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How to Form, Build,

and Protect YOUR


Business

Isabel de la Riva
Founder 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

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 Partnership
Member or Manager Managed
Traditional Roles or No Hierarchy
Powers of each
Scope of responsibility
Accountability: To Whom and when
Limitations: Extraordinary
transactions
Indemnification

Issues: Operations
Bank Accounts: Set up, EIN
Accounting Periods: Fiscal or Calendar
Reports: To State, to members, to IRS
Bookkeeping
Meetings
Changes to Agreement
Disputes

Issues: Exit or Ending the


Business
Exit Strategies
Winding Down Procedures
Liquidation and Dissolution
Limitation of Liability
Transfer of Interests:
to family, third parties
Dissolution:
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.
Banker
Accountant
Lawyer
Manager
Marketing Person
Salesperson

You DO need to be familiar with these


areas, but it is UNNECESSARY AND
UNWISE to do it alone

Its Takes A Village


Acquire professional assistance
Legal services
Accounting services
Marketing 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 State
Have an attorney assist you
Have a CPA assist you

CONTROLLED RISK

Types of Business
Formations

Sole Proprietorship
Partnership
Limited Liability Company or
Professional Limited Liability
Company
Corporation

Sole Proprietorship
Simplest and Least Expensive
Owner receives all profits

Owner has all responsibilities and


liabilities
You get what you pay for

Partnership
Business enterprise owned jointly by 2
or more
Profits, debts, and liabilities are shared
Can create a LIMITED PARTNERSHIP or
a GENERAL PARTNERSHIP
GENERAL PARTNERSHIP
All partners participate in
the day-to-day
management of the
LIMITED
PARTNERSHIP
business
Has passive partners who
contribute capital but
have minimal control

Corporations
Legal entity who can own a business,
sue or be sued
Must pay its own taxes
Operates the business according to a
written charter issued by the State
Different forms available

Sole Proprietorship and


Partnerships
The 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

Sole Proprietorship
Enjoys complete control
over business
This type of business
owner receives all the
profits, but also has sole
responsibility of all debts
and liabilities
Income tax returns
combine business and
personal income

Sole Proprietorship
Advantages
Least amount of red tape to
complete in establishing the
business
Little or no expense in forming or
dissolving the business
Simplicity of operation
Certain reporting requirements are
not necessary
Income is taxed only once

Sole Proprietorship
Disadvantages
Unlimited 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

Partnership
Partnership form is necessary
when there are several
owners involved in a business
Income tax returns are
information returns that
allocate income or losses to
the partners
The partnership or business
must file its own return, but
it pays no tax
Partners must claim their

General Partnership
Most common partnership
All partners sharing equally
Equal ownership
Equal management decisions
Equal responsibility for partnership debts

Limited Partnership
The 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
Advantages
Allows persons with insufficient
net worth to pool funds to
purchase a business
Provides an opportunity to split
management duties, unless the
partner is a limited partner
Income is taxed only once

Partnership
Disadvantages
Must share the decision making
with other partners
Compatibility and cooperation of
the partners are essential
Each 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

Corporations
Most permanent form of
business - continues for the life
of its charter regardless of what
happens to the original
organizer
Owned by stockholders in
proportion to their number of
shares
Can be a one person operation
with only one stockholder
holding all stock and being the
only officer

S vs C Corporation
Federal Income Tax Purposes
The S Corporation
Taxed the same as a
partnership
Income of S Corp passes
directly to stockholders who
pay taxes on their shares
without any federal income
taxCbeing
paid for
The
Corporation
corporation
itselfincome tax on its
Pays corporate
earnings
Stockholders pay income tax on

Corporations
Advantages
A corporation pays 15% of federal
income tax on taxable income up to
$50,000
25% tax on income from $50,001 to $75,000
It With
is easy
to sell part
of theatbusiness.
incremental
increases
100k and 335k

Bank financing may be obtained more


easily
ABILITY TO PROTECT
YOUR PERSONAL
ASSETS

Corporations
Disadvantages
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 shareholder
More difficult to transfer cash in
and out
Requires the most paperwork:
annual meetings, minute book and
record of stock and stockholders
Annual report, annual minutes and

Corporations
The C Corporation
Is the default corporation
All corporations are automatically C
unless they are specifically set up to be S

The S Corporation
Known as the Small Business
Corporation
Governed by Subchapter S of the IRS
Code of 1986
To qualify, a business MUST comply with
strict eligibility requirements with regards

Limited Liability Company


The LLC is the most flexible of the
business legal forms AND it provides a
considerable amount of liability
protection
The number and type of owners is NOT
restricted
Liability protection for owners so long
as there is no fraudulent activity
Rules 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 LLC
It is treated as a
disregarded entity for tax
purposes
As a single-member LLC, a
business person can treat
the business like a sole
proprietorship and only
needs to file a Schedule C

C
L
L

Limited Liability Company


LLC is a powerful tool, and in
many cases, its the
SOLUTION.
Attractiveness and power of an
LLC: single level of income tax
and limited liability
LLC members face only one
level of income tax: any items
of income, gain, loss,
deduction, and credit flow
through to the member
Unlike S corporations, the

C
L
L

Limited Liability Company


Advantages
Same liability protection as a
Corporation
Can be taxed as a partnership, with
single level, flow-through taxation
vs. double taxation
Flexibility of business deals
Losses which are common for
start-ups, can pass through the
entity and be deducted directly by
the owners of the business
All members/owners of LLC are

Limited Liability Company


A 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 Company


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

Limited Liability Company


It cant 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 corporation
If you sign agreements in the name of
the LLC, then the LLC is the
responsible party on the agreement,
not you as an individual owner
If 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 LLC
To have asset protection
benefits, especially the sole
member LLC, owner must
observe formalities and
operate business as an LLC
Need adequate
capitalization depending on
the nature and extent of
the business
Have annual meetings and
produce statements about
the past business year and
expectations for the future

C
L
L

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

C
L
L

Operate LLC As Separate


Business

Needs a separate checking account


and set of books
Formal bookkeeping
No need for separate federal income
tax filing
Income tax reported on Schedule C of
your personal tax return
For federal income tax purposes, the
single member/owner LLC is
disregarded

Comparison
Limited Liability
Company
Natural asset protection
features
Shields investors and
active participants of the
business in the same way
as corporation
Advantage over
corporation when it
comes to creditors
claims against the owner
of the business

Corporation
Separate legal entity that
pays taxes
Own by shares

Comparison
Limited Liability
Company
Asset protection
advantage

Limited Liability
Partnership
Fully responsible for all
claims against the
partnership
LLP 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

Operating Agreement
Answers the HOW, WHEN, WHO,
WHAT questions of your business
Managemen
t of business

Ownership

Liability

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

LLC Basic Asset Protection


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

LLC Asset Protection


Comprehensive LLC Operating
Requirements

Agreement followed by the owners


Accounting procedures to keep the
owners personal asset separate from
the business assets
Clear, timely, and accurate
documentation of funds going in and
out of the LLC
Operating procedures consistent with
the LLC being a separate valid
business entity
Singing contracts in the name of the LLC

Issues to Consider
Employees
Contracts
Trademark
Marketing
Team of Professionals

Will you take the leap?


What does it take?

Take it
Be your own boss

Offices in

San Antonio, Houston, and McAllen


HOUSTON OFFICE
SAN ANTONIO OFFICE
13407 NW MILITARY HWY 2180 NORTH LOOP WEST, STE
550
SAN ANTONIO, TEXAS
HOUSTON, TEXAS 77018
78231
(281) 769-1150
(210) 224-2200

www.delarivalaw.com
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MCALLEN OFFICE
520 WEST PECAN BLVD,
STE G
MCALLEN, TEXAS 78501
(956) 616-4151