Entity Formation

The entity you select will have significant implications on your business’s legal, financial, and operational aspects. From governance and growth to taxation and liability, each entity offers unique advantages and disadvantages.

An attorney can legally establish your entity, whether it’s a sole proprietorship, partnership, limited liability company, corporation, or another form. Selecting the correct entity involves careful consideration of factors such as your business goals, tolerance for risk, management preferences, and tax obligations.

Whether you’re launching a small startup, expanding an existing business, or seeking to protect your personal assets, understanding entity formation is essential for laying a solid foundation for your business’s success. Let one of our San Antonio business attorneys at Rodriguez & Lichtmacher, LLP assist you in forming your business correctly.

Partnerships

A partnership is a business structure in which two or more individuals or entities (partners) come together to run a business for profit. The partners own and manage the partnership, with each partner contributing capital, labor, or expertise to the business. Profits and losses are distributed according to the terms of a partnership agreement.

There are several different types of partnerships, including:

• General Partnership (GP). All partners share equally in the management and liability of the business, with each partner being personally liable for the debts and obligations of the partnership.
• Limited Partnership (LP). There are both general partners and limited partners in a limited partnership. General partners have management authority and unlimited liability for the debts and obligations of the partnership, while limited partners have limited liability and typically do not participate in the management of the business.
• Limited Liability Partnership (LLP). Similar to general partnerships, LLPs provide limited liability protection for all partners. The partners are not personally liable for the debts and obligations of the partnership except for their investment in the business.

Partnerships are easy and inexpensive to form. A written partnership agreement can detail the terms of the partnership, including profit-sharing, management responsibilities, decision-making processes, and procedures for resolving disputes. Partnerships are typically considered pass-through entities for purposes of taxation. The profits and losses of the business are passed through to the individual partners and reported on their personal tax returns. Partnerships themselves do not pay income tax at the entity level.

When individuals or entities want to combine their resources, skills, and expertise to pursue common business objectives, a partnership can be an appropriate option. However, partners must consider the implications of shared liability and establish clear agreements to govern their relationship. Consulting with a San Antonio business attorney is recommended when forming a partnership.

Limited Liability Company (LLC)

An LLC is an entity that combines the benefits of a corporation with the flexibility and tax advantages of a partnership. In an LLC, owners are referred to as either “members” or “managing members.”

Advantages of LLCs include:

• Limited Liability. Members receive limited liability protection, meaning their personal assets are protected from the debts and liabilities of the business.
• Management Flexibility. Members can choose to manage the company themselves, or they can appoint managers to handle day-to-day operations. There is also flexibility in how profits and losses are allocated among members, allowing for customized arrangements based on the needs of the business and its owners.
• Pass-through Taxation. Similar to partnerships, LLCs enjoy pass-through taxation, where the profits and losses of the business are passed through to the individual members and reported on their personal tax returns. This avoids the issue of double taxation typically experienced by corporations.

Overall, LLCs offer a balance of liability protection, operational flexibility, and tax advantages, making them a popular choice for many small and medium-sized businesses. However, you should consult with a business attorney at Rodriguez & Lichtmacher, LLP to determine if an LLC is the right fit for your specific business needs and circumstances.

Corporations

A corporation is considered a separate legal entity from its owners, known as shareholders. The corporation can enter into contracts, own assets, incur debts, sue, and be sued in its own name. Shareholders purchase stock in the corporation and are responsible for electing a board of directors to oversee the management of the corporation. In turn, the board of directors appoints officers, such as the CEO and CFO, and other executives, who are responsible for the day-to-day operations of the company.

There are benefits to corporations, such as:

• Limited Liability. Shareholders’ liability is limited to the amount they have invested in the corporation, usually represented by the number of shares they hold. In most cases, shareholders are not personally responsible for the debts and obligations of the corporation as their personal assets are shielded from the corporation’s liabilities.
• Access to Capital. Corporations have various options for raising capital, including issuing stocks and bonds. This makes it easier for corporations to raise funds for expansion, investment, and other business activities.

There are other factors to take into consideration when forming a corporation. Generally, corporations are subject to corporate income tax on their profits, meaning that the corporation itself pays taxes on its earnings. Shareholders are then taxed on dividends they receive and on capital gains when they sell their shares. This is known as double taxation, where profits are taxed at the corporate level and individual level. Corporations may also be subject to regulatory and compliance requirements. Compliance with these regulations is essential to maintain the corporation’s legal status and protect shareholders’ interests.

Corporations can offer advantages, including limited liability, perpetual existence, and access to capital. However, they also come with increased regulatory requirements and potential double taxation. Choosing the right business structure requires the knowledge of an experienced business law attorney. Contact Rodriguez & Lichtmacher, LLP to discuss whether forming a corporation is right for you.