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5 Things to Know When Buying or Selling a Business in Texas

Business Law Attorneys Houston, TX

Image courtesy of Dennis Skley

If you’re an entrepreneur, there are a few things that you should consider before buying or selling your Houston, Texas, business. Regardless of which side of the table you are on, taking the time to ensure that all aspects of the sale are appropriately handled will make the transition a seamless one. Here are five tips to make the process work for you:

  1. Research

There are many benefits to buying an existing business — brand reputation, an existing customer base and stocked inventory — but buyers should fully research any company they are considering purchasing to understand why it’s being sold and what financial shape it’s in. A retiring owner is not an issue, but a failing or struggling business may be. The current owner will be able to provide some information, but you can also contact the county clerk’s office to learn more about previous owners. The Texas secretary of state’s office can provide information about the business’s registration. If the business holds licenses or permits, the regulating organizations can help. Buyers will need to obtain the financial information for the past two years, including assets and liabilities to make an informed decision.

Sellers, on the other hand, have their own research to do. They’ll need to research similar businesses in the Houston area to set a realistic asking price. Sales prices are sometimes based on the value of the business’s assets with brand recognition factored in. Owners can also compare their business with others in the industry that have recently sold to get a sense of the best features to market. Sellers should also consult with a CPA or tax professional before negotiating the sale to lessen the significant tax impact the sale can have. The amount of tax due will be based on how the business is legally organized and whether it’s the assets or the entity that are being sold.

  1. Know What’s Included

Buyers and sellers will need to come to an agreement about exactly what is included in the sale. Key features can include inventory, fixtures and equipment. You also must address intellectual property such as trademarks, patents, customer and vendor databases, the business name, logo and website. This agreement also defines the payment arrangements, including the down payment amount and schedule for installment payments. By clearly documenting the sale, no one will experience any unpleasant surprises.

  1. Secure Licenses and Permits

Both the buyer and the seller need to understand any licenses or permits the business requires. The county clerk must be notified about the ownership change, and the Texas secretary of state needs to be notified if the business is organized as a corporation, limited liability company or partnership. The Texas comptroller of public accounts will need to be notified for sales tax information. Making sure these legal requirements are taken care of is crucial for a smooth sale.

  1. Sign the Sales Agreement

All aspects of the deal should be clearly defined in a sales agreement and signed by both the buyer and seller. This should itemize all assets included in the purchase, contracts and payment schedule. It’s a good idea to ask an attorney that specializes in real estate law to review the agreement. At closing, the business will transfer to the buyer, and both parties will need to jointly file IRS form 8594 for the year of the sale.

  1. Secure the No Tax Due Statement

Finally, buyers need to obtain a Certificate of No Tax Due from the state comptroller. If this statement is not obtained prior to purchase and taxes are owed, the new owner will be responsible for all taxes, interest and penalties.

Buying or selling a business doesn’t have to be a difficult process, but both parties must do their research, agree on the sale terms and submit the appropriate paperwork. Careful planning will lead to a good deal for everyone.

Susan J. Taylor is a Houston-based commercial litigation and business law attorney. She began practicing law in Texas in 1985 with a primary concentration in business, real estate, and commercial litigation. Ms. Taylor is Board Certified in Civil Trial Law by the Texas Board of Legal Specialization. For expert help with commercial litigation, business or real estate law issues, please contact The Taylor Law Group for a consultation.

Should You Form an LLC or a Corporation?

A Limited Liability Company (LLC) is similar to a corporation to the extent that they both allow you to start a business that can protect you from personal liability. An LLC is very popular today and easier is some respects than forming a corporation. Below is listed a brief overview of advantages and disadvantages of having an LLC for your business.

Advantages of an LLC

  • Fewer corporate formalities. An LLC requires less business formality than a corporation. Corporations must hold regular meetings of the board of directors and shareholders, keep written corporate minutes. If you fail to document or follow the proper business procedures, a creditor may be able to pierce the corporate veil and hold the shareholders personally liable for corporate actions. The members and/or managers of on LLC does not need to hold regular meetings, which can reduce the complications and the paperwork.
  • Special profit allocations. An LLC can make special allocations of profits and losses among members that can be different from their percentage ownership. An S corporation cannot make special allocations of profits and losses. S corporations must have one class of ownership in which profits and losses are allocated according to the percentage of ownership.
  • Tax flexibility. By default, an LLC I treated as a “pass-though” entity income tax purposes, similar to a sole proprietorship or partnership. This means that an LLC may avoid certain double taxation issues. However, an LLC can also elect to be treated like a corporation for tax purposes, whether it is a C corporation or S corporation.
  • No ownership restrictions. An LLC may have an unlimited number of members, whereas an S corporation is limited to one hundred. The owners of an LLC can be foreign persons, other corporations, LLCs, or any kind of trust, but the owners of a corporation should not be.
  • Ability to use cash method accounting. Most LLCs can use the cash method of accounting. This means that income is not earned until it is received. Most C corporations often must use the accrual method of accounting which means that income can be earned before it is received.
  • Ability to deduct losses. Member who are active participants in the LLCs business can deduct its operating losses against the member’s regular income to the extent it is permitted by law. Shareholders of a S corporation are able to deduct operating losses, but shareholders of a C corporation are not allowed to deduct operating losses against their income.

Disadvantages of an LLC

  • Profits are subject to Social Security and Medicare Taxes. For an LLC that is disregarded for tax purposes, there can be the disadvantage that all earned income is subject to the self-employment tax, unlike in an S corporation win which some money can be taken out as salary and some as dividends. Hoer, the LLC can opt to be taxed as a corporation and then opt to be taxed as an S corporation.
  • Owners must immediately recognize profits. Unless an LLC elects to be taxed as a corporation, profits are automatically included in a member’s income. A C corporation does not have to immediately distribute profits to its shareholder as a dividend. This mean that shareholders in a C corporation are not always taxed on the corporation’s profits.
  • Personal liability for payroll taxes. The owners of an LLC that is taxed as a disregarded entity (like a sole proprietorship or partnership) can be personally liable for payroll taxes that are not paid by the company. Shareholders of a corporation would not be liable for these taxes unless they were officers or directors.
  • Fewer fringe benefits. Employees of an LLC who receive fringe benefits, such as group insurance, medical reimbursement plans, medical insurance and parking, must treat these benefits as taxable income. However, C corporation employees who receive fringe benefits do not have to report these benefits a taxable income.

All tax issues for an LLC or a corporation should be reviewed by a CPA. This is not a comprehensive list of advantages or disadvantages of and LLC vs. a Corporation, but only gives a brief overview of some of the basic differences. You should talk to your attorney and CPA about what makes the most sense for your business.

Susan J. Taylor is a Houston-based commercial litigation and business law attorney. She began practicing law in Texas in 1985 with a primary concentration in business, real estate, and commercial litigation and bankruptcy. Ms. Taylor is Board Certified in Civil Trial Law by the Texas Board of Legal Specialization. For expert help with commercial litigation or business law issues, please contact The Taylor Law Group for a consultation.

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