Making wise choices when forming a new business are essential to the long-term success and financial stability of the company.
- Sole Proprietorship – A business owned by a single person without a formal structure. The sole owner does business under their own name or a business name but claims all business income less expenses on their own personal taxes as Self Employment income subject to a flat 15.3% tax rate (on the first $137,700 of net income). The owner is sole personal financial liability for all contracts and torts committed by any employee of the business.
- Partnership – A business owned by two or more persons or entities without a formal written structure. The business does business under a business name but requires a separate Tax ID number from the IRS so the partnership can apportion income and expenses among the partners and provide each owner with a K-1 showing their share to be filed on their taxes as business gains/losses. Because this business does not require a formal written structure, the Texas Business Organization Code (TBOC) fills in the gaps with some standard legal provisions related to contract and tort liability for each member of the partnership. Each partner bears some personal liability for the actions of any employee or partner of the business for as long as they own a part of the business.
- Single-Member LLC – Similar to a Sole Proprietorship in that it has a sole owner and operates under the owner’s Social Security Number as the company’s Tax ID Number (what the IRS calls a “disregarded entity”), this entity must use the services of an attorney to form an Operating Agreement to reduce the personal financial liability of the owner for contract and torts committed by any employee of the business. Business with high levels of income are taxes within the under the Texas Franchise Tax.
- Multi-Member LLC – Similar to a Partnership in that two or more persons or entities own and operate the business under a separate Tax ID Number, this entity must use the services of an attorney to form an Operating Agreement to reduce the owner’s personal financial liability for the contracts and torts committed by any other owner or employee of the business. The business does business under a business name but requires a separate Tax ID number from the IRS so the partnership can apportion income and expenses among the owners and provide each owner with a K-1 showing their share to be filed on their taxes as business gains/losses. Unique with this structure is the ability to be a Member-Managed LLC (where each owner has a key role in decision-making) or a Manager Managed LLC (where there is a more active manager/team and less active investors who provide capital to fund the business, but don’t participate as actively in the day-to-day management of the business). Business with high levels of income are taxes within the under the Texas Franchise Tax.
- S-Corporation – This entity is a hybrid between the C-Corp and the LLC/Partnership. This is because this busines type can have one or more members, but is taxed like a partnership, not like a traditional corporation. An attorney is needed to set up this entity. The benefit of this entity is that it is not subject to Texas Franchise Taxes or income taxes but is rather taxes like a Partnership with business income and expenses being allocated on K-1s between the owners.
- C-Corporation – This entity is treated as a separate “person” in many ways under the law. As a result, the C-Corp is not subject to Texas Franchise Taxes but is subject to federal income taxes similar to how individuals are subject to federal income taxes. Owners are taxed on the capital gains/losses apportioned to them based on their ownership in the corporation. Thus, this entity is sometimes considered to be “double taxed” as it is taxed on its overall profits as “federal income tax” and each owner is taxed on their gains/losses on their personal income taxes. The benefit of this entity is the strongest shield against personal liability for the torts and contracts of the employees and other owners of the business.
|Number of Business Owners||Attorney |
|Texas State |
|State Franchise Taxes?||Federal Tax ID Required?||Separate Federal Income Taxes?|
Limited Liability Company
|1+||Yes||Yes||Yes||Yes, if 2+||No|