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Choosing among different types of business entities

| Mar 28, 2022 | Business Formation |

A business entity is created for the purpose of managing a Texas business’s activities. The type of entity defines the structure of the business, the extent of liability for the owners and the types of taxes to pay.

Sole proprietorship

A sole proprietorship is the most basic type of business entity that has a sole owner. The sole owner is responsible for all of the business’s assets and liabilities. Setting up the business is easy because registration is not needed. However, you have to blend your business funds with your personal earnings.

General partnership

A general partnership is used by multiple owners of a business. The business formation is very similar to that of a sole proprietorship. You don’t have to register with the state, and the owners are liable for the business’s debts. However, there are two or more owners who share the liabilities.

Limited partnership

A limited partnership (LP) must be registered with the state. The two kinds of partners are the owners, called the general partners, and the investors, known as limited partners.

Limited liability company

A limited liability company (LLC) includes benefits of each of the business entity types. An LLC must be registered, but the owners do not have personal liabilities for the debts.


An “S” corporation is a pass-through entity for taxation, which is similar to a sole proprietorship and partnership. A “C” corporation requires double taxation. Both S corporations and C corporations must be registered and require corporate formalities like the creation of bylaws and meetings for the board of directors and shareholders.

Deciding which entity to choose

U.S. and state governments include the recognition of different types of business entities. The factors that define each entity include registration, taxation, liability and future growth and investment potential.