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Choosing a business structure for a startup business

On Behalf of | Mar 17, 2021 | Business Formation |

Texas can be a great place for startup entrepreneurs, but business owners will need to make several important decisions if they wish to take full advantage of the many business opportunities the Lone Star State presents to them. One of the most important of these business startup decisions is which structure they will use for their new business.

Sole Proprietorship

Business owners who prefer to work alone or who may just be starting out with their business appreciate the simplicity and economy of a sole proprietorship. Sole proprietors do not need to prepare a separate tax statement for their business. They can report the profits they earn on their personal income tax statements. The main disadvantage of this type of business formation is that owners are responsible for business liabilities, meaning you, individually, may be on the hook for the business’s debts or other legal obligations.

Partnerships

A limited or general partnership may represent the perfect solution for prospective business owners who wish to move forward with one or more partners. Limited partnerships include a general partner who becomes responsible for the day-to-day operations of the business. All partners will take part in managing a general partnership.  However, in a general partnership, all partners will be responsible for the business’s debts and other legal obligations, whether the particular partner who incurred the debt or obligation is solvent or not.

Limited Liability Company

The Limited Liability Company (LLC) has quickly become one of the most favored business structures in Texas.  One benefit of the LLC is that it provides more liability protection to the business owner(s).  Generally, if an LLC fails, the liability stays with the company and does not follow the business owner(s), individually.  Owners also have the advantage of being able to choose to elect certain tax treatment with the IRS, often resulting in significant tax savings.  One of the drawbacks to creating a legal LLC in Texas is that you will have to do a bit more paperwork than with a sole proprietorship, and you will probably want to get your tax professional involved to determine your tax implications.

Corporation

Corporate business structures are usually the most expensive and complicated structures to undertake, and as such, are usually used by larger companies with a number of current or anticipated owners, officers, and/or employees.  A corporation is treated as a separate entity, entirely apart from its owners. Corporation owners will need to understand the many regulations and tax requirements that affect their business, and are required to hold regular meetings, file certain tax statements and returns. It is highly recommended to work with your tax planning professional and attorney if you are planning to open a corporation in Texas.

S corporations are a type of corporation with an appeal to small business owners. This business structure provides business owners with the liability protection they desire without the same level of tax responsibility.

New business owners need to weigh the pros and cons of each business structure. They will then be able to choose the structure that works best for their business. An attorney may prove helpful during the decision-making process.

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