People who start a business put a lot on the line. When those businesses go under, depending upon the business structure chosen, the personal assets of the business founder could be at risk to cover the debts of the failed business or judgments in lawsuits against the business. Before choosing a structure for your new company, you should discuss your options with an experienced business attorney.
How Can You Limit Liability for Your Company?
There are many different legal structures you can use to set up a new small business. The cost and complications of setting up the various business forms are, in general, strongly related to how much personal liability protection the business form provides. The business structure also has a strong impact on tax issues, management, legal formalities, and the ability to transfer ownership interests.
Texas law provides several different business structures from which to choose when starting a business. These business forms include:
- Sole proprietorship is the most common and the simplest business structure, with a single individual conducting the business. The legal formalities are minimal, but the owner has no protection from personal liability for business debts, including judgments for premises liability and other lawsuits.
- General partnerships involve two or more people forming a business. Individual partners have no protection for personal liability for the debts of the partnership.
- Corporations are legal entities completely separate from the owners of the corporation. While the corporate structure is more legally complicated, the owners of a corporation have no personal liability for any debts of the corporation except under exceptional circumstances. So-called S-corporations are not different from corporations concerning liability but are a federal tax law choice.
- Limited liability companies are simpler to create than corporations but also provide complete protection from personal liability for corporate debts for the owners, who are known as members.
- Limited partnerships provide limited partners with protection from liability for partnership debts. However, limited partners are not allowed to participate in the management of the partnership. On the other hand, general partners may participate fully in the management of the partnership but enjoy no protection from personal liability for partnership debts.
- Limited liability partnerships provide a certain amount of protection for partners from personal liability for debts of the partnership. An LLP does not protect a partner from any liability that arises from the partner’s personal negligence or wrongful actions, but it does protect partners from personal liability for any partnership debts.
The subtle differences between various types of business structures can be a lot more meaningful than you might realize. If you choose the right structure, you all but safeguard yourself from personal liability. But in return, you might be giving up some control over your business or accepting tax consequences. An experienced corporate formation attorney will walk you through the entire process and help you choose the structure that is optimal for you.
Owning a business can be financially and professionally liberating, especially if it allows you to enjoy what you do for a living. However, it can also be financially hazardous. Before starting your business in Texas, contact Weisblatt Law Firm at (713) 666-1981 to get a free consultation over the phone.
Risks Beyond Business Structure
The structure of your business doesn’t represent the only risk associated with owning a small business. Even if you choose the appropriate structure, your business could be in financial distress quickly if you don’t manage the following risks appropriately.
Selling a Product or Service That Isn’t in Demand
You won’t make money if no one wants to buy your product. In Texas, for example, a business that sells air conditioners will typically do a lot better than one that sells thermal underwear. That is just due to supply and demand. If your business isn’t in demand, you will spend money on products that no one buys from you.
Arguably, everything is in demand if you successfully create the demand. However, creating demand means advertising your business in the right way, and that costs money, too. You aren’t any better off if the cost of advertising dwarfs the income you are making.
As the old saying goes, you can’t sell ice to an Eskimo. If you are trying to sell a product or service that has no demand, your business is likely to fail sooner rather than later.
Bad Credit Management
Very few businesses are started with cash. Nearly all business owners take some form of loan to begin. That doesn’t mean your business will fail. However, if you don’t pay close attention to your credit score and how much credit you are managing, you could find yourself in trouble. Many a business has collapsed on the edge of greatness. If only the owner could have gotten one more small loan, they would have made it big. But they had reached the end of their credit and everything fell apart. If you run out of credit, you will likely face bankruptcy or be forced to sell some portion of your business to another party.
Tax Mistakes
Every type of business structure results in different tax implications. If you have only ever paid personal income taxes before starting a business, you probably aren’t prepared for the complexity of business taxes. You should hire an experienced business accountant, business lawyer, or both before starting your business. They will help you pay the right taxes on time.
If You Are Starting a Business, Consult a Houston Business Lawyer
The federal Small Business Association reports that about 30 percent of new businesses go under within two years of opening. A total of 50 percent fail in the first five years and fully two-thirds of small businesses close within 10 years of opening. Only one-fourth of small businesses last 15 years or more.
If you are in the process of opening your own business and want to be in that last 25%, you should consult a business attorney to limit your personal financial exposure to any liabilities the business you start might incur. The lawyers of Weisblatt Law Firm, LLC, can help.
Weisblatt Law Firm routinely consults with clients starting businesses to help them limit their personal liability for their business activities. To benefit from such consultations, you can contact us at (713) 666-1981 or through our online contact form.
Attorney Andrew Weisblatt
Mr. Weisblatt has practiced continuously since becoming licensed in 1992 and has represented businesses ranging in size from one person start-up ventures to multi-national corporations employing hundreds of people in multiple countries. From 2005 through 2009 Mr. Weisblatt was in-house counsel and chief operating officer of a multi-national corporation in the steel products industry. That in-house position provided valuable insight into how businesses work and what they actually need from their lawyers – both in-house and outside counsel. Attorney Bio
