LLC vs Corporation Texas: Everything You Need to Know
In order to form an LLC or corporation, you must file a certificate of formation with the Texas Secretary of State. 3 min read
LLC vs. Corporation Texas
An LLC versus a corporation in Texas operates differently. If you want to form a business in the State of Texas, you have many options, including an LLC (Limited Liability Company), corporation, sole proprietorship, and general partnership. While the latter two are rather easy to form, such business structures provide little to no liability protection. LLCs and corporations, however, provide personal liability protection.
Starting Your Business in Texas
In order to form an LLC or corporation, you must file a certificate of formation with the Texas Secretary of State. This certificate includes your company’s name and address, your name, and your registered agent name/address. Keep in mind that you can serve as the registered agent if you are a Texas resident.
Similarities of Corporations and LLCs
There are many similarities between corporations and LLCs, the most notable being the limited liability protection. Owners and shareholders cannot be held liable for the debts and obligations of the business. Other similarities include:
• Both corporations and LLCs have distinct identities from the individual owners, members, and/or shareholders of the business. For that reason, the business can sue, or face a lawsuit.
• Only one person is required to form an LLC or corporation.
• There is no maximum cap on the number of owners who can operate an LLC or C corporation.
Differences of Corporations and LLCs
While there are many similarities between corporations and LLCs, there are also some differences between these business structures. Moreover, corporations can be further broken down into two unique types of businesses – C corporations and S corporations.
Other differences between a corporation and LLC include the following:
• Owners of a corporation are called shareholders whereas LLC owners are called members.
• Corporation owners aren’t paid; instead, they receive dividends. They are then taxed on such dividend distributions. Owners of an LLC receive a percentage of the profits made in any given taxable year, and subsequently pay taxes on that share on their own personal tax returns.
Management Functionality – LLC vs. Corp
Texas corporations have a board of directors that manage the daily operations of the business. The corporation’s shareholders (who are similar to members of an LLC) have a minor role, and only have voting power on issues that greatly affect the corporation.
The LLC members have a lot of flexibility in the management structure. The members can choose to operate a member-managed LLC, which means that they have full authority and oversight of the daily business operations. Another choice for the members is operating a manager-managed LLC. This means that the members hire an outside manager to oversee the business decisions. If they choose to hire an outside manager, the members will have very little decision over the daily operations of the company. Instead, the members will have only voting power (similar to shareholders) in determining major decisions.
An LLC is generally not subject to corporate income tax. Instead, the profits of the LLC are reported on the members’ personal tax returns. More specifically, if it is a one-member LLC, then that one member (owner) will report all of the profits on his or her personal tax return. The profits generally get passed onto the members only if those members choose to have the LLC be ‘disregarded’ by the IRS. This means that the LLC members have elected to have the IRS ‘disregard’ the LLC, as though it doesn’t exist, which is why the profits are reported on the members’ personal tax returns.
Depending on if the corporation operates as an S Corp or C Corp, the company could be subject to double taxation. More specifically, a C Corp is in fact subject to double taxation. Therefore, the corporation will pay corporate income tax on its profits. If the corporation subsequently distributes any leftover profits to the shareholders via distributions (dividends), then those individuals must report the dividends on their personal tax returns.
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