The most common types of Texas entities are:
Below is an outline of these types of entities, as well as "professional entities," including some of the management and tax issues involved with that choice of entity. All businesses should consult with a CPA to consider properly the tax implications involved with their entity selection. The tax issues identified below are for general information only. No warranty is made to the accuracy of the information or how it will apply to a particular entity.
Sole proprietorship. A sole proprietorship does not result in the formation of a legal entity. There is only a single business owner, who is individually responsible for all debts of business. All income is listed on the owner's individual tax return, but the business does not pay Texas margin tax. The owner can do business under an "assumed name." This form of business should only be undertaken after careful advice from an experienced attorney. All of the business owner's assets are subject to claims from the business creditors, whether from contracts or if the business is sued when someone thinks they were injured (physically or economically) by the company.
General Partnership. A general partnership is created whenever two or more persons or entities jointly own a business. Like the sole proprietorship, nothing need be filed with the Secretary of State. A general partnership is created whenever two people agree to do business as joint owners. While it does not require a formal written agreement, such informal arrangements are extremely likely to result is disagreements, which often cost owners much more than advance planning. The partnership itself does not pay taxes (but it does file a tax return). The income is divided up among the partners and reported on their individual returns. The partnership does not pay Texas margin tax if all the partners are people or if it is a "passive entity." Every partners' personal assets are subject to claims from the business creditors, whether from contracts or if the business is sued when someone thinks they were injured (physically or economically) by the company, even if the "other" partner created the debt. Because of this potential liability, this form of business should only be undertaken after careful advice from an experienced attorney.
Limited Partnership. A limited partnership has some characteristics of a general partnership and some characteristics of a corporation. A limited partnership has two types of partners: general partners and limited partners. There are general partners who manage the limited partnership (and are liable for its debts) and limited partners do not directly manage the partnership, so they are not liable for the debts of the limited partnership. Limited partners may be an employee of the limited partnership. Since the general partner faces personal liability, often a corporation is formed to be the general partner. For federal tax purposes, the partners are taxed like in a general partnership (the taxes pass through to the partners). For Texas margin tax purposes, a limited partnership is taxed, unless it qualifies as a "passive entity." Limited partnerships register with the Secretary of State's office and the fees associated are higher than those for most other entities.
Corporation. A corporation is a separate legal entity owned by shareholders or stockholders. Shareholders are not generally liable for the corporation's debts. The corporation's management is carried out through the board of directors. Corporations are subject to Texas margin taxes. For federal tax purposes, a corporation may be classified either as a C corporation or an S corporation.
A corporation is a separate legal entity owned by shareholders or stockholders. Shareholders are not generally liable for the corporation's debts. The corporation's management is carried out through the board of directors. Corporations are subject to Texas margin taxes. For federal tax purposes, a corporation may be classified either as a C corporation or an S corporation.
C Corporation. A C Corp pays federal income tax. Shareholders are also taxed on dividends they receive from the corporation. This "double taxation" often leads small businesses to avoid being a C Corp.
S Corporation. An S Corp is taxed similarly to a partnership. The S Corp files a tax return ' but does not directly pay taxes. The income is passed through to the shareholders. Provides some federal tax advantages over a C corporation.
A limited liability company (LLC) enjoys the liability protection afforded to a corporation. The LLC is the most flexible of all entities. An LLC can be managed either by its owners (who are called "members") or it may elect to have "managers." For federal tax purposes, and LLC can elect to either be taxed as a corporation, like a partnership, or if there is only own owner, it can be taxed like a sole proprietorship. An LLC, like all other entities that have limited liability, is subject to Texas margin taxes. The flexibility of an LLC is often what leads new or small businesses to select an LLC as their preferred entity. LLC's do not have to hold annual meetings, though I strongly recommend it.
Professional Entities. Texas created special entities for certain licensed professions. Below is a brief description of the types of professional entities and the professionals that can own them.
All of these entity types require the owners to be licensed to perform professional services in Texas. These professions include lawyers, accountants, medical doctors, osteopathy, podiatry, dentistry, optometry, therapeutic optometry, chiropractic medicine, veterinarians, and mental health professionals, including licensed therapists or counseling services, such as clinical social work, professional counseling, and marriage and family therapy. The selection of the proper entity depends on the type of profession involved, liability concerns, and tax considerations.