Starting a business in Texas is an exciting step. But before you open your doors, you need to make one of the most important decisions: choosing the right legal structure for businesses in Texas. A business services attorney can help you sort through your options.
Here’s a breakdown of various options from Hunter Sargent, PLLC to help you choose the best business structure in Texas for your venture:
Types of Business Structures
Texas recognizes several entity types, and each comes with unique requirements, protections, and tax rules. Here’s a closer look at the various types of business structures in Texas.
Sole Proprietorship
Of all the business structures in the Lone Star State, a sole proprietorship is the simplest. Key features include:
- No formal filings with the Texas Secretary of State
- Owner reports business income to the Internal Revenue Service on personal tax returns
- Exposes the owner and their personal assets to unlimited personal liability
In short, a sole proprietorship allows you to jump into a venture almost immediately. However, your personal assets will be at risk if a disgruntled client, vendor, or business partner files a suit against you. The unlimited liability of a sole proprietorship makes it one of the least appealing business structures.
General Partnership (GP)
A general partnership is one of the simpler business structures between two or more individuals who operate a venture together. Sometimes, people will engage in a general partnership without any formal paperwork, which can be incredibly risky for all involved. The line between business debts and personal assets can become gray.
If you are going to engage in a GP, you should create a written partnership agreement to protect your personal assets. The paperwork should also outline how business debts and profits will be split among stakeholders. If a conflict arises, your paperwork can provide some liability protection and outline the management structure of the GP.
Limited Liability Company (LLC)
Limited liability companies are one of the most popular business structures in Texas. They offer liability protection and protect your personal assets. Forming an LLC in Texas involves filing paperwork with the Secretary of State.
LLCs are often considered the best business entity for startups in Texas. During the startup phase, you’ll need to take on business debts. An LLC provides liability protection for your personal assets.
When comparing an LLC vs. sole proprietorship in Texas, key differences include personal liability and the protections you’ll enjoy. A sole proprietorship offers virtually no protection from personal liability. In contrast, a Texas limited liability company insulates your personal assets from liability in the event your legal entity is subject to a suit.
Corporation
A C-corp is a separate legal entity from its owners, who act as shareholders. This business structure provides significant liability protection for your personal assets. An S corporation is primarily a federal tax election filing status rather than a business structure.
The key differences between an S-corp vs. C-corp in Texas involve ownership and tax restrictions. C-corporations are taxed separately. S corporations allow for pass-through taxation, which can reduce how much money you claim on your personal tax returns and decrease your liability.
A C-corporation must maintain bylaws and hold shareholder meetings. They are also required to comply with corporate governance rules. You need competent legal counsel to form and maintain a C-corporation. You should also seek legal counsel to unlock the tax advantages of an S-Corp filing status.
Limited Partnerships (LP) and Limited Liability Partnerships (LLP)
Limited partnerships have at least one general partner and one limited partner. The general partner faces unlimited liability while limited partners enjoy protection for their personal assets.
Limited liability partnerships are one of the most common types of business entities in Texas. In an LLP, all partners have liability protection. Medical practices, accounting firms, and law practices often form LLPs to protect themselves from liability. However, an LP or LLP can be used by other types of businesses.
Pros and Cons of Texas Corporations
Corporations are a powerful tool, but they aren’t right for everyone. Advantages include:
- Strong liability protection for shareholders
- Ability to raise funds by issuing stock
- Perpetual existence, meaning ownership transfer doesn’t dissolve the entity
- Potential tax benefits if electing S-Corp filing status
The disadvantages of a corporation include:
- More expensive and complex to form
- Ongoing corporate governance requirements
- C-Corps face “double taxation”
- S-Corps have strict eligibility requirements under Federal tax classification rules
Learning how to incorporate a business in Texas and avoid the disadvantages outlined above requires experienced legal counsel. For most entrepreneurs and business owners, a limited liability company is the better fit. However, if you have a complex or rapidly growing business, incorporating it could be the right move.
Keep in mind that you may be able to elect an S-corp filing status with a limited liability company or LLP. The key is to meet the IRS’s strict eligibility requirements for S corporations.
Maintaining Your Entity’s Legal Status
Once you’ve formed your business entity with the Texas Secretary of State, you have to meet ongoing compliance requirements. Key Texas law requirements include:
- Filing tax and public information data with the Texas Comptroller
- Maintaining a registered agent in Texas at all times
- Holding shareholder meetings and following the bylaws (corporations only)
While operating agreements are not required by law for LLCs and most business entities in Texas, you should consider creating one. These documents are used to resolve disputes and provide liability protection should a disagreement arise. An experienced attorney can help you create rock-solid operating agreements to insulate yourself from liability.
Key Considerations for Choosing a Business Structure
When learning how to choose a business entity in Texas, you need to consider the following:
- Liability Exposure: Do you want to shield your personal assets?
- Taxation: Each entity type carries unique tax rules, which is why you need to identify the tax restrictions imposed on your business structure
- Control: Sole proprietorships give you total control, while partnerships and corporations require shared governance
- Funding Needs: Investors often prefer corporations because of stock options
- Compliance: Corporations have stricter reporting and governance obligations
- Exit Strategy: Consider how easy it will be to transfer ownership or sell your business later
Not sure which option is right for your business? Make a list of priorities and quickly eliminate structures that don’t meet your minimum requirements. From there, focus on the few remaining options.
Comparing Texas Business Entities
Let’s look at a few real-world examples to help you explore different business structures.
- Freelancer: A graphic designer may begin as a sole proprietorship, but they should transition to an LLC to protect personal assets once revenue grows
- Family Restaurant: An LLC provides liability protection for the owners while avoiding corporate double taxation
- Tech Startup: Venture capital firms prefer C-corporations because they can receive stock
- Professional Practice: An LLP shields individual partners from liability for one another’s professional mistakes
This Texas business structure comparison demonstrates that the “best” option depends entirely on your goals and the type of venture you are involved in.
Legal and Financial Implications of Each Entity Type
Here are some legal and financial considerations for each business structure:
- Sole Proprietorship: Low start-up costs, no filing fees, but unlimited personal liability
- LLC: Moderate filing fees, liability protection, and pass-through taxation by default
- C-Corp: Higher administrative burden and costs, along with double taxation concerns
- S-Corp: Tax benefits for qualifying businesses, but limits on ownership
- LP/LLP: Useful for shared professional practices or investment groups
Don’t get caught up in how complicated or simple it is to form the structure. Focus on which entity type will provide protection and insulate your assets from liability.
When and How to Transition Your Business Structure
Changing your structure can help you increase Texas business entity liability protection. Common transitions include:
- Moving from a sole proprietorship to an LLC
- Transitioning from an LLC to a corporation
- Restructuring a general partnership into an LLP
In each example, the business would transition to a more complex structure to unlock additional benefits, such as liability protection and the ability to attract investors.
Why Professional Guidance Matters in Texas
Whether you need to know the legal requirements for LLC in Texas or want to form a corporation, having a knowledgeable lawyer in your corner is crucial. An experienced attorney can also unpack the tax implications of business structures in Texas. A Texas business attorney for startups can:
- Identify liability concerns
- Unlock tax benefits
- Draft agreements that prevent disputes
- Ensure filings are accurate and timely
The right structure can protect your assets and reduce your tax liability.
Choose the Best Business Structure in Texas With Hunter Sargent, PLLC
At Hunter Sargent, PLLC, our legal team knows how to apply Texas law to protect you from personal liability and help you form a legal entity for your venture.
As a Texas business attorney for startups, established businesses, and rapidly growing brands, Hunter Sargent, PLLC can handle everything from explaining Texas business structure comparisons and filing Texas Secretary of State business forms to assisting with tax compliance.
Explore our business planning services or contact our firm for help choosing the best business structure in Texas for your next venture.