Thinking of running your small business in your own name?
It’s common, but in Texas, forming an LLC or corporation offers big advantages.
When an individual starts their small business, they often do so in their own name. The thought process is typically that, as they are the only person involved with the business, there is no need to become a company or corporation. Not having employees or a payroll, some individuals think that the additional step of forming an entity is unnecessary and excessive. Some individuals do not believe they can form an entity when they are the only person involved with their business. What they may not know is that choosing not to operate as a sole proprietor in Texas and instead forming a Limited Liability Company (LLC), corporation, or other formal business entity can offer several key benefits.
1. Protect Your Personal Assets
With entities such as LLCs or corporations, owners are not personally liable for business debts, lawsuits, or obligations. Only the business assets are at risk. Inversely, sole proprietors (people who run businesses in their own personal names) are personally liable for all debts and legal actions against the business. Their personal assets (house, savings, etc.) could be at risk.
2. Boost Your Business Image
Additionally, by having “LLC” or “Inc.” in a business name may make the company appear more legitimate and professional, which can help when attracting investors, applying for business loans, and gaining client trust. While it might seem nominal, the suffix adds a measure of credibility and gravitas with potential clients and customers.
3. Enjoy Tax Flexibility
An individual who runs their business as a sole proprietorship has very few options when it comes to tax filings, whereas an entity allows for more versatility. An LLC can be taxed as a sole proprietorship, partnership, S corporation, or C corporation, depending on how an individual chooses to elect, providing the individual to optimize taxes based on their situation. There are multiple classifications of corporations. An S-corp enables pass-through taxation; avoids double taxation, while a C-corp has potential tax advantages on retained earnings but is subject to double taxation unless planned carefully. Inversely, a sole proprietor has no tax flexibility. All income is reported on their personal tax return (Schedule C), and they are subject to self-employment taxes on all profits.
4. Build a Stronger Business Foundation
Formal entities provide a clear separation between personal and business finances as well as making it easier to build business credit and maintain legal protection.
An LLC or corporation can have multiple owners (members/shareholders) and is not tied to one person, making it easier to transfer ownership, bring on partners or investors, and continue operations if a member leaves or passes away. With a sole proprietor, the business ends with the owner and can be harder to transfer or sell.
Business entities such as LLCs or corporations provide for more formal structure with defined roles, governance, and rules (operating agreement, bylaws). Additionally, they can help prevent internal disputes and set clear expectations among owners or investors.
In sum, who Should Consider an LLC or Corporation?
- Anyone worried about personal liability: Protect your assets!
- Growing businesses: Hiring employees or seeking investment? Formalize your structure.
- Businesses in “risky” industries: Healthcare, food services, consulting—consider the extra protection.
- Those planning for the long-term: If you want to build a business that can continue beyond just you, an entity is crucial.
Don’t leave your future to chance. Contact us today to discuss forming an LLC or corporation in Texas.
Disclaimer: This blog post provides general information and not legal or tax advice. Consult with a legal and/or tax professional to determine the best entity type for your situation.