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After the good response about one of the most widely used business entity, I decided to write about the next most popular—corporations. Prior to 1986, a corporation was the preferred business entity for business owners. Two types of corporations exist, S and C corporations. Both are set up the same way in Texas with the Texas Secretary of State’s office; however, the S Corporation requires a filing with the Internal Revenue Service.

First, a C corporation is what most people think of when they think of a corporation. All the income and losses do not flow through to the shareholders; instead the corporation pays the income taxes. The C corporation is an income taxpayer and is responsible for income tax on all of its income. A C corporation is liable for the Texas Margin Tax and there are no self-employment taxes on any dividends paid by the C corporation to the shareholders.

Most companies, however, do not operate as a C corporation because of the double taxation nature of the entity. As stated, the corporation is taxed on its income and then the shareholders are taxed on their dividends or liquidated distributions. Nonetheless, the advantages of the C corporation (much like a S corporation) are that the shareholders are not liable for the debts of the corporation absent a personal guarantee. Clearly, so long as the shareholders observe the corporate formalities, the shareholders will have limited liability.

As I gaze into my rearview mirror and see pro football season quickly receding into the distance, I have a few observations I’d like to share.  My favorite team did not make it to the Super Bowl.  It did make the playoffs, was projected to go far and was summarily beaten by the eventual champion.

What I found interesting was the hue and cry that was associated with falling short of winning the championship.  Several commentators so bemoaned the loss that they claimed the entire season, everyone’s time and effort, was without merit.  Other football wonks said that it would have been better for the team to have had a losing season than to exit the playoffs so ignominiously.

Really?  Have we lost all perspective?  When we measure our successes singularly by their outcomes we put far too much focus upon the results.  We ignore what it took to get us there.  This is truly wasteful because the greatest richness is to be mined along the way toward our goals.

Here is a perfect example.  In 1960, President Kennedy said that the United States would land a man on the moon before the end of the decade.  This was a fantastic dream.  The technology to make this happen didn’t even exist.  It was barely a gleam in our scientists and engineers eyes.

I acknowledge that JFK’s goal was vitally important.  It kept our eyes on the prize.  It was our North Star that kept us working the problem, solving the myriad of day-to-day challenges that led, step-by-step, to the our landing on the lunar surface July 20, 1969.

However, the most significant results of our efforts had impact far beyond that one small step.  Certainly, it was an ego boost for our country and gave us bragging rights to an accomplishment that had been dreamed of since man first looked up into the night sky.  But, what definitive and measurable outcomes did the accomplishment of that goal alone have?  What do you use today that came out of the actual lunar landing experience?

If you look beyond the destination and examine the journey, we see that in order for us reach the goal, everything had to get exponentially smaller, faster and more efficient.  New technology was invented to solve these problems.  Soon thereafter, entrepreneurs lined up to see how they could make use of it all.  That cell phone you could not do without, your blackberry, the arrays of computers and other high-tech devices would not have been created as soon as they were had we not been shooting for the moon.

Over the last several months listening and reading viewer’s questions, the overwhelming response has been about choice of business entity.  As any small business owner knows, starting a business is a daunting task and many simply focus on opening the doors and paying the bills.  Many forget about strategic planning and liability issues.  Over the next few weeks, I will highlight each of the major business entities available in Texas.  With each entity, I intend on analyzing the benefits and problems associated with each.  This week, I start with a sole proprietorship.

 Sole Proprietorships

 Generally, a sole proprietor is simply a business operated by a single individual and is not connected with any typical business entity.  Many businesses operated out of the home or peddled door to door are sole proprietorships.

 A sole proprietor generally operates under an assumed name (may or may not be filed with the County) and opens a bank account with the operator’s social security account.  The business owner is personally liable for all debts and obligations of the business.  No protection is afforded the business owner for business liabilities other than offered through applicable insurance policies.  A sole proprietorship is the simplest of the business entities and the one with the most risks to one’s personal assets.  It would be recommended for a person with limited assets and very little projected liability.

 The sole proprietorship is not required to file a separate income tax form for the business as the business is operated under the social security number of the owner.  Moreover, the money made will be subject to the self-employment tax (15%).  Income in a sole proprietorship is not subject to the Texas margin tax.