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Selecting a business entity: A vital part of business formation

Congratulations on deciding to start a business in the state of Texas. Owning your own business can be one of the most rewarding experiences life has to offer, and many people never look back after finding out what it is like to be their own boss.

The next step is determining what type of business entity to form. As we discussed in an article on our website, selecting a business entity is one of the most important steps you will take in forming your business because it has impactful tax and liability consequences.

In this post, we will briefly address four of the most common business entities, with some of the pros and cons of each.

Sole proprietorship: The sole proprietorship is the most basic and informal business structure and it is an option for anyone who is going into business on their own (without co-owners or partners). A potential downside to a sole proprietorship is that your personal assets may not be protected from the business’ liabilities.

Partnership: A partnership is also a very common business entity and it is also relatively informal. A partnership is available for two or more people who are going into business together. There are different types of partnerships, including general partnerships, limited partnerships and joint ventures -- each with a varying degree of protection for the partners.

Corporation: A corporation is a formal business structure that is considered a separate entity from the people who own and operate it. This protects the owners and operators from personal liability. However, taxation can be an issue for corporations as they may be subject to double taxation (unless they qualify as an "S" corporation).

Limited Liability Company (LLC): An LLC is basically a hybrid between a partnership and a corporation, combining the tax benefits of a partnership with the personal liability protections of a corporation. For that reason, LLCs are a very popular choice for small business owners. While the process of establishing an LLC is formal, the business can be conducted with greater flexibility.

As you can see there are many choices when it comes to selecting a business entity. Meeting with an experienced business attorney can help you understand which entity would suit your needs best as well as the legal consequences that apply.

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