startup business structure texas

Different Types of Texas Business Entities: General Overview

There are different types of business entities in the state of Texas. Choosing the right structure for your business is important to avoid liabilities, unnecessary taxes, and increase profits. Here are some of the most common business structures:

  • SOLE PROPRIETORSHIP

A sole proprietorship is the most basic and easiest form of business to structure. The owner is responsible for the asset and liabilities of the company. A sole proprietor is the sole owner of a company, and he is the face of the company’s brand. Some proprietors file a “Doing Business As” (“DBA) to separate their legal names from their business names; the DBA is inexpensive in comparison to the other business structures. The Texas Secretary of State charges $25 and the County Clerks charge about $15 depending on the county. Keep in mind, even under a DBA, the proprietor (owner) is not shielded from liability.

  • LIMITED LIABILITY COMPANY (LLC)

An LLC has an independent element to it in that it is separate from the owner. You can have a one-member LLC or several people serving as members, directors, and/or managers. The beauty is in the protection from liabilities just like a corporation. Your personal assets are separate and generally protected from lawsuit. Also, LLC has the tax benefits and operational flexibility similar to a sole proprietorship or partnership. Texas Secretary of State charge $300 and additional online/filing fees will apply…which is approximately $315.

  1. SERIES LLC: A series LLC, formed under Texas law, is an LLC that provides in its governing documents for the establishment of a series of members, managers, membership interests, or assets that have separate rights, obligations and liabilities and business purposes from the general LLC. Each individual series has the ability to sue and be sued, enter into contracts, hold title to assets, and grant liens or security interests in its assets. A series of the LLC is not a separate domestic entity or organization. If each or any series of the LLC conducts business under a name other than the name of the LLC, the LLC must file an assumed name certificate for the name of the serieS. Consult a private attorney attorney to form a series LLC because there are specific language requirements.
  2. COMBINED LLC AND S-CORP: You may request for S Corp status for your LLC. Consult your attorney on the pros and cons. You’ll have to make a special election with the IRS to have the LLC taxed as an S corp using Form 2553. And you must file it before the first two months and fifteen days of the beginning of the tax year in which the election is to take effect.The LLC remains a limited liability company from a legal standpoint, but for tax purposes it’s treated as an S corp
  • CORPORATION

A corporation is complex and is best when you intend to have a large company with several employees. It has limited liability for the owners and the shareholders. The shareholders are protected from lawsuits except for their own wrongdoings, and they are held responsible for their investment in your business. The advantages of corporation is the ease of generating capital and the independence of the company from the proprietors/directors. In other words, the corporation file its own separate tax, and the owner only pay taxes on the corporation’s profits (ex. salaries or bonuses). A certificate of formation for a Texas for-profit corporation is $300 filing fee. For nonprofit corporations, filing fee is only have to pay a $25 fee.

There are different form of corporation based on tax benefits.

     C – Corporations

  1. Personal assets is separate from owners’ business debts.
  2. Independent legal and tax structures separate from owners.
  3. There is no limit to the number of shareholders.
  4. Corporation is taxed on corporations’ profits and the shareholders’ dividends.
  5. Corporation must hold annual meetings and record meeting minutes.

 S – Corporations

S corporations are “considered by law to be a unique entity, separate and apart from those who own it.” This limits the financial liability for which you (the owner, or “shareholder”) are responsible. Nevertheless, liability protection is limited – S corps do not necessarily shield you from all litigation such as an employee’s tort actions as a result of a workplace incident.

  1. Personal assets is separate from owners’ business debts.
  2. Independent legal and tax structures separate from owners except for employee’s tort action such as workplace incident and other limited exceptions.
  3. Owners report their share of profit and loss in the company on their personal tax returns.
  4. There are limits to the number of shareholders
  5. Shareholders must be U.S. citizens or residents.
  6. Corporation must hold annual meetings and record meeting minutes.
  • Partnership

There are a couple of different types of partnerships.  The type you select is dependent on the legal structure, filing cost, etc. Here are a few:

  1. GENERAL PARTNERSHIP (GP): No filing is required ($0), just an agreement between one or more persons to form a company or do business together. So, it is easy to form and operate. Each partner is liable for each respective partner’s tort (wrongdoing) and each partner reports their share of profit and loss in the company on their personal tax returns.
  2. LIMITED PARTNERSHIP (LP) : This partnership is made up of limited partners (“silent partners” such as investor with no voting power) and general partners. The general partners are responsible for the management, daily operations, and the decision-making of the business. They receive less protection while the limited partners enjoy unlimited liability. Also, there is pass-through taxation (partners report the partnership’s profit and loss on their personal tax return). This form of business is common among finance, accounting, real-estate, law, and film-production companies. To register a LP, you must file an application for registration with the Texas Secretary of State. Use Form 701 to register, and the filing fee is $200 per each general partner residing in Texas but no more than $750. You must also renew the LP registration annually.
  3. LIMITED LIABILITY PARTNERSHIP (LLP) : In Texas, a limited liability partnership (LLP) is either a pre-existing general partnership or a pre-existing limited partnership (LP) that takes the additional and entirely optional step of registering with the secretary of state as an LLP. Registration protects the partners from liability and provided some added benefit of franchise tax exemption. You cannot convert an entity into an LLP. To register a LP, you must file an application for registration with the Texas Secretary of State. Use Form 701 to register, and the filing fee is $200 per each general partner residing in Texas. Good news: no annual renewal is required as of January 1, 2016.

Helpful websites: Texas SOS and IRS Publication, and .

 

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