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When you start a small business in Texas, you may wonder which tax structure is best for your new venture. Whether you are hanging a shingle or starting a business from home, thinking about the structure of your new business can help you thrive during the first year when 20% of new businesses fail. You can belong to the 80% who make it by giving attention to how you start as a new company. So let’s look at what the best business structure is for a small business.
According to Texas.gov, “Texas offers the best business ecosystem in the nation and has frequently been named the best state to start a business. Our leading business climate and favorable regulatory environment provide the groundwork small businesses and entrepreneurs need to succeed.”
Small Business
If you are just one person running your own business, you don’t have to file with the state formally. However, if your business name is different from your own name, you must file a DBA (doing business as). All partnerships (2 individuals) and general partnerships (2 or more individuals) also need to file. You can use the SOSDirect site to accomplish naming your entity and getting started including:
- Filing your formation documents
- Retrieving evidence of your filing
- Ordering certified or plain copies
- Filing UCCs, printing documents
- Obtaining your entity status
- Validating your certificates
Forming an LLC
You can create a Limited Liability company in Texas at the SOSDirect site. An LLC is a business organization that limits the liability of the members so that if someone sues the business, the members are not personally liable. There is a layer of protection involved in owning an LLC.
“The owners of an LLC are called “members.” A member can be an individual, partnership, corporation, trust, and any other legal or commercial entity. Generally, the liability of the members is limited to their investment and they may enjoy the pass-through tax treatment afforded to partners in a partnership. As a result of federal tax classification rules, an LLC can achieve both structural flexibility and favorable tax treatment.” (1)
As “members” of an LLC, each individual has a role in the company laid out in the certificate of formation. Members of an LLC can decide to manage the business themselves or hire management.
This type of entity has the benefits of a corporation in its lack of liability. Still, it is also much like a partnership in that everyone may take part in the company’s decisions together. LLC’s are a flow-through entity and do not pay federal income tax when they file taxes as a federal s-corp. However, an LLC can also file federally as a partnership.
Consulting with an attorney about the best tax designations for an LLC is always a wise choice. An LLC may file taxes with the federal government as a corporation or partnership depending on the best tax designation for that particular entity.
Limited Partnership
When a general partnership brings on limited partners without the same obligations or duties, they form a limited partnership. For example, let’s say a feed company owned by two brothers in a partnership decides to take on a limited partner. They bring in an uncle as a limited partner. According to the filing they make for their limited partnership, the uncle may invest in the company and benefit from the limited partnership, but he is not an active partner. The limited partnership agreement specifies his role.
The general partners don’t have to file as a business with the state, but the limited partnership within the organization must file a certificate of formation.
Limited Liability Partnership
A general partnership or a limited partnership may both register as a limited liability partnership. The limited liability partnership forms so that the partners do not face personal liability as they would otherwise.
Setting up this type of company is a bit more expensive than setting up an LLC. The filing fees and insurance requirements are higher for an LLP. The state initially designed LLPs for specific professions that face more liability, such as attorneys and medical professionals. An advantage to an LLP is that it is a flow-through entity that doesn’t pay federal income tax.
You can check out the Secretary of State’s Office (SOS) to find out more about the structures of businesses in Texas.
We Can Help
At Jarrett Law, whether you are starting, merging, or selling a business, we are here to give solutions for your business’s legal issues. Creating operating agreements/bylaws, filing the appropriate formation documents with the state, determining your best type of business structure, and helping you along the way with each strategic decision is what we do.