Small Business Basics
Presented by: Firstname Lastname
Disclaimer
This information is provided for informational purposes only by
the Texas Young Lawyers Association ("TYLA") a division of the
State Bar of Texas. TYLA does not warrant this information for
any purpose. This presentation shall not constitute legal advice,
nor does it create an attorney-client relationship. The laws
referenced in this presentation may have changed or could be
affected by case law developments. Do not rely on this
presentation or your interpretation of same for any purpose. If
you have a legal question you should consult with a
properly licensed lawyer.
Are you an entrepreneur?
1. Must have burning desire and discipline to plan, work, and
sacrifice in order to successfully transform your idea into reality.
2. Are you ready, willing and able to work harder than you
ever have before?
3. Do you have self-confidence and discipline?
If you’ve answered “no” to any of these questions, you may
not be ready for entrepreneurship
Developing Your Idea
So what’s your idea?
What’s your product?
What goods or services are you going to provide to whom and
whose needs are you going to meet?
For starters, you should ask yourself “What are my skills, what
am I good at, and what do I love to do?”
The Business Plan
A business plan provides a blueprint for your business and
highlights your ideas, strategy, and team; it will be used by you
and others, such as banks, investors, and potential partners.
A business plan is a dynamic document.
The Business Plan
Other topics:
1. start-up costs
2. licensing and certification
3. capital (financial, intellectual, and human)
4. suppliers, equipment, and space
5. technology
6. advertising
7. banking relationships
The Business Plan
Other topics:
8. insurance
9. taxes
10. governance and compliance
11. growth
12. alternative strategies and opportunities, and
13 strategy
Choosing the Right Business
1. Starting a New Business: Is your idea new or novel?
2. Purchase an Existing Business: Many entrepreneurs start as
franchisees in proven businesses, thus avoiding some of the
risks and challenges inherent with starting a new business from
scratch.
Choice of Business Entity
Texas law (and most states) recognizes several business
structures.
1. Sole Proprietorship
2. General Partnership
3. Corporation
4. Limited Liability Companies
5. Limited Partnerships
Business Entity: Sole Proprietorship
• An individual person (if there is more than one owner then it
is a partnership as described below) is doing business
under his own name (or even under an assumed name).
• No formal organizational requirement
• There is no limit to liability - your personal assets are at
stake!
• You can only transfer the interests in your business by
selling the assets themselves which could mean more tax
liability.
• Access to capital can be limited.
• No entity taxation at either the federal or state level because
there is no entity to fax.
Business Entity: General Partnership
• Two or more individuals (or entities) have shared ownership
of the business.
• No formal organizational requirements to be formed nor
does it have any formal management or governance
requirements
• Any partner of the partnership can bind or obligate the
partnership
• There is no limit to liability for the partners
• Full flow through taxation - taxes are paid at the individual
partners’ level
• general partners (individuals) may also be subjected to selfemployment taxes.
Business Entity: Corporation
Under most state laws, there is one kind of corporation.
However, from a federal tax perspective there are two:
1. a C-Corporation and
2. an S-Corporation
Business Entity: Corporation
Both types of corporations have:
• rigorous management/governance structures
• a certificate of formation must be filed with the Secretary of
State
• a registered office and agent for service of process in Texas
• at least one director who is in charge of overseeing the
corporation’s business
• at least a president and a secretary as officers
• one annual meeting of the directors and the shareholders of
the corporation must take place to elect directors and
officers
Business Entity: Corporation
Both types of corporations have the following benefits:
• corporations provide for continuity of life regardless of
whether you are still around or not
• free transferability of interests (with the exception of some
restrictions applicable to S-Corporations as discussed
below)
Formalities such as annual meetings, holding corporate
assets separate and having arms-length transactions
between corporations and shareholders/directors must be
followed to maintain limited liability of the shareholders.
Business Entity: Corporation
C-Corporation:
• More flexible type of corporations in that there is no limit in
the amount of shareholders they may have
• Shares of a corporation can be sold to anyone whether a
corporation, individual person or different entities
• Double taxation
o
as a separate legal entity, pays federal and state taxes
(35%) and then individual shareholders also pay taxes on
whatever dividends (distributions of earnings) are paid
to shareholders (generally 15%)
Business Entity: Corporation
C-Corporation:
• If sold, there is a single tax to shareholders if the interests
(shares) are sold but there is double taxation if assets are
sold as it is deemed income to the entity and then a
distribution to shareholders
• Because of the double taxation feature of a C-Corporation, it
is generally not a desirable business structure for small
businesses
Business Entity: Corporation
S-Corporation:
• Named as such because of Subchapter S of the Internal
Revenue Code
• From a governance and state law perspective, SCorporations are essentially the same as C-Corporations.
• Form 2553 is filed, an S-Corporation is viewed as a
partnership or sole proprietorship for taxation purposes,
depending on the number of shareholders
o This means that the corporation itself is not taxed, as CCorporations are; rather the S-Corporation’s profits are
passed on to its shareholders, who pay income tax on that
money.
Limited Liability Companies
LLCs in most cases may be organized in two ways:
(i) member managed; or
 more like a partnership.
(ii) manager managed
 more like a corporation.
 manager (or managers) is in charge of running the
business, very much the same way directors are tasked
in corporations, and members do not have an active
role in running the business (like shareholders).
Limited Liability Companies
LLC is formed when a certificate of formation is filed with and
accepted by the Secretary of State.
LLC certificate of formation is required to state whether the LLC
will be manager or member managed and sets forth the names
of each initial manager (if manager managed) or initial member
(if member managed).
LLCs have a continuity of life and are very flexible as far as
transferability of interests with the exception that LLC interests
can not be publicly traded
Limited Liability Companies
No limitation on the number or type of members
If an LLC is owned by a single member, for taxation purposes it
is treated as a disregarded entity.
If the owner is a corporation or another LLC, it is treated as a
division or branch of that entity.
An LLC with multiple members is treated for tax purposes as a
partnership
Limited Partnership
Limited partnerships (LPs) are partnerships where certain
partners have limited liability (limited partners) and at least one
partner (general partner) has unlimited liability.
LPs are formed by filing a certificate of formation with the
Secretary of State.
LPs provide limited liability for the limited partners and
continuity of life.
A general partner is usually an LLC or a corporation in order to
provide limited liability to those forming it.
Federal taxation perspective, LPs, are taxed similarly to LLCs.
Which entity do I choose?
Consider:
(i) there is a large possibility you will go public,
(ii) you have foreign investors interested in investing in your
business, or
(iii) you are in an industry which corporations are the
preferable or most commonly used business entity
Remember, S-Corporations are a possibility, but not if
scenarios (i) or (ii) apply.
Which entity do I choose?
Consider:
In Texas at least, LPs might be a preferable business
structure to an LLC if your business will be limited to passive
investments or will only hold certain assets, such as intellectual
property or real estate
Investors in certain industries, such as oil & gas and real
estate, are used to LPs as LPs are the business structure
that have historically have been used.
Resources
A. Your local Chamber of Commerce
B. Lone Star Community College
C. Small Business Minority Group
D. www.EEOC.gov
E. www.dol.gov
F. One-stop business assistance center -City of Houston
G. El Paso Community College Small Business Development
Center
Resources
H. Dallas Small Business Development Center
I. University of Texas at San Antonio Small Business
Development Center
J. www.sba.gov
K. Federal Trade Commission www.ftc.gov
L. www.irs.gov
M. www.window.state.tx.us
N. www.texasworkforce.org
O. www.mbda.gov