Incorporation and Formation

Business Organizations

A number of alternatives are available to organize a business venture. The typical forms that a business will take are sole proprietorship, partnership, corporation, or limited liability company.

1.) Sole Proprietorship
The sole proprietorship is the most basic form of business venture. A sole proprietorship is simply the conduct of a business by one owner. Typically, the sole proprietorship form of ownership is utilized in only the smallest of businesses.

The primary advantage of a sole proprietorship is its ease of formation and operation, particularly in comparison to the corporate form. For the sole proprietorship, there is no filing requirement with respect to the formation, commencement or conduct of the business. In addition, unlike a corporation, the sole proprietorship does not require the business owner to follow any operational formalities (i.e., shareholder meetings, Director’s meetings, bylaws, etc.).However, there are some significant disadvantages to forming a sole proprietorship, most notably unlimited personal liability of the proprietor for debts incurred in the business.

2.) Partnership
A partnership results when two or more persons join together for the purpose of conducting a business or investment for profit. A partnership can consist of a formal arrangement, evidenced by a detailed written partnership agreement, or can be an informal joint venture not evidenced by a writing. Partnerships may take the form of general or limited partnerships. For federal income tax purposes, partnership income is generally not subject to tax at the entity level, but instead passes through to the partners, who must report the same personally and pay the tax. This contrasts with the regular C corporation, in which the income is that of the organization and not its owners. In addition to this broad tax distinction between a partnership and a corporation, there are also a number of non-tax differences, discussed in detail below.

3.) Corporation
The corporation is probably the most widely recognized form of business entity. A corporation is a legal entity, separate and distinct from its owners, with the capacity to own property, to conduct business, and to sue and be sued in court. The ability to organize a business as a corporation is authorized by statute, and a corporation exists under the laws of the state in which it is formed. There are a number of very significant advantages to organizing a business in the corporate form, which are discussed in more detail throughout this chapter.

4.) Limited Liability Company

Starting a new business is an exciting venture: there’s the promise of opportunity, the benefits of being self-employed in many cases, and other advantages. For those who choose to start an LLC, there’s the promise of no corporate taxes, the benefit of having no residency requirement, and enhanced credibility with others[1]. On the flip side, LLCs present a variety of risks to which the new business owner may not be privy.

According to Donald J. Scotto and Sharon Matthews, LLCs are appealing because they “are hybrid business entities which possess a unique combination of favorable legal, business, and tax attributes that do not exist in any other single entity”[2]. There is, however, a tradeoff for the limited liability. One case in which this has presented problems for an LLC owner is a 2010 Court of Appeals Case in Dallas, Texas.

A self-employed individual, referred to in the appeal as “Father,” owns his own carpentry business. After divorcing his wife, he is required to make regular payments for child support. The court institutes a lien on the payments, which allowed the Office of the Attorney General to garnish, or collect from, Father’s one bank account (this account was used for Father’s personal and business matters). The debate centered around whether Father, as the owner of his LLC, was susceptible to garnishment of his account, or whether the LLC structure protected him. In the end, the agreement originally formulated between the OAG and Father determined that Father’s account was vulnerable to the child support lien[3]. The fact that Father owns his own business does not protect him, in this case, from funds being garnished from his account to pay for child support.

While this seems like a unique case, it serves to underscore the abundance of risks in starting an LLC. When navigating the waters of business construction, it’s best to meet with someone who has helped others do so. Scheduling an appointment with a business attorney ensures your plans and ideas are securely protected and given the best opportunity for success.

If you’re planning to start a business or, specifically, an LLC, be sure to meet with an attorney first, to discuss the advantages and potential pitfalls inherent in your choice of structure. 

Non-tax Factors Incident to Selecting Business Form

Limitation of Liability. Perhaps the most significant of the non-tax factors bearing on the selection of the form of organization of the business is whether or not, or to what extent, the owners of the business will be shielded from unlimited personal liability for the obligations undertaken by the business.

A sole proprietor enjoys no limitation of liability. If the business incurs a contractual obligation, it is the proprietor who is responsible for the performance of the contract. If an injury results to a customer by reason of the negligence of the proprietor, or one of the proprietor’s employees, in the conduct of his or her business, the proprietor’s pocketbook will be the source of damages recovered by the victim in the absence of adequate liability insurance. The owner’s personal assets, such as residence, wages, vehicles, investments, and other property, are made available to satisfy the debts of the business. Liability arising under contract claims or in any other context also falls squarely on the shoulders of the sole proprietor, without limitation. The law simply does not recognize a distinction between the owner of the business and the business, notwithstanding that the business may be conducted under an assumed name. Similarly, if the owner of the sole proprietorship is unable to pay his or her personal debts, the assets of the business may be used to satisfy those obligations.

By definition, a partnership consists of at least two owners. However, as with a sole proprietor, the partners in a general partnership are personally liable for the debts and liabilities of the partnership. By contrast, in a limited partnership, it is only the general partners, and not the limited partners, who are personally liable for the debts and liabilities incurred in the partnership business. Obviously, this is a significant disadvantage for all of the partners of a general partnership and for the general partners in a limited partnership. The fact of the matter is that if the business is organized as a partnership, whether general or limited, there will be at least one partner who will be personally liable for the debts and liabilities of the partnership.

The primary advantage of organizing as a corporation is that generally its owners (i.e., the shareholders) are not personally liable for the debts of the corporation. The risk undertaken by a shareholder, by reason of his or her ownership of stock, is that the shareholder’s investment in the corporation might become worthless, and that therefore the amount invested in the enterprise will be lost. However, the shareholder’s other personal assets, such as a residence, investments, automobiles and cash, are not at risk. Conversely, since the corporation is a separate and distinct entity, it does not become liable for the personal debts of its shareholders.

The limited liability company is a business form of relatively recent vintage, organized under specific state law enacted for this purpose. Under the typical statute, the members of a limited liability company are treated identically to the shareholders of a corporation, in that they are not personally liable for the debts and liabilities of the business.


Incorporation defined – It is the process of legally forming a corporate entity aside and apart from the proprietor.

Is a corporation best for your business? Corporations have shareholders who each own stock. The stock an individual shareholder has indicates how much of the company a shareholder owns.

Starting a new corporation requires you to document certain actions at certain times. Attorneys at Marquardt Law Firm, P.C. will counsel and guide entrepreneurs and business owners in San Antonio and prepare the right documentation at the right time to be compliant with the Texas Business Organization Code and compliant with the corporation’s own bylaws.

  • Articles of Incorporation 
  • Directors’ Resolution for Amendment of Articles of Incorporation 
  • Notice to Shareholders of Special Meeting 
  • Bylaws for General Business Corporation
  • Minutes of Board of Directors’ Meeting 
  • Indemnification Agreement
  • Notice to Shareholders of Regular Meeting of Board of Directors
  • Notice to Shareholders of Special Meeting of Board of Directors
  • Notice of Shareholder Meeting
  • Proxy for Shareholder Meeting
  • Minutes of Annual Shareholder Meeting

Limited Liability Company

One of the best benefits of using a limited liability company is that you can choose different levels of liability protection and you can choose your tax status.

  • Certificate of Formation of Limited Liability Company 
  • Single Member Operating Agreement
  • Operating Agreement with Optional Tax Basis Adjustment
  • Manager Managed Operating Agreement
  • Member Managed Operating Agreement
  • Member Admission Agreement
  • Assignment of Limited Liability Company Interest Agreement
  • Minutes of Annual Members’ Meeting

Limited Partnership

A limited partnership is one of the best forms of legal entities because its complexity insulates owners from the company’s actions. A limited partnership is made up of a “general partner” and one or more “limited partners.” The “limited partners” are called limited because these individuals have limited involvement with day to day decisions of the company and, therefore, limit their liability. The “general partner,” however, has unlimited liability because the general partner makes all the day to day decisions.

Limited partnerships are good for companies that engage in risky activities. Risky activities might include activities that could lead to personal injury or death of its employees or customers.

Company Agreements

A company agreement, operating agreement, and bylaws all refer to the rules and procedures for running a Corporation, LLC, or limited partnership.

Operating Agreements

A company agreement, operating agreement, and bylaws all refer to the rules and procedures for running a Corporation, LLC, or limited partnership.


A company agreement, operating agreement, and bylaws all refer to the rules and procedures for running a Corporation, LLC, or limited partnership.

Joint Ventures and Strategic Alliances

  • Joint venture management services agreement 
  • Joint venture memorandum of understanding 
  • Joint venture partnership agreement 
  • Letter of intent to form a joint venture

Giving back to your community is great, and forming your nonprofit corporation, to ensure that your philanthropy doesn’t bite you back takes a great legal team. You will need documentation to prove to the community, the State of Texas, and the federal government that you are organized, legal, and set up correctly.

  • Certificate of Formation of a Nonprofit Corporation
  • Bylaws of a Nonprofit Corporation
  • Minutes of Board of Directors
  • Statement of Values and Code of Ethics
  • Statement of Conflict of Interest Policy

[1] “What is an LLC (Limited Liability Company)?” by

[2] “Limited Liability Company: The Growing Entity of Choice.” By Donald J. Scotto and Sharon Matthews, Coopers and Lybrand LLP and C&L.

[3] Court of Appeals Case Number 05-08-01293-CV, In the Interest of C.A.T., a child. Court of Appeals of Texas, Fifth District, Dallas. June 22, 2010. Pages 202-212.