. The Houston Business Transaction Attorneys and the Houston Business Formation Lawyers at PHAM CLOVES, PLLC are experienced with drafting By Laws, Operating Agreements, Certificate of Formation, Articles of Incorporation, and other operating agreements that are essential to your business. Please contact one of our Houston Business Formation Attorneys or our West Houston Business Transaction Lawyers for further assistance.

DISCLAIMER

Each business entity is unique in its line of business, management styles, as well as how the company operates and shareholders and members' rights and obligations. As such, no two business is exactly the same, even if it is within the same industry. We encourage you to contact our Houston Business Formation Lawyers and our Houston Business Transaction Attorneys to get more information regarding what type of business entity best suit your organization. Further, our experienced Houston Business Contract Attorneys and our Houston Business Transaction Lawyers may also be able to assist you in clarifying and drafting each members and partner's fiduciary duties and obligations to avoid future conflicts. It can be said that the best way to avoid future conflict and promote a healthy business organizations is to draft detail Company Agreements and By Laws and address issues that may arise in the day to day operations. You should NOT rely on the information on of this web site in replacing a personal consultation with an experienced Houston Business Transaction Lawyers and the West Houston Business Formation Attorneys at PHAM & CLOVES, PLLC.  There may be legal issues in which you may not be aware that affects your rights and obligations as a partner, shareholder of the corporation, or a member of a company. We encourage you to contact our Southwest Houston Business Transaction Attorneys at 713-492-0337 or complete our Contact Form.

Our office is conviently located in the Westchase Business District (10 minutes from the Galleria and 20 Minutes from Downtown Houston). Serving Clients in Texas and the Houston metroplitan such as West Houston, Southwest Houston, Sugar Land, Katy, Copperfield, Memorial, Spring, Northwest Houston, Northchase, Spring Cypress, Champion Forest, The Woodlands, Kingwood, Humble, Lake Houston, Midtown, Memorial, West Oaks, Royal Oaks, Missouri City, Richmond, Pear Land, Clear Lake, League City, Westchase Business District, Harris County, and Galveston County. In addition, our Houston business attorneys also have the language ability to communicate and to translate for clients who speak Vietnamese, Tagalog, Hindi, and in Urdu.