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Doing Business as an LLC or Corporation in Texas: Which Is Your Best Bet?

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Starting a business in Texas or anywhere is an exciting journey with many choices. One key decision is choosing the right legal structure, like LLCs or corporations.

November 23, 2023
Author: NCH

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What Is an LLC?

An LLC is a flexible business structure that combines elements of both a partnership and a corporation. It provides limited liability protection to its owners, called “members,” while offering a partnership’s simplicity and tax flexibility. 

An LLC isn’t a separate tax entity, which means that profits and losses pass through to the members’ personal tax returns. This means that LLcs have a more straightforward tax situation than corporations.

Advantages of an LLC

  • Limited Liability: This means that the personal assets of the members are separate from the debts and liabilities of the LLC. The members’ personal assets are generally protected if the company faces financial trouble or legal issues, reducing personal risk.
  • Operational Flexibility: Members can choose whether the LLC will be managed by its members or by designated managers. This allows the business to adapt its management approach based on the preferences and expertise of its owners.
  • Pass-Through Taxation: Unlike corporations, where the entity is taxed at the corporate level, an LLC’s profits and losses “pass through” to the members. This means the LLC’s income is reported on the members’ individual tax returns. This approach can help avoid the issue of double taxation that corporations often face.

What Are Corporations?

A corporation operates as a separate legal entity from its owners or “shareholders.” It offers limited liability protection to its shareholders, and corporations have a more formal structure with a board of directors, officers, and shareholders. 

They can issue stock and raise capital more easily, making them an attractive choice for larger businesses or those planning to seek external investment.

Benefits of Incorporation

  • Limited Liability: Similar to an LLC, shareholders’ personal assets are typically shielded from the debts and liabilities of the corporation. In short, the separation between personal and business assets can provide significant protection.
  • Tax Deductions: Corporations can often deduct certain business expenses, such as employee salaries and benefits, as tax-deductible items. This can help lower the corporation’s overall tax liability.
  • Perpetual Existence: In Texas, a corporation can continue to operate indefinitely regardless of changes in ownership or management. This perpetual nature provides stability and can be particularly beneficial for businesses with long-term plans.

LLCs vs Corporations in Texas: Key Factors to Consider

Liability Protection

Both LLCs and corporations in Texas provide a significant degree of liability protection for their owners. This means that the personal assets of the members (LLC) or shareholders (corporation) are generally shielded in the event of legal issues or financial liabilities. 

This form of protection is a worthwhile consideration for business owners, as it helps safeguard their homes, savings, and other personal assets from potential business-related risks.

Tax Implications

In Texas, LLCs are “pass-through” entities, meaning that profits and losses flow through to the members’ individual tax returns. This often results in a simpler and more favorable tax situation, especially for small businesses. LLCs in Texas are also not subject to the state’s franchise tax, making them an appealing choice for those looking to minimize taxes.

Corporations, while providing limited liability protection, can face double taxation. This means the corporation itself is taxed on its profits, and then shareholders are taxed again on any dividends they receive. However, corporations can elect to be taxed as an S corporation, eliminating the double taxation issue.

Ownership and Management Structure

Corporations can issue various classes of stock, making it easier to attract investors by offering ownership stakes and dividends. This feature makes corporations ideal for businesses with ambitious growth plans that require external funding.

While LLCs can also raise capital, the process is generally more straightforward for corporations. Investors often prefer the familiar structure and protections provided by corporation shares, potentially giving it an edge when seeking external capital.

Long-Term Goals and Exit Strategy

If you envision growing your business substantially, going public, or eventually selling it, a Corporation might align better with these aspirations. The formal structure and ease of raising capital make these goals more achievable.

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Conversely, an LLC might make more sense when you have a smaller business and anticipate a simple exit strategy, such as selling the business as a whole or passing it on to family members. The flexibility and simplicity of an LLC can make the transition smoother in such scenarios.

Texas-Specific Considerations for Corporations and LLCs

State Filing Fees and Requirements

For LLCs, the process generally begins with submitting a Certificate of Formation to the Secretary of State. The filing fee can vary, so always check the most up-to-date information on the Secretary of State’s official website. On the other hand, corporations need to file Articles of Incorporation along with a corresponding filing fee.

Take note that Texas requires an LLC to designate a registered agent, which is an individual or entity responsible for receiving legal documents on behalf of the company. Corporations must also appoint a registered agent, adding an extra layer of compliance. 

Ongoing Compliance Obligations

For corporations in Texas, regular compliance requirements include holding annual meetings of shareholders and directors, keeping accurate corporate records, and filing an annual franchise tax report with the Texas Comptroller’s office. This report details the corporation’s financial information, and the franchise tax calculation is based on the revenue of the business. 

While LLCs don’t have the same formal meeting requirements as corporations, they are required to file an annual PIR. This report ensures the state has up-to-date information about the LLC, including its members and managers.

Business Licenses and Permits

Whether you opt for an LLC or a corporation in Texas, obtaining the necessary business licenses and permits is important in operating legally in the state. The specific licenses and permits you need will depend on various factors, such as your industry, location, and business activities.

Texas doesn’t have a state-level business license requirement; however, many cities and counties may impose their own licensing requirements. This can include permits related to zoning, health, safety, and the like.

Still Undecided Between a Corporation or LLC in Texas?

Let our business formation experts at NCH help you do business as an LLC or corporation in Texas. We are dedicated to empowering entrepreneurs to decide the best for their business, including its structure. With our years of experience, we can provide you with the guidance and support you need to choose the right path for your upcoming venture.

Are you ready to take the next step? Call 1-800-508-1729 for a free consultation!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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