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The first step in starting a business is to
determine the basic legal structure of the business,
and to properly record the business name. This step
is important when starting a business, since
financial implications vary depending on which legal
structure is selected. These range from corporation
responsibilities for annual franchise tax fees to
personal liability for business dealings as a sole
proprietorship. The business name selected is the
identifying and marketing component of the business.
It should be given much thought and consideration. A
professional tax consultant, accountant, and/or
attorney should always be consulted before
determining legal structure and business name.
Related Content:
How
to Develop Your Business Plan
Legal Structure
There are several legal structures available for
businesses operating in the U.S.. Each structure is
listed below with a brief description of the entity.
A sole proprietorship exists when a single
individual operates a business and owns all assets.
A sole proprietor is personally liable for all
debts, and business ownership is nontransferable.
Under a sole proprietorship, the life of the
business is limited to the life of the individual
proprietor. The sole proprietorship makes no legal
distinction between personal and business debts, and
it does not require a separate income tax return. A
sole proprietorship is often operated under the name
of the owner. Whenever operating a business under a
name other than the sole proprietor, an Assumed Name
Certificate must be filed with the county clerk.
Assumed Name Certificates are discussed later in
this section.
A general partnership exists when two or more
individuals or businesses join to operate a
business. Under a general partnership, a separate
business entity exists, but creditors can still look
to the partners’ personal assets for satisfaction of
debts. General partners share equally in assets and
liabilities. A general partnership requires an
annual partnership income tax return (separate from
the partners’ personal returns). A general
partnership may be operated under the names of the
owners, or a different name. In either case, an
Assumed Name Certificate must be filed with the
county clerk.
A limited partnership is a partnership formed by
two or more persons or entities, under the laws of
Texas, and having one or more general partners and
one or more limited partners. General partners share
equally in debts and assets, while limited partners
have limited debt obligations. A limited partnership
must be registered with the Secretary of State. (See
next section for details on the business name.)
- Registered Limited Liability Partnership
A registered limited liability partnership is a
general partnership that has been registered with
the Secretary of State. A partner’s liability in a
registered limited liability partnership differs
from that of an ordinary partnership. In a
registered limited liability partnership, a partner
is not individually liable, under some
circumstances, for debts and obligations of the
partnership arising from errors, omissions,
negligence, incompetence, or malfeasance committed
in the course of business by others in the
partnership.
A corporation (Subchapter C or S) is created when
two or more individuals, partnerships, or other
entities join together to form a separate entity for
the purpose of operating a business in the state. A
corporation has its own legal identity, separate
from its owners. The corporation offers protection
to the business owners’ personal assets from debts
and liabilities relating to the operation of the
corporation. Taxation of the corporation varies
depending on the type of corporation formed.
A corporation must be registered with the Secretary
of State.
A Subchapter C Corporation is taxed at a higher
rate than an individual. The owners are not taxed
personally for profits; however, the owners do pay
personal taxes on any salaries and/or dividends, and
the corporation is also taxed on the profits.
Owners of Subchapter S Corporations may deduct
business losses on personal income tax returns,
similar to a partnership. The Subchapter S
Corporation also offers alternative methods for
distributing the business income to the owners.
- Limited Liability Company
A limited liability company is an unincorporated
business entity which shares some of the aspects of
Subchapter S Corporations and limited partnerships,
and yet has more flexibility than more traditional
business entities. The limited liability company is
designed to provide its owners with limited
liability and pass-through tax advantages without
the restrictions imposed on Subchapter S
Corporations and limited partnerships. A limited
liability company must be registered with the
Secretary of State.
Related Content:
Comparison Chart:
Advantages and Disadvantages of Sole Proprietorship,
Partnership, Corporation, and Limited Liability
Company
Business Name
Once the legal structure of the business has been
determined, and if a separate business name will be
used, the business name must be registered with the
county clerk’s office and/or the Secretary of State.
It is very important to do a thorough search when
considering a business name. If a corporation and an
unincorporated company have very similar names,
neither automatically has the right to the name. If
both parties have properly filed the Assumed Name
Certificate, the courts will most likely have to
decide this matter. Taking the time necessary to
conduct the name research up front will help avoid
legal costs after the business is opened and
operating.
State Registration
All businesses operating as limited
partnerships, registered limited liability
partnerships, limited liability companies,
corporations, professional corporations, nonprofit
corporations, and professional associations must
register with the Secretary of State. The Secretary
of State provides a summary of requirements for the
creation of these entities, but does not provide
forms except for registration of a limited liability
partnership. The Secretary of State publishes the
Filing Guide, which offers guidelines for
registering business entities. The guide also
includes administrative rules and sample forms
promulgated by the Secretary of State. The guide
costs $35 and can be purchased directly from the
Secretary of State (No longer available as of
2/15/2000). To order, refer to the telephone numbers
listed on the next page.
Corporations, limited partnerships, and limited
liability companies organized in other states or
countries may transact business in US by
obtaining a certificate of authority through the
Secretary of State. The Secretary of State can
provide forms for the certificate of authority. An
out-of-state business may also consider the option
of creating a Texas corporation, limited
partnership, or limited liability company for
transaction of business in US .
A name may not be used by more than one
corporation in the state. The Secretary of State
will perform a name search to verify that no other
corporation, limited partnership, or limited
liability company in US is using the exact name
selected. To find out if a business name is
available, call the Secretary of State and they will
do an immediate computer search. The search is only
for business names registered with the Secretary of
State, and does not include business names
registered only a county clerk.
If a corporation will transact business under
names other than that stated in the articles of
incorporation, the corporation must file an Assumed
Name Certificate with the Secretary of State, and
with the county clerk in which the principal office
and registered office of the corporation are
located. (See next section for details on Assumed
Name Certificates.)
Local Registration (Assumed Name Certificate)
If the business will operate as a sole
proprietorship or a general partnership, an Assumed
Name Certificate or d.b.a. (doing business as) for
each name (or deviation of that name) the business
will use must be on file with the county clerk in
each county where a business premise will be
maintained. If no business premise will be
maintained, it should be filed in each county where
business will be conducted.
If the business will operate as a corporation,
limited partnership, or limited liability company,
and the business will be identified by a name other
than the name on file with the Secretary of State,
an Assumed Name Certificate must be filed with the
Secretary of State and each county in which the
business will have a registered or principal office.
Neither the filing of an Assumed Name Certificate
nor the reservation or registration of a company
name imparts any real protection to the party filing
the certificate. It is merely a formal process that
informs the general public of the registered agent
for a business and where official contact with the
business can be made.
Filing the Assumed Name Certificate
Each county clerk office may use a different
form; however, the information requested should be
the same. Be prepared to provide the business name,
mailing address, city, state, zip, expected period
of operation, business type, and owner information.
Period of operation is the period of time the
business will use the name. Ten years is the maximum
length of time an assumed name filing is valid.
However, if the name will be used for a period of
less than ten years, indicate this on the form. Note
that names must also be renewed every ten years.
Business type refers to the legal structure of
the business. Indicate whether the business will
operate as a corporation, partnership, sole
proprietorship, etc.
Owner information is the name(s) of the owner(s),
personal address(es), and signature(s). All owners’
signatures must be notarized. This service is
sometimes offered at the county clerk’s office. The
form cannot be filed until all owners have signed it
and all signatures have been notarized.
The following information will be helpful in
filing the Assumed Name Certificate in the county
the business will operate.
First, write down the name of the business you
will be considering. Pay close attention to
capitalization, spacing, punctuation, etc. Consider
this carefully as this name will identify the
business to the public.
Next, search the county records for that exact
business name in the assumed name books or computer.
An assumed name filing is valid for ten years, so
search records for the last ten years to verify that
the name is available. One book will not necessarily
encompass one year of filings, so check the front of
the book for dates. Some records are computerized;
however, a computerized index may not contain ten
years of filing history. Use the computer for the
period it covers, and then use the books for any of
the remaining ten years. If the business name has
been used, look in the margin to see if it has been
abandoned. If the name has been abandoned, it can
legally be used again. Many county clerk offices
will provide a name search service for a nominal
fee. The whole search process will often be taken
care of through the mail. Please contact the local
county clerk for verification of their process.
Finally, if the company name is available, fill
out the assumed name form and have it notarized.
Then file it with the county clerk’s office. The
county clerk will keep the original Assumed Name
Certificate, so be sure to request several certified
copies (at least one for the bank and one for your
business records). For filing fee information and
accepted form of payment, contact the local county
clerk’s office. Most county clerk offices accept
cash, certified checks, or money orders. If
processing via mail, send the forms by certified
mail with a return receipt requested to verify
receipt by the county clerk. |
