When forming a new business, there are several considerations to analyze when selecting the appropriate business entity type. Although many new business owners are wary of tax-related considerations, there are many non-tax considerations to be aware of.
Naturally, once a business owner hires employees or takes on a partner, the business owner becomes concerned about protecting his personal assets from the liabilities of his business. Almost every business owner will benefit from shielding his personal assets from the liabilities of the business via the operation of the business within a business entity that provides, via statute, such protection. The only business owner who may not benefit greatly from a limited liability shield is the sole proprietor who does not have employees.
While most entrepreneurs are familiar with the veil of protection offered by the corporate form, lesser known and understood issues involving the transferability of business interest may be just as important. In addition to shareholder agreements, buy-sell agreements, partnership agreements, and limited liability company regulations, state and federal laws govern the transferability of business interests. The choice of business entity impacts upon the transfer of business interests in the event of a stakeholder’s disability, death, divorce, and exit from the business. In addition to carefully crafting the governing documents of the business entity relating to the transferability of business interests, the well-advised business owner will consider the state and federal laws governing the transferability of business interests as those laws relate to each business entity.
Types of Entities in Texas:
- Sole Proprietorship/General Partnership
- Corporation
- Limited Liability Company
- Limited Partnership
The majority of businesses in our country are small, family-owned businesses. When advising these small businesses regarding choice of entity, you must consider and balance the following goals of the small business owner:
- liability protection;
- maintenance of control over the operation and assets of the business;
- minimization of income and other related taxes;
- optimization of valuation discounts for transfer tax purposes.
Additionally, planning for the death, divorce or incapacity of the business owner is critical to the growth, value, and longevity of the business.