Generally – Texas has several forms of business entities. The most common are corporation, general partnership, limited liability partnership, limited partnership, and limited liability company. The entities formed on or after January 1, 2006 are subject to the Texas Business Organizations Code.
Corporation – ownership is shown by stock. There is limited liability for owners. The corporation is managed by directors and officers. Capital can be raised by sale of stock., The shares can be easily transferred, but are subject to state and federal securities laws. There is a low cost of formation. A Corporation is subject to Texas Margin Tax and profits are basically taxed twice – once on receipt by corporation and once on distribution.
S Corporation – a Corporation that is taxed almost like a partnership. The “S” denotes tax status with the IRS.
General Partnership – Ownership is shown by the percentage of interest in the partnership. There is no limited liability for the owners. If the partners are individuals, then the partnership does not have to pay the Texas Margin Tax. Profit and loss distribution, business management and capital contributions are controlled by the partnership agreement. The partner’s interest may be subject to State and federal securities laws. There is a limited transfer of interests. This is considered the most dangerous and risky of entities.
Limited Liability Partnership – This is a general partnership in which the liability of some partners is limited. There is no one-size-fits-all type of LLP. The formation agreement has to be filed with the Secretary of State. The LLP must carry at least $100,000 of liability insurance, and is subject to the Texas Margin Tax.
Limited Partnership – has a general partner (with unlimited liability) and limited partners (with limited liability). The general partner operates the business. A written agreement is not required, but most LPs have one. Limited partnership interests are usually considered subject to the state and federal securities laws. The agreement usually restricts transfer of partnership interest.
Limited Liability Company – This is the preferred form for most new businesses. It was created by the Legislature to combine the best of all entities. Tax-wise, it can be treated as a partnership, but is subject to the Texas Margin Tax. The LLC provides for limited liability and centralized management. Owners of an LLC have freedom to determine the internal structure and operation of the LLC. A relatively new version of the LLC is the Series LLC, which provides for segregation of management, assets and liabilities within the entity.
How do you know which entity is best for your new business venture? Your planning should consider both failure and success, so do your research and then talk to a lawyer.