How to Form, Build, and Protect YOUR Business

Isabel de la RivaFounder and Senior Partner

de la Riva & Associates Legal Team

What Do I Need To Do First?Thinking of Starting A Business?

Planning on Buying A Business?

Wanting to Formalize An Existing Business?

Basic Startup Issues to Consider

Name of Entity Name Protection

Organization Partnership, LLC, Corporation

Costs and Fees Filing fees, attorney fees, startup costs

Business Plan Research, write and produce

Issues: Initial Contributions

Beginning Capital: Who and how much. Money or sweat.Property Contributions: Tax issues, changing title, costs, choosing a location.Interest or Return: Paycheck or distribution.

Issues: Management

Independent or PartnershipMember or Manager ManagedTraditional Roles or No Hierarchy

Powers of eachScope of responsibilityAccountability: To Whom and whenLimitations: Extraordinary transactionsIndemnificationRemoval or Resignation

Issues: Operations

Bank Accounts: Set up, EINAccounting Periods: Fiscal or CalendarReports: To State, to members, to IRSBookkeepingMeetingsChanges to AgreementDisputes

Issues: Exit or Ending the Business

Exit StrategiesWinding Down ProceduresLiquidation and DissolutionLimitation of LiabilityTransfer of Interests:

to family, third partiesDissolution:

Planned or Unplanned

Pros and Cons

The advantages and disadvantages of each legal business formation depend upon the objectives of the business owners and the assets that the owners contributed to the business, past and present.

With each choice of a legal formation, there are various qualifying requirements, degrees of liability, tax consequences, and possibilities for exiting and ending of the business

Issues: Formalizing A Business

No, you cannot do it all.BankerAccountantLawyerManagerMarketing PersonSalesperson

You DO need to be familiar with these areas, but it is UNNECESSARY AND UNWISE to do it alone

It’s Takes A Village

Acquire professional assistanceLegal servicesAccounting servicesMarketing services

Saves you time and money

HOW TO PROTECT YOUR ASSETS

Discuss your decision with the people around you: family, partners, friends.Create a legal entity through the Secretary of StateHave an attorney assist youHave a CPA assist you

CONTROLLED RISK

Types of Business Formations

Sole ProprietorshipPartnershipLimited Liability Company or

Professional Limited Liability CompanyCorporation

Sole Proprietorship

Simplest and Least ExpensiveOwner receives all profits

Owner has all responsibilities and liabilitiesYou get what you pay for

PartnershipBusiness enterprise owned jointly by 2 or moreProfits, debts, and liabilities are shared Can create a LIMITED PARTNERSHIP or a GENERAL PARTNERSHIP

GENERAL PARTNERSHIPAll partners participate in the day-to-day management of the business

LIMITED PARTNERSHIPHas passive partners who contribute capital but have minimal control

Corporations

Legal entity who can own a business, sue or be suedMust pay its own taxesOperates the business according to a written charter issued by the StateDifferent forms available

Sole Proprietorship and PartnershipsThe sole proprietorship contains the most risk because there is no limited liability protection inherent in this legal business form.

The business owner is personally liable for any claims against his company that are not covered by some form of business insurance.

The business owner's personal assets are not protected.

Sole Proprietorship

Enjoys complete control over businessThis type of business owner receives all the profits, but also has sole responsibility of all debts and liabilitiesIncome tax returns combine business and personal income

Sole Proprietorship

AdvantagesLeast amount of red tape to complete in establishing the businessLittle or no expense in forming or dissolving the businessSimplicity of operationCertain reporting requirements are not necessaryIncome is taxed only once

Sole Proprietorship

DisadvantagesUnlimited liability for business debts. Income tax rate may be higher than the corporate form of business organization. Tax saving or retirement plans are complicated.If the business is to operate as a sole proprietorship or partnership, the entrepreneur should consider recording a declaration of business name.

Partnership

Partnership form is necessary when there are several owners involved in a businessIncome tax returns are information returns that allocate income or losses to the partnersThe partnership or business must file its own return, but it pays no taxPartners must claim their share of the profits or losses on their personal returns

General Partnership

Most common partnershipAll partners sharing equally

Equal ownershipEqual management decisionsEqual responsibility for partnership debts

Limited PartnershipThe limited partnership must include at least one or more general partners who participate in management decisions and who have personal responsibility for the partnership debts There will also be one or more limited partners who do not participate in management and whose liability for partnership debts is limited to the amount they have contributed to the business

Partnership

AdvantagesAllows persons with insufficient net worth to pool funds to purchase a businessProvides an opportunity to split management duties, unless the partner is a limited partnerIncome is taxed only once

Partnership

DisadvantagesMust share the decision making with other partnersCompatibility and cooperation of the partners are essentialEach general partner has unlimited liability for the debts of the partnership

If all but one of the general partners are financially unsound and unable to pay debts, the one financially secure partner can be required to pay the total amount owedIncome tax rate may be higher than a corporation

CorporationsMost permanent form of business - continues for the life of its charter regardless of what happens to the original organizerOwned by stockholders in proportion to their number of sharesCan be a one person operation with only one stockholder holding all stock and being the only officer“S” and “C” Corporations dictate how taxes are handled

“S” vs “C” Corporation –Federal Income Tax Purposes

The S CorporationTaxed the same as a partnershipIncome of S Corp passes directly to stockholders who pay taxes on their shares without any federal income tax being paid for corporation itself

The C CorporationPays corporate income tax on its earningsStockholders pay income tax on dividends

Corporations

AdvantagesA corporation pays 15% of federal income tax on taxable income up to $50,000

25% tax on income from $50,001 to $75,000With incremental increases at 100k and 335k

It is easy to sell part of the business.Bank financing may be obtained more easilyABILITY TO PROTECT YOUR PERSONAL ASSETS

CorporationsDisadvantages

Earnings or income withdrawn from a corporation must be in the form of dividends or bonuses both are taxable to both the corporation and the shareholderMore difficult to transfer cash in and outRequires the most paperwork: annual meetings, minute book and record of stock and stockholdersAnnual report, annual minutes and fee due to Secretary of StateRequires By-Laws, Articles of Incorporation and issuance of stock with SOS approval

Corporations

The C CorporationIs the default corporationAll corporations are automatically C unless they are specifically set up to be S

The S CorporationKnown as the “Small Business Corporation”Governed by Subchapter S of the IRS Code of 1986To qualify, a business MUST comply with strict eligibility requirements with regards to the number and type of shareholders

Limited Liability Company

The LLC is the most flexible of the business legal forms AND it provides a considerable amount of liability protectionThe number and type of owners is NOT restrictedLiability protection for owners so long as there is no fraudulent activityRules for administering an LLC are not as strict as those for an S or a C corporation

Single-Member LLC

An individual in business by himself, with no employees, can make his/her company an LLCIt is treated as a disregarded entity for tax purposesAs a single-member LLC, a business person can treat the business like a sole proprietorship and only needs to file a Schedule C with the IRS

LLC

Limited Liability CompanyLLC is a powerful tool, and in many cases, it’s the SOLUTION.

Attractiveness and power of an LLC: single level of income tax and limited liabilityLLC members face only one level of income tax: any items of income, gain, loss, deduction, and credit flow through to the memberUnlike S corporations, the favorable tax treatment is not dependent on the identity of the members and there is no limited to the number of members

LLC

Limited Liability CompanyAdvantages

Same liability protection as a CorporationCan be taxed as a partnership, with single level, flow-through taxation vs. double taxationFlexibility of business dealsLosses – which are common for start-ups, can pass through the entity and be deducted directly by the owners of the businessAll members/owners of LLC are protected from liabilityEasy to form and dissolve

Limited Liability CompanyA disadvantage to forming an LLC:

Upon sale, the LLC would likely have some ordinary income component that would be taxed at a higher rate than if a business were to end up selling its stock as a C or S corporation, where it would receive capital gains treatment,

Limited Liability CompanyBut losses from single-member LLCs flow through automatically when filed on the Schedule CFrom a tax perspective, there is no difference between a sole proprietorship and a single-member LLCYou get the benefit of limited liability protection without having the additional administrative burden of filing an additional tax return

Limited Liability Company

It can’t hurt you from a tax perspective to form a limited liability company.

LLC Benefits – Asset Protection

A limited liability company offers the same asset protection as a corporationIf you sign agreements in the name of the LLC, then the LLC is the responsible party on the agreement, not you as an individual ownerIf the business is not successful, or if it incurs a large unexpected debt (not personally guaranteed), then your personal assets are protected from LLC creditors

Operating as an LLCTo have asset protection benefits, especially the sole member LLC, owner must observe formalities and operate business as an LLCNeed adequate capitalization depending on the nature and extent of the businessHave annual meetings and produce statements about the past business year and expectations for the future

LLC

Operating as an LLCOwner must enter into contracts through LLC and not personallyUse checks and stationary to give notice to third parties they are dealing with an LLC

LLC

Operate LLC As Separate Business

Needs a separate checking account and set of booksFormal bookkeepingNo need for separate federal income tax filingIncome tax reported on Schedule C of your personal tax returnFor federal income tax purposes, the single member/owner LLC is disregarded

Comparison

Limited Liability CompanyNatural asset protection featuresShields investors and active participants of the business in the same way as corporationAdvantage over corporation when it comes to creditors’ claims against the owner of the business

CorporationSeparate legal entity that pays taxesOwn by shares

Comparison

Limited Liability CompanyAsset protection advantage

Limited Liability PartnershipFully responsible for all claims against the partnershipLLP will likely have a corporation for a general partner to limited the liability of the GP, but then you increase complexity when setting up a business arrangement by creating a corporate entity within a partnership entity

LLC Agreement

Agreement by which owners govern themselves can have additional asset protection features written into the business arrangement

Issues will vary depending on whether owners are family, strangers, wealthy, cash-tight, or a mixture

Management of business

LiabilityOwnership

Operating Agreement can delineate duties, roles, responsibilities, etc.

Operating AgreementAnswers the HOW, WHEN, WHO, WHAT questions of your business

LLC – Basic Asset Protection

Many people create LLCs for protection of their personal assets from creditors and lawsuit related to their businessIf proper procedure is followed, an LLC will extend protection to the owners of the LLC from the creditors of the LLC

LLC Asset Protection RequirementsComprehensive LLC Operating Agreement followed by the ownersAccounting procedures to keep the owner’s personal asset separate from the business assetsClear, timely, and accurate documentation of funds going in and out of the LLCOperating procedures consistent with the LLC being a separate valid business entity

Singing contracts in the name of the LLCUsing personal guarantees only as a last resort

Issues to Consider

EmployeesContractsTrademarkMarketingTeam of Professionals

Will you take the leap?

What does it take?

Take it

Be your own boss

Offices in San Antonio, Houston, and McAllen

SAN ANTONIO OFFICE13407 NW MILITARY HWYSAN ANTONIO, TEXAS 78231(210) 224-2200

HOUSTON OFFICE2180 NORTH LOOP WEST, STE

550HOUSTON, TEXAS 77018

(281) 769-1150

MCALLEN OFFICE520 WEST PECAN BLVD,

STE GMCALLEN, TEXAS 78501

(956) 616-4151

www.delarivalaw.com

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