Business Entities: Choices as Defined within the State of Texas
Electing a single entity may be the most important decision for an entrepreneur in relation to the creation of their business. Today there are several entity options available for entrepreneurs. If he or she has had no previous knowledge of business entities then they may not fully recognize the crucial role the selection of an entity plays in the business’ taxation procedure. The tax liability one is responsible for depends greatly upon the election of a particular entity whether it is a Limited Liability Partnership, Limited Partnership, Limited Liability Company, S corporation, C Corporation, or a ...view middle of the document...
The limitation of a partner’s liability for debts or obligations includes acts of or arising from errors, omissions, negligence, incompetence, or malfeasance committed by others in the partnership. Texas regulation also goes on to cover a partner’s liability of acts another partner or a representative of the partnership not working under the supervision or direction of the partner at the time the acts resulting in liability occurred. On the other hand, the document provided by the Secretary of State goes on to specifically state that this limitation does not protect the partner who was directly involved or who had notice or knowledge of the activity in which the errors, omissions, negligence, incompetence or malfeasance were committed. The provisions do not protect the partnership’s assets for partnership debts and obligation as it has shielded the liability of a partner not directly involved in an unlawful activity. However, the regulations explicitly require that the partnership attain insurance or segregate funds to cover judgments related to errors, omissions, negligence, or malfeasance.
Example: Suppose a $500,000 judgment is placed on a Company A because someone mistakenly reported an inaccurate figure for tax purposes. The IRS found that the fault was not committed with intent by any particular partner of the company. Because of this finding the insurance will pay the full amount.
None of the partners in the company will be responsible for paying any portion of the $500,000 judgment.
Another type of business entity is the limited partnership. A limited partnership is very similar to that of a general partnership. A limited partnership has two classes of partners. It must have at least one general and limited partner. The general partner in a Limited Partnership generally possesses the same rights and responsibilities as if he was in a general partnership. These rights and responsibilities include: the right to participate in the management of the partnership and unlimited liability for all partnership debts. In a limited partnership the Limited Partners accept the responsibility of limited liability which means that they are only liable for debts incurred by the company to the extent of their own documented capital investment plus any additional amount he or she has committed to contribute.
Example: John and Eric both are limited partners in Company B. John has invested twenty-five percent into Company B while Eric has invested the other seventy-five percent. If Company B incurs a $100,000 judgment then both John and Eric are responsible to pay this debt because they have accepted the responsibility of being a limited partner. The total amount of John’s liability amounts to $25,000 while Eric’s liability equals $75,000 because the judgment is limited to their own individual invested capital of twenty-five and seventy-five percent, respectively.
This distinction is made...