Choosing the entity in which your business will operate is confusing. It is one of the most important decisions you will make, and it can be particularly challenging when family members are involved. It is normal to want to be fair to the heirs you invite into the business, allowing them a voice in the business to prevent future conflicts.
You might choose to remain the sole proprietor, hire family members, and decide through your will how the business will be passed on. Alternatively, you can set up a partnership, limited liability company, or corporation. To learn which entity is best for your situation, consult a San Antonio family business formation lawyer at Begum Peláez-Prada PLLC.
Many young entrepreneurs in San Antonio begin their journey as sole proprietorship because they are the only owner and regulatory reporting is minimal. Even the taxes on profits are reported on the owner’s personal tax form, Schedule C of Form 1040. If the owner marries and brings a spouse and children into the business, they can be treated as employees. This can be beneficial since wages for children younger than 18 are not subject to Social Security and Medicare withholding, although they are subject to income tax withholding.
The business is usually regarded as a partnership, even if no formal agreement is adopted when both spouses are running it, although they can elect to be considered as a qualified joint venture. If no agreement is formalized and the original spouse/sole proprietor dies, the business becomes part of the estate, so it is important to address succession in your will or change the entity designation.
Partners share legal, financial, and management of a business while operating similarly to a sole proprietorship, in which personal finances are co-mingled with business profits and losses.
To avoid family conflicts about responsibilities, growing the company, succession, and how to handle buyouts, the San Antonio family business formation attorneys at Begum Peláez-Prada PLLC recommend that a partnership agreement be adopted.
Corporations are automatically designated as C-corporations at inception unless the filer elects to become an S-corporation. This allows owners to pass business profits and losses to family shareholders, who report them on their personal income tax returns. C-corps are figuratively living entities that act as a shield for owners who are generally not responsible for the business’s debts. The company files its own tax return on IRS Form 1120.
Corporate bylaws dictate matters of succession, owners’ duties, and what happens when a substantial stockholder divorces or dies. They can also limit shares to outsiders and mandate that only family members can serve on the Board of Directors.
A family LLC shields owners—or members—from liability for company debts like a corporation, but without overwhelming compliance regulations. In family LLCs, members must be blood relatives or related by marriage. The company must adopt an operating agreement that specifies rights, decision-making procedures, asset transfers, and how death, retirement, and divorce are treated.
Members are personally protected from company liability, while the pass-through tax structure avoids double taxation.
Begum Peláez-Prada PLLC’s managing attorney, Sasha Begum, brings comprehensive business experience spanning almost 20 years to find solutions to your legal issues. Whether your new business will remain an intimate sole proprietorship or, as time passes, is reinvented into another entity, Sasha and our team could help guide you.
When family members are involved, avoiding internal conflict and fostering communication are the keys to operating successfully. Contact a San Antonio family business formation lawyer today to get started.
