Bigger, Better Business Formation in Texas

Texas has long been recognized as an economic powerhouse. In 2016, the Bureau of Economic Analysis reported The Lone Star State generated $1.6 trillion in gross domestic product, which ranks second only to California among U.S. states. Currently, Forbes has Texas at the top of their list for economic climate. This is made possible due to the state’s economic and job growth, which have been ranked second and third fastest over the past five years, respectively. From startups operating out of garages in the Silicon Hills, to international corporations in Dallas, Houston, and San Antonio, Texas has proven to be a great state for business opportunity. This explains why so many new businesses are making their home in The Lone Star State.

There are many business structure options for business owners looking to establish their business in Texas. Among these, the most popular are sole proprietorships,general partnerships, limited liability partnerships, limited liability companies, and corporations. Identifying the needs of their particular business will help business owners determine which structure is right for their business.

A sole proprietorship, the most common and simplest business structure, is created when a single individual owns all of the assets engaged in business activity. This business structure does not require formal organization with the state. In a sole proprietorship, the operator of the business is personally liable for all of the business’s debts and liabilities. Moreover, ownership interest in a sole proprietorship is nontransferable, and the life of the business is limited to the life of the sole proprietor. Often, sole proprietorships operate under the name of their owner. However, sole proprietors who wish to create a new name for their venture may do so with an “Assumed Name Certificate.”

General partnerships are created when two or more people agree to associate for the purposes of carrying on a business for profit. While a separate entity is created under a general partnership, creditors can still seek the assets of the partners’ personal assets for satisfaction for debts created by the business. General partnerships operate in accordance with a partnership agreement, though there is no requirement for the agreement to be in writing to be enforceable. Similar to sole proprietorships, general partnerships are not required to file with the state, and, because they are owned by natural persons, will not be subject to the state franchise tax.

A Limited liability partnership (LLP) is a general partnership that has been registered with Texas’s Secretary of State. The LLP’s registration will be effective until 1-year anniversary of the date of registration or the later effective date of the business. Typically, the partners of a LLP are not individually liable for the debts created by the business or for the incompetence, malfeasance, or negligence committed during the LLP’s course of business. Unlike general partnerships, LLPs are subject to the state franchise tax.

A Limited Liability Company (LLC) is formed when a certificate of formation is filed with Texas’s Secretary of State. LLCs are owned and governed by members. The members of a LLC can be a natural person, business, trust, and any other legal entity. The liability of a LLC’s members is limited to their investment. LLCs are designed to provide its owners with limited liability and tax advantages. Like LLPs, LLCs are subject to the state franchise tax, and are also required to pay a $300 filing fee.

 Corporations are recognized legal persons, owned by shareholders, which provide limited liability, centralized management, ease of transferability of ownership interest, and perpetual duration of the business. While corporations are owned by shareholders, they are managed by directors. Similar to LLCs, corporations are subject to the franchise tax, as well as a $300 filing fee.

While these are the most common business structures, there are many more that provide additional options for those looking to establish their business in Texas. Determining which structure best suits a business is an important decision and choosing the right one will allow the business to be most effective and profitable.

The information contained in this post is for general information and educational purposes only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this publication. Accordingly, the information on this post is provided with the understanding that the author and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional.

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