Starting a Small Business in Texas: Legal Tips and Insights

Starting a small business is an exciting journey, but it’s essential to ensure that your legal bases are covered to set yourself up for success. As Texas attorneys, we often guide clients through the nuances of business formation, regulatory compliance, and risk management. Here are some fundamental aspects you should consider when planning to launch your small business in Texas.

1. Choosing the Right Business Entity

The type of business entity you choose has significant legal and tax implications. In Texas, the most common types are sole proprietorship, partnership, limited liability company (LLC), and corporation. Here’s a brief overview:

• Sole Proprietorship: Sometimes call a “dba” or “doing business as,” this is the simplest form, but it offers no personal liability protection.
• Partnership: This involves two or more people. You can choose from general partnerships, limited partnerships, and limited liability partnerships, each providing varying degrees of liability protection and involvement.
• Limited Liability Company (LLC): Combines the liability protection of a corporation with the tax efficiencies and operational flexibility of a partnership.  In Texas, LLCs are subject to a franchise tax for income over a threshold.
• Corporation: This entity provides the strongest protection from personal liability but is more complex and expensive to manage.

2. Pros and Cons of an S Corporation Designation

A common myth is that an S Corporation is an entity type. However, an S Corporation is not a type of business entity but rather a tax designation status that can be elected by LLCs or corporations. It allows profits, and some losses, to be passed directly to owners’ personal income without ever being subject to corporate tax rates. However, not all businesses qualify for S Corp status.

Pros:

• Tax Savings: Only the dividends paid to the shareholders are taxed at the lower tax rate, not the entire business income.
• Business Credibility: Being an S Corp may help a business appear more credible to investors and lenders.

Cons:

• Strict Qualifications: There are limits on the number of shareholders, and all shareholders must be U.S. citizens or residents.
• Stock Restrictions: S Corps can only have one class of stock, which may limit the company’s ability to raise capital.

3. The Importance of an Operating Agreement

For business entities, bylaws and/or an operating agreement is crucial. This internal document outlines the management structure, profit distribution, and various operational procedures, which helps prevent conflicts among members. Although not legally required in Texas, having one ensures that your business operates under your own rules, not just under the state’s default rules, which are often caveat emptor as to businesses.

4. Attorney Drafted Client Engagement Agreements

To protect your business and clarify the expectations between you and your clients, you should have a licensed attorney draft your client engagement agreements. These documents can detail the scope of work, payment terms, dispute resolution methods, confidentiality obligations, designation of governing law, and terms providing clear legal recourse for both parties.

Depending on the type of business being carried out, there may be statutory and legally required disclosures to your clients that are necessary to avoid penalties or unenforceability. For instance, there are laws that require specific fonts sizes and certain wording in disclaimers to certain contracts, or the business is subject to legal liability for failing to provide that information.

If the company practices across state lines, federal requirements need to be met as well. International companies must comply with additional governing laws, such as the Hague Convention and international treaties.

5. Recommended Insurances to Carry and/or Consider

Carrying the right insurance is crucial for risk management. The following should be reviewed and considered for your business:

• General Liability Insurance: Covers injuries or property damage caused by your business operations.
• Professional Liability Insurance/E&O Insurance: Also known as errors and omissions insurance, it covers damages that arise from professional mistakes or failure to perform.
• Property Insurance: Covers loss and damage to real or personal business property due to issues like fire and theft.
• Cyber Insurance/Cyber Liability Insurance: Covers financial losses that companies have as a result of ransomware attacks, data breaches, and cyber incidents.
• Workers Compensation: Covers for bodily injuries sustained by employees.
• Umbrella or Excess Policies: to protect directors from personal liability.
• Health Insurance: Decide if you are going to offer health insurance and investigate various coverages.

6. Other Recommendations

• Keep Good Records: Maintain accurate and detailed records of income, expenses, and investments.
• Understand Employment Laws: If you plan to hire employees, ensure you understand state and federal employment laws, including wage regulations and worker rights.
• Consult Professionals: Regularly consult with an accountant and a lawyer to keep your business compliant with current laws and best practices.
• Discuss your business model with professionals in the field so that you have an understanding of what the day-to-day business needs will be. Review options such as client management systems and software to assist you in growth and development.
• Considering marketing.  Be aware that some professions require marketing to be tailored to specific guidelines, so find a marketer that specializes in your niche area.

Starting a business involves navigating a complex web of decisions and legal implications. It’s always best to seek professional advice tailored to your specific circumstances to avoid common pitfalls and ensure compliance with applicable laws and regulations.  Schedule a Consultation today.  We look forward to assisting you!