If you are running a business on your own in Texas and have not formally organized it, you are operating as a sole proprietor by default. That may work fine in the early stages, but as your business grows, the question of whether to form an LLC becomes more pressing.
Here is a straightforward look at how the two structures differ and what each one means for your business.
What is the difference between a sole proprietorship and an LLC?
A sole proprietorship is not a separate legal entity. You and your business are the same person in the eyes of the law, which means your personal assets are at risk if a client sues you or your business cannot pay a debt.
An LLC, or limited liability company, is a separate legal entity created by filing a Certificate of Formation with the Texas Secretary of State. That separation generally protects your personal assets from business liabilities, as long as you keep your business and personal finances separate.
How does each structure affect your taxes?
For federal taxes, forming an LLC does not change how your business income is reported. Whether you operate as a sole proprietor or a single-member LLC, you file on Schedule C of your personal return either way.
The difference in Texas is the franchise tax. Sole proprietorships are exempt, while LLCs are subject to it. Most small businesses will not owe any tax since the threshold is currently $2,650,000 in annualized total revenue. However, even if you owe nothing, your LLC must still file a Public Information Report with the Texas Comptroller every year. Missing that filing can affect your LLC’s good standing.
Which structure makes more sense for your situation?
A sole proprietorship may be fine if you are in the early stages of a low-risk business with no employees and little chance of a lawsuit. However, if you work with clients under contracts, carry business debt or plan to grow, an LLC is worth considering. Forming one costs $300 in Texas, and you will need to file an annual franchise tax report, but the liability protection it provides can be well worth the tradeoff.
If you are unsure which structure fits where your business is headed, a business attorney can review your specific situation, walk you through the implications of each option and help you make the right call before you commit to either path.
