BUSINESS | Frequently Asked Questions
How should I organize my new business?
Possible ways exist for organizing a new business
Which one is most appropriate for your new business depends on how many owners will be involved, how much you want to protect your personal assets from the liabilities of the business, and how you want to handle certain tax aspects of the business.
If you will be the sole owner of your business, then this is the default structure for your business. A sole proprietorship is the simplest way to run your business, but it exposes your personal assets to the liabilities of the business.
If you and one or more other persons will own the business and if you do nothing else about how the business is structured, the business will be a partnership. A partnership is defined as “an association of two or more persons to carry on a business for profit as owners” and can arise whether the persons involved call it a partnership or something else (e.g., a “joint venture”), if they don’t try to organize the business in some other form, such as a corporation. Like a sole proprietorship, the assets of each partner are subject to the debts of the partnership.
A corporation is a business entity that is formed by following registration procedures established under state law and is a legal entity separate and distinct from its owners, who are called shareholders. In a corporation, the owners’ liability for the debts of the corporation is limited to their investment in the company and their personal assets are protected.
A corporation can have one or more owners. Small corporations that meet certain criteria can elect to be treated differently for tax purposes than regular corporations (called “C corporations”) by registering with the IRS as an “S corporation.”
Limited liability company
A limited liability company (called an “LLC”) is composed of one or more members who are the owners. It is like a corporation in that the LLC’s members’ personal assets are not subject to the LLC’s debts. It can be formed by one or more members, and the members can be individuals or other legal entities such as corporations and partnerships. To form an LLC, you must file appropriate forms with the Secretary of State or equivalent agency in the state where you want to register it.
A limited partnership (“LP”) combines aspects of partnerships and corporations. It is composed of a general partner and one or more limited partners. Both can be individual or other legal entities such as corporations, LLCs or partnerships. The general partner operates the business but and the general partner’s assets are subject to the LP’s debts. The limited partners’ are not subject to the LP’s debts, but only so long as they do not participate in running the company.
For more information about the tax implications of these choices, you should consult your CPA or other tax advisor before forming your business. The IRS website also has information about choosing a business structure. Go to http://www.irs.gov/businesses/small/article/0,,id=98359,00.html.
Can I use any name I want to for my new business?
No. Ordinarily, sole proprietors and partnerships can use the owners’ personal names, as long as it isn't closely similar to another business's name, but if you form a corporation or LLC or otherwise want to adopt a special business name, you must register that name with the Secretary of State. In any event, regardless of the form your business takes, you won’t be able to use the same or closely similar name as any that are already being used and registered. So, the first step in naming your business should be to contact the Secretary of State to find out if the name you want is available. Once you find one that is available, you can use it when you register the corporation, LLC or limited partnership, or if you are a sole proprietor or partnership, you can register the name as a “doing business as” (“dba” or (d/b/a”) with the Secretary of State. For more information, go to the Secretary of State’s website: http://www.sos.state.tx.us/.
You should also check with the U.S. Patent and Trademark Office to be sure that your chosen name isn’t registered as a trademark: http://www.uspto.gov/trademarks/index.jsp.
Do I have to register with the government if I start a business?
Regardless of how you structure your company, you do have to register in some fashion with at least one level of government if you will be selling products or operating under a name other than your personal name.
If you choose to operate as a corporation, LLC or LP, you will need to register with the Secretary of State. Also, you will need to register your business name (assuming it isn’t already being used by someone else). For more information about this, go to the Secretary of State’s website: http://www.sos.state.tx.us/.
You will have to get a permit from the Comptroller of Public Accounts if you engage in business in Texas and you:
- sell tangible personal property in Texas;
- lease tangible personal property in Texas; or
- sell taxable services in Texas
For more information about this, go the to Comptroller’s website, http://www.cpa.state.tx.us/taxinfo/sales/.
Where can I get money to start a business?
Businesses vary greatly in the amount of money required to startup, but all businesses have two major sources: you own money and other people’s money (“OPM”).
Some small businesses don’t require a large infusion of money to get going and can be started using your own savings and existing assets (e.g., computers, software, tools and equipment you already own). However, the more complex the business is, the more money you will need and that’s where OPM becomes necessary.
OPM takes two basic forms: debt and equity. Debt is money you borrow from someone else, in return for which you or your company becomes obligated to pay back, with interest. Equity funds are obtained from persons or entities who become co-owners in the business.
The major difference between debt and equity is that a creditor is not a co-owner and must be paid back even if the business doesn’t earn any profits, while those who supply equity funds become owners and share with you in the profits, if any, and the risk that the business might lose money or fail.
Debt financing is available from banks and various other financial institutions, as well as investors who are engaged in debt financing.
Equity financing is available from your partners in the case of a partnership, and from your co-owners and co-members in the case of corporations, LLCs. Later on, after the business has been started, additional owners may come into the business through what is called a private placement. Many companies, especially after they have been operating for a time, obtain equity financing through the stock markets. This is done through initial public offerings (“IPOs”). An IPO must be registered with the Securities and Exchange Commission (SEC) and must comply with very rigid federal securities laws and regulations, as well as state laws and regulations. As a result, IPOs require the help of specially trained lawyers and accountants and consequently they are very expensive. By contrast, a private placement doesn’t have to go through the SEC’s registration process and isn’t nearly as expensive as an IPO, but it still has to comply with some of the SEC’s regulations, so consultation with a qualified attorney and a competent CPA are absolutely essential.
Venture capitalists are persons and companies who specialize in offering or locating financing for companies at various stages of development. If your company meets their criteria, you may find this a useful source of financing. They can be found through your local banker or your attorney or CPA may be able to refer you to some. Before doing so, however, you, your banker, CPA and lawyer should discuss whether you are a good candidate for equity financing and whether a particular venture capitalist is reputable.
See our Setting up your Business page.
What should I do if I have an idea for an invention?
If you have an idea for an invention, you may be able to patent it and have the sole right to make, use and sell your invention. To protect your potential rights, do not share your idea or invention with anyone and be sure to consult with a patent attorney as soon as possible.
Patenting an invention is a race—whoever puts an idea to use first has the edge, so telling others about it may let someone get the jump on you. Patenting an invention is a complex and expensive process. Trying to do it yourself can jeopardize your rights if you aren’t thoroughly familiar with the process. Seeing a patent lawyer will help you avoid pitfalls. Also, your invention may not be patentable for a variety of reasons and the attorney may be able to determine that right away and save you time and money.
Above all don’t delay. If you have already made your invention, your time may be very short.
What should I do about sexual (or other forms of) harassment?
Step 1—If you haven’t already done so, adopt some policies and procedures for (1) educating your employees about sexual harassment, including defining harassment and giving clear examples of what is and isn’t harassment, (2) assigning responsibility to a specific person to whom complaints should be made, (3) describing the procedures to be followed for making and investigating complaints, and (4) clearly describing the discipline that will be imposed.
Step 2—Make your employees familiar with your policies and procedures. Hold meetings, distribute copies of the policies and procedures and require your employees to sign a document confirming that they have read and understand them.
Step 3—Religiously follow your own procedures and apply them fairly. If a complaint is made, take action immediately but don’t impose discipline until you have all the facts. Consult with your lawyer before taking action.
If you haven’t adopted policies and procedures and you have received a complaint, investigate it immediately. Let those involved know that you will take the complaint seriously and impose discipline, but seek legal advice before taking action.
If you haven’t received any complaints, but haven’t established policies and procedures, seek legal counsel for help in developing some for when the need arises.
Click here for more on sexual and other harassment.
What can a contractor do to make sure he gets paid?
Mechanics’ and materialman’s liens are available to contractors and suppliers who provide labor and materials for construction projects. These liens protect contractors and suppliers by putting a “hold” on the property on which the construction project was performed. This prevents the current owner from selling the property without paying what's owed to the contractors and suppliers.
The lien also gives the contractor and supplier the ability to seek payment through foreclosure and judicial sale of the property.
The requirements for establishing a lien vary, depending on whether the property is residential or commercial. These requirements are more stringent for residential properties and they include certain notices and disclosures that must be given to the owners. Failure to comply with some of these requirements for residential properties may subject the contractor or supplier to liability under the Texas Deceptive Trade Practices Act for damages, including punitive damages and attorneys fees. So, seek legal advice before filing or enforcing a lien on residential property.
Click here if you need help with filing a lien.