You decide to get out of the rat race, leave the cubicle farm behind, and open your own business. Before you do, there are important decisions to make to ensure your business and personal assets are protected. In this post, our Texas corporate attorney goes over the basics of helping you navigate this new phase of your life.
Understanding the Liability of a Sole Proprietorship in Texas
Starting and running a business as a sole proprietor in Texas offers many advantages, including simplicity and full control over business decisions. However, it also comes with inherent risks, particularly regarding personal liability for business debts and obligations. Understanding the legal considerations and taking proactive steps to protect your business and personal assets is crucial.
Although it’s very simple to set up a sole proprietorship in Texas, you are also taking quite a risk. Legally, you and the business are inseparable. So the business’s liabilities and debts are yours also, personally. One way to combat that is to buy business insurance to cover the liabilities. There are other ways to protect yourself and your business, though.
Setting up LLC to Protect Personal Assets: Is It Right for You?
Instead of a sole proprietorship, you might consider setting yourself up as an LLC, a limited liability company. The primary advantage to operating your business through an LLC is that if someone wants to file suit against your business, they must sue the LLC.
In Texas, LLC members generally aren’t personally responsible for the company’s liabilities. The primary benefit of an LLC structure is the limited liability protection it offers to its members. This means that the personal assets of LLC members, such as their homes, vehicles, or personal bank accounts, are protected from business debts and legal claims against the LLC.
However, there are exceptions where LLC members could be personally liable:
- Personal Guarantees: If a member personally guarantees a loan or other obligation, they are responsible if the LLC defaults on its payment.
- Fraud or Misconduct: If a member engages in fraudulent activities or illegal actions, they may be held personally liable for resulting damages or losses.
- Failure to Maintain Corporate Veil: If an LLC fails to maintain a clear distinction between personal and business finances, or doesn’t follow proper business protocols, it could lead to “piercing the corporate veil,” making members personally liable.
While LLCs provide substantial protection against personal liability, these exceptions underscore the importance of operating the business correctly and legally to maintain limited liability status. If you need more information, consulting with a corporate attorney is advised.
To set up an LLC you will need to file a certificate of formation with the Texas Secretary of State’s office. You will first need to choose a unique name, which must include the letters “LLC.”
If You Decide on a Sole Proprietorship
If the sole proprietorship sounds like the better plan for your business, you will still need to plan ahead and understand how to operate efficiently. Here are some important things you will need to do:
- Business Name: Choose a unique business name and check its availability with the Texas Secretary of State. If you plan to operate under a name other than your own, file a “Doing Business As” (DBA) or Assumed Name certificate with your local county clerk’s office (Texas Secretary of State) (Steps to Starting a Business). If you elect to file an Assumed Name certificate, you must renew it every 10 years.
- Obtain an EIN: While it’s optional for sole proprietorships, obtaining an Employer Identification Number (EIN) is recommended for tax and financial purposes. This also allows you to open business bank accounts and maintain privacy by using the EIN instead of your Social Security Number (SSN) in business transactions.
- Business Licenses and Permits: Depending on your business type and location, you might need specific licenses or permits. Texas doesn’t have a general business license requirement for sole proprietorships, but check local and state regulations to ensure compliance.
- Business Banking and Insurance: Open a separate business bank account to keep your personal and business finances separate. Consider business liability insurance to protect against potential lawsuits.
- Prepare for Taxes: Sole proprietors must pay self-employment taxes, which cover Social Security and Medicare contributions. Use IRS Form 1040 Schedule SE to calculate and report these taxes. Report business income and expenses on your personal income tax return using IRS Form 1040 Schedule C. If you sell taxable goods or services, you must obtain a Sales and Use Tax Permit from the Texas Comptroller of Public Accounts and collect sales tax from customers.
- Contracts & Agreements: Use well-drafted contracts and agreements to clearly define the terms and conditions of your business relationships, reducing the risk of disputes and liabilities
Planning ahead and addressing these considerations will help you operate your sole proprietorship smoothly and legally.
When to Seek Help From a Texas Corporate Attorney: Getting the Legal Protection You Need
The main benefit for operating as a sole proprietor is simplicity. However, simplicity also comes with significant risks, particularly regarding personal liability. By understanding the legal considerations and taking proactive steps to protect your business and personal assets, you can mitigate these risks and set your business up for success.
Key strategies include registering your business name, obtaining necessary licenses and permits, meeting tax obligations, securing liability protection through insurance and separate finances, protecting your intellectual property, ensuring data privacy and security, maintaining accurate records, and planning for the future with a comprehensive succession plan.
Whether or not you choose to operate as a sole proprietor or incorporate, consulting an experienced Texas business attorney is a wise move. We can get you started on the right path. Contact us today. Let us show you how we can help.
This is not intended to be legal advice. Please consult an attorney.