Dear Mr. Premack: Before I retired, I was a
computer specialist for my employer. When I retired, I began to do private
consulting work -- some for my old employer, some for new customers. The
living I make from consulting has been pretty good, and I wonder if it is
time to formalize my business. What options exist to structure the
business? - E.S. A business may be structured in one of three ways: as a
Sole Proprietorship, as a Partnership, or as a Corporation. Each has
different advantages and requirements. A Proprietorship ends automatically
when you die, but a Partnership and Corporation may continue to exist
after your death since they legally exist separate from you.
Most businesses like yours are set up as sole proprietorships. This
means that there is only one owner, who is responsible for all operation
and ownership of the company. The only formality is to register your
business name with the county clerk.
However, sole proprietorship does not provide you with any insulation
from liability. To limit your risks, you need to form a Corporation. Texas
corporate laws are about as liberal as anywhere in the U.S., and allow a
single owner to run the entire company.
When the corporate formalities are followed, your personal assets
cannot be held liable for the corporation's actions. This shield exists
only if you adhere to the corporation's required organization.
Structurally, a corporation must have at least one owner (the
shareholder). The shareholder elects a Board of Directors, who decide on
overall goals and policies for the corporation and who elect officers.
They must elect at least a President and Treasurer.
Texas corporate laws allow a "one-person corporation" -- that is, you
can personally fill all of the roles. You may be the sole shareholder, the
sole Director, and fill all the officers' positions. But if you do this,
you must be very careful to honor the separate existence of your
corporation.
Partnerships require at least two owners, who agree to split the costs
and profits of owning the business. A partnership can be created on a
handshake, but I highly recommend anyone going into business with a
partner to sign a written partnership agreement. The most difficult moment
in a partnership is its break-up; pre-planning for this eventuality can
really simplify the event.
Partnerships and Corporations also follow their own unique income tax
rules, but a sole proprietorship has no separate income tax return.
Choosing the proper business form should be done in consultation with your
attorney and C.P.A., and I encourage you to contact them. |