How To Form a Business in Texas (Part 2)

Now that you have your business plan written (see How to Form a Business in Texas (Part 1)), you should determine the most suitable type of business entity for your business needs. Factors like taxes and liability will likely play a big role in the type of entity you choose. The type of entity under which your business operates determines the structure and laws by your business are governed. Choosing the right entity for the business can be very challenging, but here is a general, brief summary of the most common business entities in Texas:

Sole proprietorship:

  • The business owner essentially is the business. So, any actions done by the business are treated as though they were done by the owner.
  • It’s the least complex of the business entities, and the owner has most control in a sole proprietorship.
  • Has the least amount of government interference.
  • Because the business and the owner are treated as a single person, the business’s income is taxed as the owner’s individual income; and
  • the owner has full liability for the business.

Partnership

  • Like a sole proprietorship, except that it’s made up of two or more business owners (“partners”).
  • The owners of the business are liable for the actions of the business (and the other partners).
  • Partners are typically taxed on the income received by the partnership.
  • Partnerships are often based on contracts or agreements between the partners (as to how the partnership will function and how the business will be run).

Limited Liability Company (“LLC”)

  • Entity is separate from its owners (looked at as two separate individuals).
  • The owners of the LLC are called “members.”
  • The default rule for LLC’s is that they are taxed just like a partnership (or in the case of a single-member LLC, like a sole proprietorship) However, the LLC can elect to the taxed as a corporation.
  • The company is liable for third-party liability while its members are shielded.
  • LLC’s are seen as more informal than corporations.

Corporation (Corp. or Inc.)

  • Entity is separate from its owners (looked at as two separate individuals).
  • The owners of the corporation are called “shareholders.”
  • A corporation’s income is taxed, and shareholders (and directors and officers) are also separately taxed on their income. Similar to an LLC, this type of “double taxation” can be avoided if it files for a Subchapter S election.
  • The company is liable for third-party liability while its members are shielded by the “corporate veil.”
  • Corporations are quite complex and require a lot of formal procedures to remain protected.

These may not be the only factors involved in your decisions. So, it’s vastly important you conduct a thorough analysis of your business’s needs. It’s important to note that we recommend you consult with an attorney to get a specific, in-depth analysis of the type of business entity that may be most suitable for your business, but hopefully, this post has introduced you to some of the business entities and has given you some background information. We recommend that you use this post as a simple guide before you speak with an attorney about the details and factors related to your business.

Stay tuned for the next installment in our series on How to Form a Business in Texas!

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