There are a number of different ways to organize a business, and some may better suit your needs than others. My goal in providing you with business formation services is to help you to meet your needs today and tomorrow.
A Sole Proprietorship is where one person owns and controls the business. Business profits are taxed at the owner’s personal income tax rate (federal income taxes only as Texas does not levy a state income tax). However, the owner is personally liable for all debts and obligations of the business.
General Partnerships are for businesses owned and controlled by more than one party. While partners remain personally liable for debts and obligations of the partnership, general partnerships allow for a sharing of the rights and responsibilities. They are relatively easy to set up. General Partnerships are governed by the laws of Texas.
Limited Partnerships are also for multiple owner businesses, made up of at least one “general partner” and one “limited partner”. All “general partners” have the same rights and responsibilities as they would in a General Partnership, but “limited partners” do not have any power to control the company. In exchange for giving up this right, a “limited partner” is not liable for the debts or obligations of the business that exceed their investment in the company. Limited Partnerships are governed by the laws of Texas and when compared to General Partnerships, they have additional requirements that need to be followed.
A Limited Liability Company (LLC) is a business structure that combines aspects of Limited Partnerships and Corporations (see below). Individual members of an LLC are not personally liable for the debts and obligations of the company. They are typically only liable in the same way a shareholder would be in a corporation. LLCs are governed by the laws of Texas and have additional requirements that have to be met in order to legally form a company.
A Corporation is an entity that is essentially viewed by law as an “artificial” person for legal and tax purposes. Unlike the other types of businesses, a corporation is a legal entity that is separate from its owner(s). Just like you (a “natural” person) a corporation (an “artificial” person) must pay income taxes on its profits. This leads to what is known as “double taxation” because a shareholder must also pay tax on any profit gained by investing in the corporation. The advantage of a corporation is because the corporation is a legal entity separate and distinct from all of its shareholders, the corporation, not the shareholders, is liable for all debts and obligations. The laws regarding formation of a corporation in Texas are much more complex than other types of business organizations.
The S Corporation is a special type of corporation that avoids the “double taxation” problem (once at the corporate level and again at the personal level) found in a standard corporation, because all income and loss is reported only on shareholders’ personal tax returns. However, this great benefit does come with some restrictions and must meet specific guidelines, including:
- Maximum of 75 shareholders.
- Other Corporations and Partnerships cannot be shareholders (although non-profit charitable organizations can be)
- All shareholders must be U.S. Citizens or legal residents.
- Only a single class of stock may be issued
If you have questions, give me a call at 713-893-8087, or use this form.