Every new entrepreneur in Texas will need to decide what type of business format they want to use in their operation. While businesses that are owned and operated by one individual are typically set up as a sole proprietorship, many entrepreneurs will want to establish a separate entity that allows for more individual financial protection. Each business can be unique in certain operational aspects, and the ability to depreciate assets and reduce liability can be vital for long-term success in some situations. Aside from a sole proprietorship, here are a few types of business formats that can be considered.
Limited liability company
Probably the most commonly chosen small business format is a limited liability company, also known as a LLC. Even a single owner can set up a LLC, and there are basic business law reasons for the choice. Chief among those reasons is that a limited liability company is a separate entity, which makes the company a pass-through entity for individual tax obligations.
Many Texas businesses are owned by multiple individuals who will share in operational responsibilities and profits. Partnerships can be very effective as a business format when these responsibilities and allowances for each partner are set forth in a detailed agreement.
A corporate format is usually chosen when there is significant investment involved that comes from a variety of sources. Corporations are completely separate entities from the shareholders and have additional tax obligations, creating a double taxation situation that many single owners want to avoid. Another drawback of corporations is that they also have time-based reporting obligations to shareholders that are not required of other small business entities.
It is important for all Texas business owners to understand the nuances among these types of business entities with respect to their own unique operation. Some formats work more effectively than others, , but it is very important to evaluate all factors and choose the entity that is best for you.