Eat healthier. Walk more. Scroll the socials less. Learn to meditate. These are all worthy New Year’s resolutions.
But are they achievable? Sure.
Are they sustainable? Well, by the time you’re reading this, I can tell you that, in my case at least, the answer is an embarrassing “no.” (My healthy living resolutions are always undermined by my other New Year’s tradition, eating the last remnants from the Christmas snack baskets our clients send us before they expire).
Continually making, then abandoning, my New Year’s resolutions has caused me to re-evaluate my whole approach to goal setting. I’ve now determined that the best types of resolutions are those that:
- You only have to perform once, but could potentially last forever; and
- You can pay someone else to do for you. And if such a resolution could also protect you and your family from personal liability, simplify the probate process, and, in some cases, create tax benefits, well, now we’re talking some real positive life changes!
Fortunately, such a resolution exists, and you don’t even need to join a gym or purchase a Masterclass subscription to achieve or sustain it.
The attorneys at Brousseau Naftis Erick & Massingill are happy to advise you through the entity formation process and handle the formation process. Because, like all good New Year’s resolutions, this one can be outsourced. Please contact us if we can help.
You simply need to follow this advice: Form a single-purpose entity for each business venture and each income-producing property you own. It’s a simple goal, but, like a lot of goals, it’s one that people tend to put off for years, either thinking it’s too complicated, too expensive, or overkill for the type of business they operate.
But, in reality, forming and maintaining an entity is a relatively easy process, particularly if it’s a limited liability company (LLC).
The Purpose of Forming an Entity
From a legal perspective, the primary purpose of forming an entity to operate a business or own income-producing property is to shield you and your family from personal liability from claims relating to the business. For example, if you own a rental property in your individual capacity, you are personally at risk for claims arising out of that property, whether it’s a water leak that damages your tenant’s belongings, a slip and fall that occurs in the parking lot, or a repair bill you feel is unjustified.
When you allow your personal fortune to be exposed to liability, you’re at a severe disadvantage when it comes to determining ways to resolve these types of issues. This is because without the type of liability shield an entity provides, all of your assets are in jeopardy — not just the ones connected to your business or your business property.
That’s why it’s prudent to encapsulate and shield each one of your business assets into its own unique entity. In doing so, you’re not only shielding yourself and your family from personal liability, but you’re also shielding your other business ventures or properties from mishaps, contractual disputes, and other claims relating to a different business or property.
Operating your business in the form of an entity has other advantages. For instance, whether there’s a will or not, the probate process will slow down (and, in most cases, temporarily halt) a deceased’s heirs’ ability to use or operate business property or access income the deceased owned in their personal name.
In the case of rental property owned by an individual, this would mean that rental income will sit, sometimes for several months, until the Court recognizes an executor to take control of an individual estate’s assets. In the meantime, the deceased’s heirs may be forced to fund any maintenance or other expenses out of their own pockets to preserve the asset.
If, on the other hand, the rental property was instead owned by an entity with a living manager, president, or other executive given the authority to operate the entity, then, despite the death of any individual owner of the entity, the officer could direct the entity to continue to use its own income and its own accounts to preserve the asset until the ownership of the entity is distributed to the deceased owner’s heirs.
There are also several tax and accounting advantages to owning property or operating a business through an entity rather than on an individual basis. Although most closely held entities are generally treated, or elect to be treated, as a pass-through entity for tax purposes (essentially making their tax treatment no different than the treatment of individual sole proprietorships), forming an entity will allow you alternative tax treatment options that may better suit your specific needs and those of the business and its purpose.
Choosing the Right Entity for You
In Texas, there are three main options available for for-profit entity formation: the limited liability company (LLC), the corporation (Inc.), and the limited partnership (LP). (There are also professional entities such as professional corporations and professional associations that won’t be addressed in this post.)
All three options afford business owners a similar measure of liability protection, so in determining which is right for your business, the primary determining factors will be the areas of tax treatment and flexibility of ownership. Regarding tax treatment, we always recommend that you consult with a tax professional first to determine which entity structure and tax treatment election works best for you. As to the question of flexibility of ownership, a corporation will give you the most flexibility when it comes to raising capital from multiple investors and creating stock-option type compensation packages for your employees.
For everyone else, there’s a clear and easy answer: Form an LLC. It’s not a “one size fits all” option, but it’s definitely a “one size fits most” solution. It affords individuals with at least the same (and some would argue, better) liability protection than any other entity form, and depending on the number of owners, an LLC will have different tax treatment options to choose from.
But above all, forming and maintaining an LLC is much easier than maintaining a limited partnership or a corporation.
And when you’ve been putting off something for years, sometimes the easiest and simplest solution is the best way to move forward. This is especially true for entity formation, because each day you deliberate over finding the perfect form and tax treatment option for your business, you leave yourself exposed to personal liability.
