Texas recognizes a wide variety of business organizations. Among them are the following:
Corporations
The corporate form is popular because it generally protects the owners from liability beyond the amount of their investment. The money to start or expand the company comes from people who buy stock that they can trade without the corporation selling any of its assets.
A corporation is viewed by the law for many purposes as if it were a person. The need to comply with corporate formalities can make this form of business association expensive to operate, and its status as a taxable entity can generate "double taxation" of both the corporation on its profits and the shareholders on the distributions the corporation makes to them.
Creating a corporation requires filing a Certificate of Formation with the Secretary of State. This instrument establishes the basic structure of the company, which is then run by officers selected by a Board of Directors that is elected by the shareholders. By-laws elaborate on the duties and rights of the officers, directors, and shareholders. Stockholders who are not involved in the business, so called passive investors, are often protected by securities laws.
Most disputes among the owners in corporations revolve around whether the management of the company-the officers and directors-have complied with their duties as defined in the governing documents of the company or as established by the law for corporations. Chief among those duties is a fiduciary duty to the corporation. Claims arise when management have secretly diverted corporate assets to themselves, paid themselves unreasonable compensation, or taken advantage, for themselves, of business opportunities that belonged to the company.
Close Corporation
This is a corporation with relatively few shareholders that has elected to forego some corporate formalities. It files a notice with the Secretary of State that its shareholders have agreed to operate the company under a shareholder agreement. When disputes arise between the shareholders in a close corporation, the issues often revolve around interpretation of the shareholder's agreement, or as in other business entities, breaches of fiduciary duties by those running the business.
Subchapter S Corporation
This is a corporation that is created and operated exactly as a regular corporation. For tax purposes, however, its shareholders elect to be taxed as a partnership and thereby avoid the double taxation that occurs with a traditional corporation. Subchapter S status is available in only limited circumstances described in the tax code and regulations. The rights and obligations of the shareholders are not impacted by the Subchapter S election.
General Partnership
A general partnership is popular because it requires less formality than a corporation and avoids the possibility of double taxation that can occur with corporations.
Among the disadvantages of a general partnership is that each of the partners is liable for debts of the partnership. Thus, if things go badly, a partner can lose more than merely the amount of his or her investment in the partnership.
Creating a general partnership requires no approval from the government, only that the partners agree to share profits and losses. It is best if the partners set out the terms of their partnership in a written partnership agreement, but a written agreement is not strictly necessary. The partnership may have to file an assumed name certificate and-depending on the business in which it engages--obtain business licenses in its name. It must also file an informational tax return, but does not pay federal income tax. Rather, each partner includes that partner's share of the partnership's income or loss on the partner's individual tax return.
Disputes among partners can take many forms. Frequently, the partners have failed to execute a partnership agreement or have a partnership agreement that does not deal with changes that can occur in the business. Accordingly, they may lack a clear agreement about how to deal with a situation. Each partner owes a fiduciary duty to the other partners. Accordingly, claims against them arise when they have secretly diverted corporate assets to themselves, paid themselves unreasonable compensation, or taken advantage, for themselves, of business opportunities that belonged to the company.
Limited Partnership
This is an entity with two kinds of partners. General partners run the business and are fully at risk for debts of the business-just like a partner in a general partnership. Limited partners have no say in the normal operation of the business and are at risk only to the extent of their investment.
Creating a limited partnership requires filing a Limited Partnership Agreement or filing a Certificate of Formation of Limited Partnership with the Secretary of State. The rights and duties of the partners are established by a Limited Partnership Agreement.
Because of the passive nature of a limited partner's investment, litigation involving limited partnerships often overlap with those arising in securities litigation. In addition, litigation issues revolve around interpretation of the Limited Partnership Agreement and whether the general partner has complied with fiduciary duties.
Limited Liability Partnership
A partnership may register with the Secretary of State as a Limited Liability Partnership so long as it complies with certain financial responsibility requirements. The partners in a limited liability partnership are protected from certain kinds of personal liability to creditors of the partnership. The rights and duties between the partners are not impacted.
Limited Liability Company
A relatively new form of entity, a Limited Liability Company is neither a corporation nor a partnership. It is an entity created by filing a Certificate of Limited Liability Company with the Secretary of State. The company has "members" rather than shareholders, issues "membership interests" rather than stock certificates, operates under a "Company Agreement" rather than Articles and By-laws, and is governed by "managers" rather than directors.
The principle advantages of a Limited Liability Company are 1) limited liability to the members (similar to shareholders in a corporation), 2) less formality than a corporation, and 3) the flexibility to elect taxation as a sole proprietorship, partnership, or corporation. Disadvantages arise from the newness of the form of this entity. The law on most aspects of corporations and partnerships is well-developed. Much less law exists regarding Limited Liability companies.
The disputes that arise relate to interpretation of the Company Agreement, securities violations when the membership interests are held by passive investors, and the same types of fiduciary breaches as arise with other entities.
Joint Venture
A joint venture is a partnership formed for a limited purpose. It may or may not be constituted as a specific entity. Litigation often arises over whether a joint venture even existed. Litigation involving joint ventures can entail claims of both contractual and fiduciary duties.
