Small Business

We incorporate businesses. Selecting the type of business entity is very important to the success of your business.

"Helping to build the cities of El Paso, Texas, Las Cruces, New Mexico, and Juarez, Mexico one family at a time"

Anderson, Anderson, Bright & Crout, P.C.
El Paso, Texas 79936
PHONE (915) 595-1380 or (915) 581-4600
FAX (915) 591-6201 or (915) 592-2363

Selection of Appropriate Ownership Entity

This article analyzes and compares various business entities available to parties who desire for business or investment purposes to acquire, own, operate, or develop real estate, and discusses factors relevant to the decision of the best entity for the particular situation.Most real estate owners are interested in two primary overriding issues:taxation (paying the least amount of tax) and risk management (avoiding losing personal assets in the event of a lawsuit).In addition to these two issues the following issues are often considered:

1. Formation and Maintenance requirements: The ease and expense of forming and maintaining the entity;

2. Management and Control: The extent of control desired by the owners;

3. Transferability of Interest: The extent and ease by which an ownership interest in the entity may be transferred.

4. Legal Flexibility: The extent to which the action of the owners of the business are governed and limited by law (and their ability to contractually vary that result) and the ease with which the form of business can be changed;

5. Continuity of Existence: The extent to which the owners desire that the entity have continuity of existence; and

6. Methods for Getting Money Out: When and how do owners get paid.

Because of the sophistication of these issues and the length of this paper we will focus only on the issues of taxation and risk management.

Description of Legal Entities.

A sole proprietorship is a business conducted by an individual who owns all of the property.There are no formal requirements for a sole proprietorship to exist other than the filing of an assumed business name certificate ("Sole Proprietorship").

A general partnership is, by statutory definition, an association of two or more persons to carry on a business for profit as co-owners ("General Partnership"). A joint venture is, essentially a general partnership with a limited purpose. A General Partnership may be created by a handshake or under a written agreement.

A limited partnership is a partnership that has and is owned by one or more general partners (who are liable for the obligations of the partnership) and one or more limited partners (liable only to the extent of their actual or committed investment in the partnership) ("Limited Partnership"). The creation of a Limited Partnership involves the filing of a certificate with the state of Texas. A Limited Partnership generally requires a written agreement.

A registered limited liability partnership ("LLP") is a special type of general partnership in which, in certain circumstances, some LLP partners are not liable for debts and obligations of the partnership that arise from errors, omissions, negligence, incompetence, or malfeasance committed without the knowledge of the protected partner by another partner or employee not supervised by the protected partner.

A corporation is a legal entity formed under state law ("Corporation")and ownedbythe shareholders. It requires the filing of an application called "Articles of Incorporation" with the state of Texas.

An S corporation is formed as described above ("S Corp") but has made the required election under the Internal Revenue Code of 1986, as amended to be treated as having the federal income tax attributes of a partnership (discussed below).

A limited liability company ("LLC") is a non-corporate entity organized under state statute that is owned by its "members" (who are treated like shareholders) and is taxed like a partnership.

Taxation and Risk Management Issues of the Entities:

In addressing the issue of "taxation" most owners want to know how to avoid paying more taxes, or on the converse they would like to know how to pay the least taxes possible.

Sole Proprietorships, General Partnerships, Limited Partnerships, and LLP’s share the best status in that regard.S Corps and LLCs share the next best status in that regard.A corporation occupies the worst status in that regard.Federal income taxes are generally not attributable to a Sole Proprietorship, a General Partnership, a Limited Partnership, an LLP, a S Corp or an LLC but to their respective owners.The S Corp and the LLC are, however, required to pay additional taxes as they are required to pay Texas franchise taxes while the other entities described above are not.

Worst yet, is the Corporation. It is required to pay both Federal income taxes and the Texas franchise tax.

Additionally, the owner (shareholder) of a corporation must pay Federal income tax on funds distributed to him or her as a dividend.This form of taxation is often referred to as "double taxation".

When addressing the issue of "risk management" most owners want to know - how do we avoid losing our personal assets if we are sued?Lawsuits generally result from two sources: contractual liability (breach of contract) and tort liability (where someone is hurt).

Generally, the Corporation, S Corp and LLC share the best status in this regard.For both contractual and tort liabilities, liability for these entities and their owners, is generally limited to the assets of the entities.

Owners are generally not liable so their personal assets are protected.Next comes the Limited Partnership and the LLP.Liability is limited to the entity’s assets, the general partners’ assets and the limited partners’ liability is limited to their agreed amount of investment in the Limited Partnership.Some liability protection is afforded the LLP’s general partners for "errors, omissions, negligence, incompetence or malfeasance if the respective general partner had no knowledge of such activity (the "Protected Partner") that was committed by another general partner or employee of the LLP and such employee was not supervised by the Protected Partner.

The General Partnership and Sole Proprietorship lose out right in the risk management category.The owners of a sole proprietorship and the general partnership have unlimited liability.Thus the owners’ assets are left unprotected.

In closing, the three entities that tend to be used most often in real estate related transactions are the Limited Partnership, LLC and S Corp.Note that significant planning is generally necessary in any real estate related entity - please seek appropriate legal counsel to provide a more in depth analysis.