©2010 Haynes and Boone, LLP Choice of Business Entity by Christina Marshall

©2010 Haynes and Boone, LLP

Choice of Business Entity

by Christina Marshall


Major Business Considerations

• Liability of Owners• Management• Capitalization• Transferability of Ownership Interests• Economic Provisions• Tax Implications

– Federal– State


Entity Choices

• Sole Proprietorship• Corporation• Limited Liability Company• Partnerships

– General Partnership– Limited Partnership


Sole Proprietorship

• For the single business owner who has not made a state law filing

• Unlimited liability for the owner

• Taxed at the owner level


Corporations• Must file a formation document with Secretary

of State

• Owned by shareholders who hold stock

• Managed by directors (who are elected by stockholders)

• Operated by officers (who are elected by directors)

• Governed by the Bylaws of the Corporation and the relevant state code.

• Inexpensive to form


Corporations

• Shareholders are not liable for the debts of the corporation. – Loss is limited to investment

• Officers and directors are not liable for the debts of the corporation.– But they owe fiduciary duties

• Preferred entity for investors


Taxation ofCorporations

• C Corporation– Double taxation– Shareholders are taxed only when they receive

a distribution.

• S Corporation– All gains and losses flow through to the

shareholders.– Shareholders are taxed on their gains regardless of whether or not they receive distribution of profits.


Limited Liability Company• Must file a formation document with the Secretary of State

• Owned by members (who hold membership interests or units)

• The LLC is managed by either (i) members or (ii) managers who are elected by the members. Also, the members or managers can elect officers.

• Members are not personally liable for the debts of the LLC.

• Managers and officers are not liable for the debts of the LLC .

• Governed by the LLC Agreement and the relevant state code

• More expensive to form


Taxation of LLCs

•Can be taxed as a partnership or a corporation


General Partnerships• No state law filing is necessary

• Requires at least 2 persons or entities

• Each partner is jointly and severally liable for all the liabilities of the partnership.

• All partners have an equal right to participate in management, unless the partnership agreement provides otherwise.


Limited Partnerships• Must file a formation document with the Secretary

of State

• Need at least 1GP and 1 LP

• GP is joint and severally liable for liabilities of the partnership.

• GP manages the partnership.• Limited partners’ liability: limited to their

contribution (unless they participate in management)

• Governed by the Partnership Agreement and the relevant state code

• More expensive to form


Taxation of Partnerships

• Partnerships (limited and general) taxed on a flow-through basis (no tax at the entity level)

• Profit / loss is taxed to the partners

• Partners are taxed whether or not they receive distributions.


State Tax

• Most states impose some form of a franchise tax on business entities.

• Some states impose a flat tax, others impose tax based upon income or capital apportioned to the state.

• Texas imposes a margin tax for entities with limited liability.


Special Considerations For Any Business Entity

• Buy/sell provisions

• Voting Agreements

• Distributions


Texas vs. Delaware

• Development of laws • Court system• Investors’ preference• Taxation


KAUFFMAN INDEX OF ENTREPRENEURIAL ACTIVITY BY

STATE (2009)State

TexasFloridaCalifornia New YorkWashingtonIllinois

Entrepreneurs per100,000 People

450440410340240240


The Five States With The Highest Entrepreneurial Activity Rates:

• Oklahoma (470 per 100,000 adults)• Montana (470 per 100,000 adults)• Arizona (460 per 100,000 adults)• Texas (450 per 100,000 adults)• Idaho (450 per 100,000 adults)


Entrepreneurial Activity by Metropolitan Area (Out of Top 15)

MSA

• Miami-Ft. Lauderdale-Miami Beach, FL

• Atlanta-Sandy Springs-Marietta, GA

• San Francisco-Oakland-Freemont, CA

• Dallas-Fort Worth-Arlington, TX• Seattle-Tacoma-Bellevue, WA

Entrepreneurs per

100,000 people

610510480340160


Questions?

Contact Information:

Christina Marshall – [email protected]

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Documents

©2010 Haynes and Boone, LLP Choice of Business Entity by Christina Marshall