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Choosing a legal entity for your business

On Behalf of | Aug 2, 2021 | Business Law

Selecting the most effective business entity for a startup in Texas is easily one of the most important decisions at the outset. While sole proprietorship operations often operate on a tax identification number or an individual Social Security number for tax purposes, other startups often cannot. Partnerships face a different situation when taxes are considered, and many will want to establish themselves as a limited liability company or a corporation when they are conducting a significant volume of business. Understanding the differences in these entity types is important for all business owners, and many times this decision will require consulting with a business law attorney.

Basic Partnership

Businesses being operated by owners who have an equal share in profit distribution and investment capital typically function best as a partnership. This is a relatively common business entity structure and works well for both income and income tax purposes. Additionally, partners should be equally liable for expenses and operating capital as well, and they often will include a contract between all primary owners.

Limited liability company

The first entity type that should be evaluated by new business startups is a limited liability company, also known as an LLC. This works well for partnerships where partners will be paid per their particular work within the company because the LLC serves as a pass-through for tax purposes, but its “members” choose if they want to be taxed as a partnership or a corporation.

Corporations

There are effectively two types of corporations for business startups to choose from, with those being designated as “S” or “C” corporate entities. Both types have similar record-keeping and reporting obligations to stockholders, but they do vary in some respects. C corporations are essentially double-taxed with both the individuals and the corporation itself having a tax liability. S corporations do not require double taxation, as they are pass through entities to stockholders, but passive income is limited to 25%.