General Corporate Formation 1 Table of Contents 1. Select a - - PowerPoint PPT Presentation

General Corporate Formation

1

Table of Contents

• 1. Select a Business Structure

2 Investor Considerations

• 2. Investor Considerations
• 3. Consider a Business Name, Conduct an Originality Search, and Register with the

Secretary of State

• 4. File an “Assumed Name Certificate” if Necessary

5 Request an Employer Identification Number (EIN)

• 5. Request an Employer Identification Number (EIN)
• 6. Determine Business’s State and Local Tax Obligations

i i i ifi i i i d/

• 7. Determine Necessary Licenses, Permits, Certifications, Registrations, and/or

Authorizations for Business Operations

• 8. Determine Federal and State Employer Requirements

8. ete e ede a a d State p oye equ e e ts

2

Select a Business Structure Select a Business Structure (“Choice of Entity”)

• Selecting a business structure requires careful consideration of filing

requirements, taxation, liability, management structure, continuity, and transferability of ownership interests.

• Several forms of entity are available, each with unique characteristics

 Sole Proprietorship  General Partnership  Corporation  Limited Liability Company (LLC)  Limited Partnership  Limited Liability Partnership (LLP)

3

Sole Proprietorship

• Simplest and most common form of entity – exists when a single individual owns all

business assets and engages in business operations under their own name.

• Owner Liability – Sole Proprietor is personally liable for all debts and obligations of the

business.

• Continuity – Business exists only for the life of the Sole Proprietor.
• Transferability of Ownership Interest – Business ownership is non-transferable.
• Taxation – Sole Proprietor is solely responsible.

4

General Partnership

• Created when two or more individuals associate and carry on a business for profit.
• Management – Typically operates pursuant to a “Partnership Agreement” (either written or oral)

th th t t l Ab t P t hi A t P t hi i d b t t l rather than state law. Absent a Partnership Agreement, Partnership is governed by state law.

• Owner Liability – Although a business entity exists, partners may be held personally liable for all

debts and obligations of the Partnership.

• Taxation – Not taxed at an entity level for Federal income tax purposes, but can “Check-the-Box”

y p p

5

Corporation

• Filing Requirements for Formation – Must file “Certificate of Formation” with Secretary of State *

Filing Requirements for Formation Must file Certificate of Formation with Secretary of State.

• Taxation – Typically subject to “double taxation” of Corporate and Shareholder income. However,

shareholders may file an election with the IRS to be taxed as an “S Corporation” (thereby avoiding “double taxation”). M t St t B d f Di t b i d t ff i Sh h ld

• Management Structure – Board of Directors manages business and corporate affairs. Shareholders

may limit Board authority through “shareholder agreements.”

• Owner Liability – Shareholders are shielded from Corporation’s liabilities or obligations (i.e.

“limited liability”). However, limited liability is subject to “veil piercing” in certain situations (e.g., commingling of personal and business assets or affairs, failure to follow corporate formalities, etc.)

• Continuity – Perpetual existence unless specified otherwise in “Certificate of Formation.”
• Transferability of Ownership Interest – Shares are freely transferable, although transfer restrictions

may be included in “Certificate of Formation” and “shareholder agreements.” may be included in Certificate of Formation and shareholder agreements.

6

Limited Liability Company (LLC)

• Filing Requirements for Formation – Must file “Certificate of Formation” with Secretary of State.
• Taxation – No “double taxation” of both Entity’s and Owners’ income. Instead, LLCs allow “pass

through” taxation (similar to “S Corporations” and Partnerships).

• Management Structure – Business affairs managed either by “members” (i.e. owners) or “managers”

Management Structure Business affairs managed either by members (i.e. owners) or managers as determined by members of the LLC.

• Owner Liability – Members/managers are generally not liable for LLC’s liabilities and/or obligations.

Owners’ liability is typically limited to their investment in the LLC. C ti it “Wi di ” (i li id ti ) i i d th f t i t (

• Continuity – “Winding up” (i.e. liquidation) is required upon the occurrence of certain events (e.g.,

LLC’s term expires; action by members to dissolve LLC; death, expulsion or withdrawal of member; entry of judicial decree ordering dissolution; etc.).

• Transferability of Ownership Interest – Membership interests freely assignable.

7

Limited Partnership

• A Partnership comprised of at least one General Partner and one or more Limited Partners. Typically
• perates according to a “Limited Partnership Agreement” (either written or oral) among partners.

Fili R i t f F ti “Li it d P t hi A t (LPA)” d t b fil d b t

• Filing Requirements for Formation – “Limited Partnership Agreement (LPA)” need not be filed, but

“Certificate of Formation” must be filed with Secretary of State.

• Taxation – No “double taxation” of Entity’s and Owners’ income. Instead, Limited Partnerships allow

“pass through” taxation (similar to General Partnerships).

• Management Structure – General Partners manage business affairs. However, Limited partners can be

granted express rights, powers or obligations within the “Certificate of Formation” and “LPA.”

• Owner Liability – Unlimited personal liability for General Partner(s); Limited liability for Limited

Partners. Partners.

• Continuity – Exists until occurrence of event requiring dissolution (e.g., absence of Limited Partners

for 90 days; agreement to dissolve among General and Limited Partners holding majority ownership).

• Transferability of Ownership Interest – Partnership interests freely assignable.

8

Limited Liability Partnership Limited Liability Partnership (LLP)

• Organizing as an LLP allows General Partners in Limited Partnerships to avoid unlimited personal

liability. Fili R i t f F ti M t fil “LLP A li ti ” ith S t f St t

• Filing Requirements for Formation – Must file “LLP Application” with Secretary of State.
• Taxation – No “double taxation” of Entity’s and Owners’ income. Instead, LLPs allow “pass

through” taxation (similar to General Partnerships). Lacks LLC’s flexibility in choosing how to be taxed at federal level.

• Management Structure – General Partners manage business affairs. However, Limited partners can

be granted express rights, powers or obligations within the “Certificate of Formation” and “LPA.”

• Owner Liability – General Partners avoid unlimited liability, with exceptions for direct involvement

in (or knowledge of) wrongdoing. (o

• w edge o ) w o gdo g.
• Continuity – Exists until occurrence of event requiring dissolution (e.g., absence of Limited Partners

for 90 days; agreement to dissolve among General and Limited Partners holding majority ownership).

• Transferability of Ownership Interest – Partnership interests freely assignable.

9

Investor Considerations

• Factors Favoring LLCs
• 1. LLCs allow greater flexibility

 May easily be reorganized into a C Corporation (“wait and see” approach provides flexibility in executing future business plans)  May be “member” managed (like a partnership) or “manager” managed (like a corporation) 2 Avoids rigid/impractical qualification requirements of S Corporations (e g may 2. Avoids rigid/impractical qualification requirements of S Corporations (e.g., may include entities and foreign individuals as owners) 3. Capable of distributing appreciated assets without triggering taxable gain (i.e. assets may “pass out” of an LLC more freely than in S or C Corporations)

• Factors Favoring C Corporations
• 1. C Corporations are capable of issuing preferred stock (but not S Corporations)

2 Common knowledge of C Corporations among investors lowers transaction costs

• 2. Common knowledge of C Corporations among investors lowers transaction costs

(the Corporate form is easy for investors to understand and requires less explanation/transaction costs)

• 3. C Corporations avoid taxation problems associated with “pass through” taxation

10

Consider Business Name, Conduct Originality Search and Register with Secretary of State

• A business must register with the Secretary of State under a designated

g y g business name if operating as a Corporation, LLC, Limited Partnership, or LLP.

• A business name must not already be in use. Therefore, it is important to

d h h h* fi ’ i i li conduct a thorough search* to confirm a name’s originality. * The Secretary of State offers a limited name search to confirm a name is not used by other

Texas corporations limited partnerships or LLCs However this search does not cover entities Texas corporations, limited partnerships or LLCs. However, this search does not cover entities registered solely with the office of a county clerk. 11

If Necessary File an “Assumed Name If Necessary, File an Assumed Name Certificate”

• An “Assumed Name Certificate” must be filed with the Secretary of State if business
• perations are carried out under an “assumed name” (i.e. a name not registered with the

Secretary of State or otherwise including the surnames of all partners).  For Corporations, LLCs, and Limited Partnerships, the Certificate must be filed with the Texas Secretary of State and all counties where the “assumed name” will be used in business operations.  For Sole Proprietorships and General Partnerships, the Certificate must be filed (a) with the county clerk of the counties where business premises are maintained, or (b) if no business premises are maintained, in all counties where business is ( ) p conducted under the “assumed name.”

12

Request an “Employer Identification Number” (EIN)

• All employers with employees, including business partnerships and corporations, must

be assigned an Employer Identification Number (EIN) from the United States Internal Revenue Service.

• The IRS offers free online services allowing employers to apply for and immediately

g p y pp y y receive an EIN.  An EIN (along with a copy of a Certificate of Formation) is required to open a bank account for a business account for a business.  A new EIN must be applied for if a business changes ownership or structure.

13

Determine State and Local Tax Determine State and Local Tax Obligations

• State Taxes – Texas Comptroller of Public Accounts administers and collects a variety
• f state taxes.* These taxes include franchise taxes, property taxes, and taxes on all

retail sales, leases and rentals of most goods and taxable services. , g

• Local Taxes – In addition to local sales and use taxes, County Appraisal Districts assess

and collect Business Inventory Taxes (property taxes) from businesses owning tangible personal property used to produce income personal property used to produce income. *A detailed list of state taxes is available at http://comptroller.texas.gov/taxes/#TexasTaxes.

14

Determine Necessary Licenses, Permits, Certifications, Registrations, and/or Authorizations for Business Operations

• Texas does not require a general “business license,” but regulatory agencies require

specific licenses and permits* based on the nature of a business and its related products. L l t ( iti ti ) i ifi it d li

• Local government (cities or counties) may require specific permits and licenses.

Municipalities typically have their own unique regulations. Examples of local licenses and permits include:  alarm permits  building permits  health permits  occupational permits  i it  signage permits  zoning permits *License requirements for various businesses are available at http://tdlr.texas.gov/. License requirements for various businesses are available at http://tdlr.texas.gov/.

15

Determine Federal and State Employer Determine Federal and State Employer Requirements

• Labor, safety and wage requirements under Federal and State law (e.g., drug-free workplace

y g q ( g g p requirements, statutory requirements under the Americans with Disabilities Act and Equal Employment Opportunity Act).

• Federal Income Tax Withholding (Form W-4) – All employees must fill out an exemption certificate

for their employer (W-4) before beginning employment. Employers must submit W-4 to IRS for for their employer (W 4) before beginning employment. Employers must submit W 4 to IRS for verification.

• Federal Wage and Tax Statement (Form W-2) – Employers must report annually to the IRS (using

Form W-2) the wage and tax information withheld for all employees. Form W-2 must be completed yearly by January 31 for each employee yearly by January 31 for each employee.

• Federal Employee Eligibility Verification (Form I-9) – Employers must verify work eligibility for

employees hired after November 6, 1986.

• New Hire Reporting – Employers must report newly and re-hired employees within 20 days of hiring.
• State Insurance Requirements – Texas requires businesses to carry certain types of insurance.

Examples include unemployment insurance, workers’ compensation insurance and commercial property insurance.

16