Sole Proprietorship vs. LLC vs. Corporation

Before you flip the switch on the “Open” sign, you’ll need to decide what type of business structure is right for your future business. Unfortunately, it’s not as easy as waking up and deciding you’ll print some business cards to share with friends. Instead, you have to consider your options and put a lot of thought into the different types of structures before filing officially with the State of Texas.  

Let’s start with some definitions of the types of business structures most common in Texas: (Note: Business structure definitions and regulations can change by state, so be sure to check locally.)

Types of Businesses:

Sole Proprietorship: This is when a person operates a business with no formal organization. If Jane Doe bakes cakes, her company will act as a sole proprietorship, either as “Jane Doe” or a DBA like “Janes Cakes,” for example. This is considered the “easiest” type of business structure to have; however, there is little to no legal or financial protection if something goes wrong. 

General Partnership: This is when two or more people have a for-profit business, and they operate together. These partners may have a written partnership agreement, which is not required to be filed with the state. This can be troublesome if there is a legal issue in the future. 

Corporation: When owners of a business are called “shareholders” under a single person that manages the company, usually a Director of the business. To be an official Texas Corporation, you must file with the Secretary of State and agree to meet minimum state requirements. There is an added layer of protection with a Corporation as the state law requires shareholder agreements. The option to add an “s” at the end of “Corporation” is the difference between tax elections, so check with your business attorney and tax specialist before deciding what works best for your company. 

Limited Liability Company or LLC: An LLC has powers of both a partnership and a corporation. Owners of an LLC are called “members” and can be a person, a partnership of two or more, or a whole legal entity. An LLC provides the same legal and financial protections that corporations do but is simpler to operate since the members are not personally liable for potential damages and usually are provided with preferred tax treatment. The consensus is that this is a happy medium structure with flexibility and coverage. 

Limited Partnership: This is when a marriage of business structures combines a partnership with a general or limited partner. Of course, the limited partnership operates under the partnership agreement and certificate of formation. 

Limited Liability Partnership: When a business wants to limit the liability of all general partners, it can file as a Limited Liability Partnership with the Secretary of State. 

So, after reviewing the types of business structures, have you decided which one best applies to your business type? It’s a plethora of important information, so before you make any big decisions, always review the information with your business attorney and tax specialists. Regardless of what you choose, remember to protect your business with the right coverage. As always, your SOGO team is here to help out with any resources and advice you may need!

Still need help figuring out the location for your business? Check out our last blog “Location: The Most Underrated Part When Starting a Business” to learn more on why you need to re-think the location.