Here at Romano & Sumner, whether we are dealing with Estate Planning or assisting a client to start their own business, we deal with the creation of Texas entities. What is an entity, you may ask? An entity is company, partnership, or corporation that is recognized as if it were a “person” in the eyes of the law.
The next question is usually: “What kind of Business Entity should I choose?”
A while ago I gave a webinar to a group of entrepreneurs that answered this very question. I received such positive feedback that I wanted to start a blog series that describes the types of entities that are out there and why you might select one over another.
First, let me start with some basic assumptions: a person who wants to create an entity. . .
- . . .is doing so for asset protection to limit personal liability;
- . . .is looking for favorable tax treatment; and
- . . . wants to make a Profit! (note: this blog does not cover non-profit organizations)
Given these assumptions, the most common choice of business entity include:
- A sole proprietorship (also known as the DBA or “Doing Business As”)
- A Partnership – either a general partnership , limited partnership , or limited liability partnership
- A Corporation – including an S-Corp; and
- A Limited Liability Company.
In this Part 1, I will be covering the sole proprietorship. In the next installments, I will be discussing Partnerships, Corporations and Limited Liability Companies.
THE SOLE PROPRIETORSHIP
A sole proprietorship is typically an individual who wants to conduct business under a name other than their given name. For example, Clark Kent wants to conduct business as Superman R Us. So what does Clark Kent need to do to be recognized as a legal entity?
In order to create a sole proprietorship Clark Kent must file an Assumed Name certificate with the county clerk in the county where he maintains a business presence, or in each county where he regularly conducts business or renders professional services. (see the Harris County Clerk’s webpage for assumed name forms and requirements)
The basic form requires:
- The person’s full legal name
- The length of time the assumed name will last, not to exceed 10 years
- The form must be signed and notarized
- And a filing fee needs to be paid.
That is it! In the above example if Clark Kent does all of this, he can now provide services under the name Supermen R Us.
From a tax perspective, all income generated by a sole proprietorship is taxed as ordinary income and would go on Clark Kent’s standard personal income tax return. The advantage here is that there is no double taxation (something I will discuss in another segment) as there is with corporations where income is taxed at the corporate level as well as at the level of the individual investor.
So why aren’t all businesses sole proprietorships? The answer: PERSONAL LIABILITY
A sole proprietor (the owner of the sole proprietorship) has full personal liability for all acts that are conducted under the assumed name. In other words, Clark Kent is liable for all acts conducted under Supermen R Us. Any creditor can go after not only the assets of the business but also Clark Kent’s personal assets.
In summary. While a Sole Proprietorship is relatively easy and inexpensive to set up, the personal liability risks are just not worth it. Especially when there are other options available!
In my next segment I will be discussing Partnerships.
For a free initial consultation with experienced Sugar Land business attorney who can advise you on how to set up a Texas business entity, please call us at 281 242-0995 or contact our Sugar Land law office.