What type of business entity should I form?
A number of different factors should be considered when selecting the type of entity for your business including tax, liability, and ownership. Following is a brief comparison of the most common business entities.
The choice of entity has a direct impact on federal taxation. In general, corporations are subject to taxation at the corporate level and then again at the personal level, while partnerships and limited liabilitycompanies are pass-thru entities for taxation purposes and taxed only at the personal level. Small corporations that make a subchapter Selection (otherwise known as “S corporations”) are taxed as pass-thru entities if specific size limitations and shareholder restrictions are met. Generally, to be taxed as a pass-thru entity, S corporations must have 75 or less shareholders and all shareholders must be United States citizens.
Another tax impact of entity choice is whether state franchise tax will have to be paid. Under current Texas law, all state law corporations, including S corporations and limited liability companies must pay the Texas franchise tax unless an exemption applies. Limited partnerships do not pay franchise tax. This fact leads any new business owners to choose to form their business as a limited partnership.
One of the key reasons for choosing a corporation, limited liability company, or limited partnership is to take advantage of the liability limitations. Generally, the owners of corporations, limited liability companies, and limited liability partnerships are protected from most liability. While limited partners of a limited partnership are protected from liability, the general partner of the same limited partnership has unlimited vicarious liability for the torts of the other partners and contracts of the partnership.
Ownership restrictions may also determine what entity suits you best. As previously mentioned S corporations are restricted to 75 shareholders that are United States citizens. In Texas, limited partnerships and limited liability partnerships require a minimum of two (2) persons. While a limited liability company in Texas may exist with only a single member, most states require two (2) or more persons to form a limited liability company.
Please keep in mind that this is an overview comparison. There are many different types of business entities, each with their own advantages and disadvantages. Your selection of an entity should be made with the advice of a professional to ensure that your objectives are met. Please call our office to further discuss your entity