Choice of Entity Decision Tree

by Jackson Walker
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I. GENERAL.

A. Introduction. In selecting a form of business entity in which to engage in business in the United States, the organizer or initial owners should consider the following five business entity forms:

• Corporation

• General Partnership

• Limited Partnership

• Limited Liability Partnership (“LLP”)

• Limited Liability Company (“LLC”)

The form of business entity most advantageous in a particular situation depends on the objectives of the business for which the entity is being organized. In most situations, the choice of entity focus will be on how the entity and its owners will be taxed and the extent to which the entity will shield the owners of the business from liabilities arising out of its activities. Appendix A at the back of this paper is an Entity Comparison Chart that compares key characteristics of the available Texas business entities, and Appendix B compares the tax attributes of the respective entities.

Until the 1990s, the spectrum of business entity forms available in Texas was not as broad as it is today. In 1991, the Texas Legislature passed the world’s first LLP statute permitting a general partnership to significantly limit the individual liability of its partners for certain acts of other partners by the partnership making a specified filing with the Secretary of State of Texas (the “Secretary of State”) and complying with certain other statutory requirements.1 The Texas LLP statute was later amended to extend its LLP shield to contracts.

Also in 1991, Texas became the fourth state to adopt a statute providing for the creation of an LLC, which limits the personal liability of LLC interest owners for LLC obligations at least as much as the liability of corporate shareholders is limited for corporate obligations. Today, all fifty states and the District of Columbia have adopted LLP and LLC statutes.2

The Texas Legislature enacted the Texas Business Organizations Code (the “TBOC”) to codify the Texas statutes relating to business entities referenced above, together with the Texas statutes governing the formation and operation of other for profit and non-profit private sector entities. The TBOC is applicable to entities formed or converting under Texas law after January 1, 2006. Entities in existence on January 1, 2006 could continue to be governed by the Texas source statutes until January 1, 2010, after which time they must conform to the TBOC,3 although they could elect to be governed by the TBOC prior to that time.4

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