Choosing the right business structure in Texas can feel overwhelming, with each option offering different advantages and challenges. From liability protection to tax implications, it’s important to pick the structure that aligns best with your business goals.
In this blog, we’ll break down the main business entity options in Texas, explaining their pros and cons in simple terms.
Whether you’re just starting or thinking of restructuring, this guide will help you understand your options and make a more informed decision.
Types of Business Entities in Texas
When starting a business in Texas, you have several entity options to choose from, each with its own set of advantages and drawbacks.
The most common types include:
• Sole Proprietorship
• Partnership
• Limited Liability Company (LLC)
• Corporation
Let’s dive into each one:
Sole Proprietorship
A sole proprietorship is simple, personal, and gets the job done without fuss. There’s no formal setup required, making it an appealing option for small business owners. Most start with this structure until they expand and need something more.
But keep in mind—this simplicity comes with a risk: you’re personally responsible for any debts or legal issues the business faces.
In Texas, you can operate under your legal name or choose a trade name. If you select a trade name, you’ll need to file an “Assumed Name Certificate” with your county. Filing fees are usually under $20.
More details can be found through the Texas Secretary of State or by contacting your local county clerk’s office for specific filing requirements.
Partnership
When you choose a partnership, you’re teaming up with one or more people to share ownership, profits, and responsibilities. There are two common types of partnerships: general partnerships and limited partnerships.
General Partnership (GP)
In a general partnership, all partners share responsibility for managing the business and are personally liable for debts or legal issues.
Example: If you and a friend run the business together, both of you are liable for any legal actions or debts the business incurs.
Limited Partnership (LP)
A limited partnership includes at least one general partner with liability and one or more limited partners who invest but aren’t involved in daily operations.
Example: If you manage the business, but a relative invests money and doesn’t get involved in daily decisions, they are a limited partner and only risk their investment, not their personal assets.
Limited Liability or (LLP) is also an option in Texas and worth mentioning since either a LP or GP entity can register as an LLP to limit their liabilities.
Making Decisions in a Partnership
Decision-making in partnerships can sometimes be challenging since control is shared. Reaching an agreement often requires discussion and negotiation. While this can slow things down, it also ensures multiple perspectives are considered.
To avoid misunderstandings, it’s important to have a formal partnership agreement that clearly outlines roles, responsibilities, and profit-sharing arrangements. This document also helps with transitions when someone joins or leaves the partnership.
One thing to keep in mind: partnerships in Texas are subject to a franchise tax if they earn more than $2.47 million annually. If your earnings are less, you’re exempt.
To register a general partnership, you’ll need to file an Assumed Name Certificate with the Texas Secretary of State. Don’t think registration with the state is required for a GP. See below from the Texas Secretary of State:
General partnership: A general partnership is created when two or more persons associate to carry on a business for profit. A partnership generally operates in accordance with a partnership agreement, but there is no requirement that the agreement be in writing and no state-filing requirement. If the business of the partnership is conducted under an assumed name (a name that does not include the surname of all of the partners), then an assumed name certificate (commonly referred to as a DBA) should be filed with the office of the county clerk in the county where a business premise is maintained. If no business premise is maintained, then an assumed name certificate should be filed in all counties where business is conducted under the assumed name.
Also including link to the Texas SOS page on entity options
https://www.sos.state.tx.us/corp/businessstructure.shtml
Limited Liability Companies
An LLC, short for Limited Liability Company, is a mix between a corporation and a partnership. It gives you limited liability, so your personal assets stay protected if your business runs into trouble, like going bankrupt. Plus, you get flexibility in how you run things—you can manage the business yourself or hire someone else to do it, kind of like a corporation.
Also, taxation is flexible too! LLCs can choose to be taxed like a sole proprietor, corporation, or partnership, whichever benefits the members most.
In Texas, your business name has to end with “LLC” so it’s clear that you’re a limited liability company. You’ll also need a registered agent, someone who acts on behalf of your business to receive legal papers or official documents. Can we also add language around filing a cert of formation for an LLC
While you can act as your own agent, it can be tricky to keep up with everything. Most people find it easier to hire a Texas-registered agent to take care of it for them.
Corporation
A corporation is one of the most formal and structured business entities. When you form a corporation, you’re creating a separate legal entity from yourself, which means the corporation can own assets, incur debt, and be sued—without it affecting your personal finances.
Each owner of a corporation is called a shareholder, and they own shares of stock in the company. Depending on the type of stock they hold, shareholders have different rights, like voting on major decisions or receiving dividends. Corporations, especially publicly traded ones, have the strictest government oversight because they handle public investment and must follow strict rules to protect investors.
In Texas, if you’re forming a corporation, you’ll need to appoint a registered agent (a person or service that receives official legal documents on behalf of your business). You’ll also need to file a Certificate of Formation (often called “articles of incorporation”) with the Texas Secretary of State.
Plus, the corporation’s board of directors needs to adopt bylaws, which are basically the rules for how your corporation will operate.
One other thing to know is that Texas doesn’t require corporations to declare a par value for their stocks. This means you can issue “no-par” stocks, which gives you flexibility in raising capital for your business without setting a minimum share price upfront.
It’s a bit more complex than forming an LLC, but the structure and protections can be worth it, especially if you’re planning to grow or bring on investors.
As You Grow
As your business grows, you might find that the structure you started with no longer suits your needs.
In Texas, transitioning from a simpler structure (like a sole proprietorship or partnership) to a more formal one (such as an LLC or corporation) is often easier than going in the other direction.
For example, moving from a sole proprietorship to an LLC can provide you with personal liability protection and more flexibility in how you manage your business.
However, it’s important to keep in mind that changing business structures may have tax consequences, especially if you’re adding new partners or shifting from a more complex structure to a simpler one. Changing structures can also affect your tax filings, liability protections, and management responsibilities.
Make sure to talk to your CPA and a tax attorney to understand the financial and legal implications before making any changes.
Typical Business Structures for Texas Businesses
In Texas, many businesses start as sole proprietorships or partnerships because they are easy to set up and require minimal paperwork.
As businesses grow, owners often transition to an LLC or a corporation for better liability protection and potential tax benefits.
- Sole Proprietorship: The simplest structure, where the owner is personally responsible for all debts and liabilities.
- General Partnership: Similar to a sole proprietorship but with two or more partners sharing responsibility and liability.
- Limited Partnership (LP): ….
- Limited Liability Partnership (LLP): ….
- Limited Liability Company (LLC): Combines the simplicity of a partnership with the liability protection of a corporation. An LLC is a popular choice for businesses that want flexibility in how they are taxed and managed.
- Corporation: A separate legal entity offering the highest level of liability protection. Corporations require more administrative work, but they are often beneficial for businesses looking to raise capital or expand significantly
Holding Companies in Texas
Finally, if your business owns valuable assets like real estate or equipment, setting up a holding company can be a smart way to protect them. A holding company is a separate entity that owns your assets, while your operating company runs the day-to-day business. This setup helps protect those assets from potential risks or liabilities that your operating business might face.
Most business owners in Texas choose to set up their holding company as an LLC because it provides liability protection and flexibility in both management and taxes. The operating company can then lease the assets from the holding company, which helps keep everything separate and secure.
Why Avoid Holding Real Estate in a Corporation?
It’s usually not recommended to hold real estate in a corporation because of potential double taxation and complications when transferring property. Instead, many businesses prefer to use an LLC, which offers tax advantages and simpler management.
This is a more complex topic, so it’s important to speak with your accountant or contact us at Traktion for guidance on how to structure your business for maximum protection and tax efficiency.
Still Undecided? Let The Traktion Team Help
Choosing an entity type can be daunting, with each option’s benefits and downsides. But don’t worry—Traktion is here to help.
We’re accountants based in Dallas, helping Texas businesses make smart decisions from day one, starting with that crucial first step: selecting the best entity type for your goals.
Ready to get started? Just book a quick call with us using the calendar below. We’re always here to help you make smart, informed decisions.
Until next time!