Category: Business Planning

As a Texas attorney, I often encounter clients who are unsure about the different types of business entities available to them. Choosing the right entity is crucial as it impacts liability protection and bookkeeping requirements. In this blog post, we will explore the differences between a corporation, a limited liability company (LLC), a series limited liability company (Series LLC), a partnership, and an assumed name, shedding light on the varying levels of liability protection and bookkeeping obligations associated with each.

1. Corporation: A corporation is a legal entity separate from its owners (shareholders) and offers the highest level of liability protection. In Texas, corporations are typically formed as C corporations. Generally, under a C Corporation, shareholders’ liability is generally limited to the amount they invest in the corporation. Corporations must comply with certain formalities, such as holding regular meetings and maintaining proper records, to maintain their liability protection. They must also keep accurate financial records, including income statements, balance sheets, and cash flow statements. Notably, some people believe that an “S corporation” is a specific type of corporation. This is a misnomer, as the term “S corporation” is not a entity type per se, but rather a tax designation, as even an LLC can be taxed as a S Corp.
2. Limited Liability Company (LLC): An LLC is a popular choice for small businesses due to its flexible management structure and liability protection. The owners of an LLC are known as members. In Texas, an LLC can be managed by its members or by managers appointed by the members. Members’ liability is generally limited to their investment in the LLC. LLCs in Texas are required to maintain proper records of their activities and keep financial records, although the level of formality is typically less stringent compared to corporations.
3. Series Limited Liability Company (Series LLC): Texas is one of the few states that recognize the Series LLC, which allows for the creation of separate series within a single LLC. Each series operates as a distinct entity, with its own assets, liabilities, and members. The liability protection for each series is generally isolated from the others, offering a unique level of asset segregation. However, it’s important to note that the Series LLC structure is relatively new and complex, requiring proper maintenance and compliance to preserve the desired liability protection. Bookkeeping requirements for a Series LLC are similar to those of a traditional LLC, but additional care must be taken to track the activities and financials of each individual series.
4. Partnership: A partnership is a business entity formed by two or more individuals who agree to share profits and losses. There are two primary types of partnerships: general partnerships and limited partnerships. In a general partnership, all partners have joint and several liability, meaning they are individually responsible for the partnership’s debts and obligations. In a limited partnership, there are general partners (who have unlimited liability) and limited partners (whose liability is generally limited to their investment). Partnerships in Texas are required to maintain proper records of their activities and keep financial records.
5. Assumed Name: An assumed name, also known as a “doing business as” (DBA) name, allows an individual or entity to operate a business under a name other than their legal name. It’s important to note that an assumed name does not create a separate legal entity or provide liability protection. Instead, it is simply a way to conduct business under a different name. Assumed names must be registered with the appropriate county clerk’s office, and accurate records of the business’s transactions and financials should be maintained.

Conclusion: Choosing the right business entity is crucial for both liability protection and maintaining proper bookkeeping records. Corporations offer the highest level of liability protection but come with more formalities. LLCs provide flexibility and reasonable liability protection, while Series LLCs allow for segregation of assets and liabilities within different series. Partnerships have different levels of liability based on their type, and assumed names are a way to operate a business under a different name but don’t provide liability.  If you are planning on starting a business entity, The Woodlands Law Firm can help you.  Please set up a consultation today.

If your business is purchasing the assets of another business, consulting with an experienced attorney is absolutely recommended.  Crafting a comprehensive and legally binding asset purchase agreement (“APA”) is crucial for ensuring a smooth transfer of assets between parties. An APA outlines the terms and conditions of the purchase and sale of specific assets, including intellectual property, equipment, and goodwill. Generally, the following steps are required to complete an APA:

1. Initial Consultation:

Begin by meeting with your attorney and provide information regarding the buyer or seller, and explain the objectives and expectations. Give relevant information about the assets, the parties involved, and any specific provisions that should be addressed in the agreement. Identify whether any specialized industry regulations or legal considerations apply.  While attorneys are experts in the legal field, it is impossible for an attorney to know every nuance of every type of business field. It is a good practice to provide specific information and/or requirements that you are aware of, if you work in a specialized industry.  This will also reduce your attorney’s research time.

2. Identify Parties and Assets:

Clearly identify the buyer and seller by their legal names and addresses. Specify the assets to be transferred, providing detailed descriptions and any pertinent documentation, such as intellectual property registrations, equipment lists, and financial statements. Be comprehensive to avoid ambiguity.

3. Purchase Price and Payment Terms:

Determine the purchase price for the assets and outline the payment terms. This may include specifying the amount to be paid, the payment schedule, and any adjustment mechanisms based on factors like inventory valuation or working capital. Address the form of payment, such as cash, installment payments, or assumption of liabilities.

4. Representations and Warranties:

Include a section where both parties make representations and warranties regarding their ownership of the assets, their legal capacity to enter into the agreement, and the accuracy of the provided information. Address any limitations or disclosures to manage risk and potential liability.

5. Conditions Precedent:

Specify any conditions that must be met before the closing of the transaction. This may include obtaining necessary regulatory approvals, consents from third parties, or the absence of any material adverse changes in the business. Outline the consequences if any conditions are not satisfied.  Usually, failure to complete the precedent can undo the deal completely.

6. Indemnification and Limitation of Liability:

Detail the indemnification provisions, specifying which party will indemnify the other for any losses, liabilities, or claims arising from the transaction. Consider the scope, duration, and monetary limits of the indemnification, and outline any exceptions or exclusions. Your attorney will consult Texas laws regarding the enforceability of indemnification clauses. This area is especially sticky, as Texas requires specific wording if the parties want to require that the other party defend them (pay for their attorney’s fees) at the beginning of the suit, instead of having to win first and then be reimbursed, and Texas even requires specific fonts and/or attention to be drawn to these sections.

7.  Closing and Post-Closing Obligations: 

Define the closing date and the obligations of both parties before and after the closing. Address any post-closing matters, such as transitional assistance, employee retention, the transfer of licenses or permits, and the transfer of customer contracts or relationships.

8. Governing Law and Dispute Resolution:

Specify if the agreement will be governed by Texas law and designate a venue for resolving disputes, such as state or federal courts or alternative dispute resolution mechanisms like mediation or arbitration. Include any requirements for notice or negotiation before initiating formal dispute resolution.  If you have questions about these types of procedures, make sure to ask questions in order to understand them.  Oftentimes, when a deal goes sour and there is an arbitration clause, individuals and small businesses are surprised that they are forced into arbitration, which has a higher up-front cost, and limited opportunity to appeal.

9. Confidentiality and Non-Competition:

Include provisions regarding confidentiality to protect any sensitive information shared during the transaction. If applicable, address non-competition agreements that may restrict the seller from competing with the buyer in a specific geographic area or industry for a defined period.

10. Execution and Closing:

Ensure that the agreement includes signature blocks for all parties involved, indicating their full legal names, titles, and the date of execution. Consider whether any additional documents, such as bills of sale or assignment agreements, should be executed simultaneously with the APA.

Conclusion:

Drafting an asset purchase agreement requires careful attention to detail, a thorough understanding of the transaction itself, communication with the parties involved, and a comprehensive understanding of Texas law. Most forms copied online do not contain the specific Texas requirements needed for an enforceable agreement. Remember that the best laid plans include dispute resolution procedures. The Woodlands Law Firm can assist you in the drafting of such documents.  Book a consultation today.