One of the first steps in starting a new business in Texas is choosing an ownership structure. Each structure offers different advantages and disadvantages, depending upon your potential risks, liabilities, expenses, investment needs, and income tax situation.
Sole Proprietorship
A sole proprietorship is the most common type of small business in the state of Texas and the easiest type of business to form. This type of business structure is often favored by individual service providers and those who are starting their business on a shoestring budget.
In a sole proprietorship, a single individual is engaging in business activity without the assistance of a formal organization. They can be doing business under their own name or under a company name they have selected. However, using a name other than the surname of the individual requires the individual to file an assumed name certificate (often referred to as a DBA) with the office of the county clerk in the county where their business premise is maintained.
General Partnership
In a general partnership, two or more individuals are working together to operate a business for profit. The individuals typically have a partnership agreement, but this agreement is not required to be filed with any Texas agency.
If the business operates under a name that does not include the surname of all of the partners, it is necessary to file an assumed name certificate with the office of the county clerk where the business premise is maintained.
Limited Partnership
A limited partnership has one or more general partners and one or more limited partners. As with a general partnership, the individuals typically have a partnership agreement. However, this agreement is not required to be filed with any Texas agency.
To create a limited partnership, you must file a certificate of formation with the Texas Secretary of State.
Limited Liability Partnership
When partners wish to limit their personal liability, a general or limited partnership may choose to register as a limited liability partnership. With this structure, each partner is protected from claims related to negligence, incompetence, or error of their co-partners.
You must complete a form with the Secretary of State to register as a limited liability partnership.
Corporation
A corporation is a type of business that has limited liability, perpetual duration, centralization of management, and an ease in the transferability of ownership interests. The owners are referred to as shareholders, while the people who manage the business and its affairs are called directors.
The corporate structure is often created when you need to attract investment capital or wish to offer employees stock options as part of the recruitment process. Forming a corporation may also be attractive when you wish to reduce tax liability. In many cases, a corporation and its owners receive a lower combined tax bill than the owners of an unincorporated business earning the same profit.
To create a corporation, you must file a certificate of formation with the Texas Secretary of State. If you want your for-profit corporation to be taxed as an “S” corporation, you must also file an election with the Internal Revenue Service.
Limited Liability Company
A limited liability company (LLC) has the powers of both a corporation and a partnership, which gives it structural flexibility and favorable tax treatment. The owners are called members and can be an individual, partnership, trust, corporation, or other legal or commercial entity. In most cases, member liability is limited to their investment. Members can also take advantage of the pass-through tax treatment granted to partners in a partnership.
A limited liability company is often recommended when your business involves activities that could result in customers suing your company if something goes wrong. For example, if you wanted to start a business repairing roofs, you wouldn't want to place your personal assets at risk in the event of a lawsuit.
You must file a certificate of formation with the Texas Secretary of State to create a Texas limited liability company.
Making the Choice That's Right for Your Business
Choosing the right type of business structure requires you to consider many different variables regarding how your business plans to operate. Colin Smith can answer your questions about business formation within the state of Texas and ensure that your business is properly structured from the beginning. Call today to learn more.