Advantages and drawbacks to doing business as a Texas corporation

Many small business owners begin their businesses as sole proprietorships or partnerships and then wonder whether to incorporate.  At the Peterson Law Group, our Conroe, Texas business lawyers can review with you the benefits and drawbacks of incorporation to help you decide whether that is the best move for your business.

Unlike a partnership or sole proprietorship, a corporation is a separate legal entity apart from its owners.  The defining characteristics of a corporation are:  limited liability for shareholders, perpetual existence, centralized management, the ability to raise capital by issuing shares, and ease of transfer of ownership through sale of shares.

Owners

The owners of a corporation are called shareholders.  A corporation can be owned by a single shareholder.  Therefore, it, like an LLC, is an option for sole business owners who want limited liability.  It can also be owned by multiple individuals and other business entities

Setting up a corporation

A corporation is more expensive to create and operate than a partnership because of the numerous legal formalities that are required.  You must file a Certificate of Formation with the Texas Secretary of State and pay a filing fee.  You’ll also need to prepare and adopt corporate bylaws, issue shares, and adopt a management structure.  A corporation is typically run by a board of directors, but Texas law permits the shareholders to dispense with a board and have the corporation managed directly by the shareholders.  For this option you will need to prepare shareholder agreements.

You should also have buy-sell agreements among the shareholders describing what will happen when a shareholder dies, retires, or becomes disabled.  You may even find it beneficial to have a pre-incorporation agreement which covers such issues as how much stock each shareholder will buy and how it will be paid for, how each shareholder  will be compensated for work in the business, and what corporate offices each will hold.

Personal liability

Shareholders are not personally liable for the obligations of the corporation so long as proper corporate formalities are observed.  Therefore, a creditor cannot take your personal assets to pay a loan, business debt, or court judgment against the corporation.

However, as a practical matter, banks and other lenders may require your personal guarantee before they will loan the business money, in which case, you will be personally liable if the corporation cannot repay the loan. You also will still be personally liable for any torts you commit (e.g., you injure someone while driving negligently on company business).

Although liability insurance can provide protection for a sole proprietor or partner, incorporation may be a good idea if your business is at high risk for a lawsuit (e.g., a business that serves alcohol or removes hazardous waste) and can’t afford or is unable to purchase adequate insurance.

Incorporating your business is also one way to protect you from liability for the negligence or other improprieties of your co-owners for which you could be liable in a general partnership.

Investors

If you hope to raise money for your business from investors, a corporation is probably the best choice.  Investors typically expect to receive stock (as opposed to a membership in an LLC) in exchange for their money.  In addition, a corporation will enable you to offer employees stock options at a good price as an incentive for their hard work.

Conroe, Texas business attorneys offer assistance with your small business

The Conroe, Texas business lawyers at the Peterson Law Group are prepared to meet the legal needs of your small business.  If you decide to incorporate, we can prepare the necessary documents to get your company up and running.  Phone us at 979-703-7014 to schedule a consultation.

About Chris Peterson

Chris Peterson is an attorney and the owner and founder of Peterson Law Group, a Texas law firm with offices in Bryan/College Station and Kingwood. He mainly practices in the areas of Estate Planning and Business Planning. Chris is also a Certified Estate Planner. Besides his law practice, Chris is a serial entrepreneur and community volunteer. He is known for his cutting edge law practice that utilizes technology to deliver efficient, excellent work.