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November 1, 2012Kerri Dobbins

Guaranty and Suretyship Law – Whether an Individual May Avoid Obligations Under a Personal Guaranty Contract When a Company Converts to a Different Organizational Form

Wasserberg v. Flooring Servs. of Tex., LLC, 376 S.W.3d 202 (Tex. App.—Houston [14th Dist.] 2012, no pet. h.)

Choosing the Correct Entity

Clients come to you with a sole proprietorship but you should never form one. Clients come to you with a general partnership that they have either intentionally formed, or formed as a matter of law. Both provide no tax advantage and no liability shield, and it is our responsibility to move them out of the sole proprietorship or general partnership into a better entity. LLPs seemed like a great idea for a few years, but I consider them obsolete and counterproductive. Limited Partnerships are excellent vehicles for things like oil and gas drilling or other areas where your client wants to raise money, there are numerous investors, and only one person (or one small group of people) are going to actually be involved in the operation of the business. For all other entities your options are a C Corp, an S Corp, or an LLC. A C Corp is an essential requirement to publicly trade the ownership interests or if you have a large group of investors who want a corporation. Usually you are forming either a Sub S Corp or an LLC depending upon the unique facts of your client’s proposed business, their management structure, the number of people who are going to invest, the tax treatment they want to receive, and the advice of their independent CPA. One of our jobs is to take the opaque, Mississippi mud filled, zero visibility ocean of law that the client is swimming in and simplify it to the clarity of the water of the Caribbean. It all comes down to liability shield, tax treatment, management structure, and potential expansion and enlargement of the investor pool.