Starting a business in Texas is exciting, but one of the first legal decisions you'll face is also one of the most important: should you form an LLC or a corporation?
Both structures protect your personal assets from business liabilities. But they work differently when it comes to taxes, management, and long-term flexibility. Here's a plain-language guide to help you decide.
What Is an LLC?
A Limited Liability Company (LLC) is a flexible business structure that combines the liability protection of a corporation with the simplicity of a sole proprietorship or partnership. LLCs are governed in Texas by the Texas Business Organizations Code (BOC).
Key characteristics:
- Liability protection: Your personal assets (home, savings, car) are generally shielded from business debts and lawsuits
- Pass-through taxation: By default, LLC profits flow through to the owners' personal tax returns -- the LLC itself doesn't pay federal income tax
- Flexible management: No board of directors required. The LLC can be managed by its owners (members) or by appointed managers
- Fewer formalities: No required annual meetings, no corporate minutes, less paperwork
What Is a Corporation?
A corporation is a more formal business structure with a defined hierarchy: shareholders (owners), a board of directors (oversight), and officers (management). Texas recognizes both C-corporations and S-corporations.
Key characteristics:
- Liability protection: Same personal asset protection as an LLC
- Separate tax entity (C-corp): A C-corporation pays its own federal income tax, and shareholders pay again on dividends -- this is called "double taxation"
- S-corp election: An S-corporation avoids double taxation by passing income through to shareholders, but has restrictions (100 shareholder limit, one class of stock, U.S. residents only)
- More formalities: Annual meetings, corporate minutes, board resolutions, and more recordkeeping
Tax Considerations in Texas
Texas has no personal income tax, which affects this decision differently than in other states:
- Texas franchise tax: Both LLCs and corporations are subject to the Texas franchise (margin) tax if they exceed the revenue threshold (currently $2.47 million in total revenue). Below that threshold, you still file but owe nothing.
- Federal taxes: This is where the structure matters most. An LLC taxed as a sole proprietorship or partnership means all profits are subject to self-employment tax. An LLC or corporation that elects S-corp status can reduce self-employment tax by paying the owner a reasonable salary and taking remaining profits as distributions.
When an LLC Makes Sense
An LLC is typically the better choice for:
- Small businesses with one or a few owners -- Simplicity and flexibility are the main advantages
- Real estate investors -- LLCs are the standard structure for holding rental properties in Texas
- Professional practices and consulting firms -- Low administrative burden with strong liability protection
- Businesses that want to keep things simple -- No board meetings, no corporate minutes, less paperwork
When a Corporation Makes Sense
A corporation is typically better for:
- Businesses seeking outside investment -- Venture capital and angel investors prefer the standardized structure of a C-corp (especially Delaware C-corps)
- Companies planning to go public -- Only corporations can issue stock on public exchanges
- Businesses with multiple classes of ownership -- C-corps can issue preferred stock, common stock, and other equity classes
- Large companies with many owners -- The corporate structure provides clearer governance
The S-Corp Election: Best of Both Worlds?
Many Texas business owners form an LLC and then elect S-corp tax treatment with the IRS. This gives you:
- The simplicity and flexibility of an LLC
- The self-employment tax savings of an S-corp
- Pass-through taxation (no double taxation)
This is one of the most popular structures for small businesses in Texas earning more than $50,000 to $60,000 in annual profit, because the tax savings on self-employment taxes can be significant.
Formation Basics in Texas
Regardless of which structure you choose, formation in Texas requires:
- Filing with the Texas Secretary of State -- Certificate of Formation for an LLC, or Certificate of Formation for a corporation
- Filing fee: $300 for either structure
- Registered agent: A person or entity in Texas designated to receive legal documents
- EIN: An Employer Identification Number from the IRS (free)
Get It Right from the Start
Choosing the wrong business structure can cost you thousands in unnecessary taxes or create liability gaps you didn't anticipate. At WG Law, we help entrepreneurs and small business owners in McKinney and North Texas choose the right structure, file the paperwork, and set up the foundational documents -- operating agreements, bylaws, and resolutions -- that protect your business from day one.