1. Sole Proprietorship

The most common and simplest form of business is the Sole Proprietorship. In a sole proprietorship, a single individual engages in the business activity without necessity of formal organization. If the business is conducted under an assumed name (a name other than the surname of the individual), then an Assumed Name Certificate, commonly referred to as a DBA, should be filed with the office of the County Clerk in the county where a business premise is maintained. If no business premise is maintained, then an Assumed Name Certificate should be filed in all counties where business is conducted under the assumed name.

Pros:

• Simple and inexpensive to create and operate.
• Owner reports profit or loss on personal tax return.
• Easy to start up and discontinue.
• Can be converted easily to another business entity.

Cons:

• Owner personally liable for business debts.
• Owner responsible for raising capital.
• Insurance risks are personally held.
• Health or personal issues can negatively affect the business.

2. General Partnership

In a general partnership, two or more people share ownership of a single business. The partners manage the business and are responsible for all debts and obligations of the business. While there is no requirement that a partnership agreement be in writing in order to be recognizable, the details of the agreement should be written out formally to define the roles of each partner, including what would happen if the business fails. And similar to a sole proprietorship, there are no stat filing requirements.

Also, if the business is conducted under an assumed name (a name other than the surname of the individual), then an Assumed Name Certificate, commonly referred to as a DBA, should be filed with the office of the County Clerk in the county where a business premise is maintained. If no business premise is maintained, then an Assumed Name Certificate should be filed in all counties where business is conducted under the assumed name.

Pros:

• Simple and inexpensive to create and operate.
• Owners (partners) report share of profit or loss on personal tax returns.
• Creates multiple options for financing and managing the business.
• Partners are taxed on the income they receive from the partnership.

Cons:

• Owners (partners) are personally liable for business debts.
• Issues can negatively affect the company and the owners’ personal finances.
• Difficult to prove legality if not filed or notarized correctly.
• Limited lifespan based on the presence of the original partners.

3. Corporations

A Texas Corporation is created by filing a Certificate of Formation with the Texas Secretary of State. The Secretary of State provides a form that meets minimum State law requirements.

A corporation is a company recognized by law as a single entity with the characteristics of limited liability, centralization of management, perpetual duration, and ease of transferability of ownership interests. The owners of a corporation are called “shareholders.” The persons who manage the business and affairs of a corporation are called “directors”. Choosing the best management structure for your corporation is a decision you should make with the advice of an attorney.

Note: An “S” Corporation is not a matter of state corporate law but rather a federal tax election. A for profit corporation elects to be taxed as an “S” Corporation by filing an election with the Internal Revenue Service.

Pros:

• Owners have limited personal liability for business debts.
• Fringe benefits can be deducted as business expense.
• Owners can split corporate profits among themselves and the corporation, paying lower overall tax rates.
• Owners only pay taxes on corporate profits paid to them through salaries, bonuses and dividends.

Cons:

• More expensive to create.
• Paperwork can seem burdensome to some owners.
• Separate taxable entity.
• Some corporations are taxed on the company's profits and again on any dividends paid to the shareholders.

4. Limited Liability Company (LLC)

Like a corporation, a Texas Limited Liability Company is created by filing a Certificate of Formation with the Texas Secretary of State. The Secretary of State provides a form that meets minimum State law requirements.

An LLC, though, is not a corporation or partnership; rather, it can be thought of as a hybrid between a corporation and a partnership. Depending on how the LLC is structured, it may be modeled after a general partnership with limited liability - or to a limited partnership where all the owners are free to participate in management and all have limited liability, or to an “S” Corporation without the ownership and tax restrictions imposed by the Internal Revenue Service.

The owners of an LLC are called “members.” A member can be an individual, partnership, corporation, trust, and any other legal or commercial entity. Generally, the liability of the members is limited to their investment and they may enjoy the pass -through tax treatment afforded to partners in a partnership. As a result of federal tax classification rules, an LLC can achieve both structural flexibility and favorable tax treatment. Nevertheless, persons contemplating forming an LLC are well advised to consult competent legal counsel. A Limited Liability Company can be managed by managers or by its members. The management structure must be stated in the Certificate of Formation. Management structure is a determination that is made by the LLC and its members.

Pros:

• Owners have limited personal liability for business debts, even if they participate in management.
• Profit and loss can be allocated differently than ownership interests.
• IRS rules now allow LLCs to choose between being taxed as a partnership or a corporation.
• The liability of a member of an LLC is limited to the member’s personal investment in the company.

Cons:

• More expensive to create.
• State laws for creating LLCs may not reflect latest federal tax changes.
• Tax and liability treatment of LLCs is not uniform across State lines.
• LLCs may have some restrictions placed on the transfer of ownership.