When you are starting a small business, you have a lot on your mind. Choosing a legal business structure may not be at the top of your to-do list. But choosing the right structure for your needs can help your business grow and thrive. Choosing the wrong one can, in particularly bad cases, lead to personal financial disaster.
If you are starting the business by yourself, the easiest, least expensive type of business is the sole proprietorship. Technically, if you are selling goods and/or services by yourself, you already have a sole proprietorship. To do it right however, you will need to register your business with the Texas Secretary of State. If you are using a trade name, you will need to register the business name,
The simplicity of the sole proprietorship is attractive to many entrepreneurs, but it comes with serious drawbacks. If you own a sole proprietorship, there is little legal or financial separation between you and the business. You will be held personally responsible for the taxes and debts of your business.
Another disadvantage of the sole proprietorship is that, by definition, it can’t survive taking on another owner. If you take on a partner, your business will become a partnership. For this, it is wise to draft a partnership agreement.
The limited liability company, or LLC, avoids some of the problems of a sole proprietorship. Generally, owners are not held personally responsible for the debts of the business. Owners may be held liable for business taxes, but the LLC structure is adaptable enough that owners may be able to set up a tax status that protects them. And LLCs can be good for solo owners or small groups who share decision making responsibilities for a company.
To form your LLC, you must file articles of formation with the Texas Secretary of State’s office as well as registering your business and trade name, if applicable. You must also file an annual report and take care of other recordkeeping duties.
It’s wise for start-ups and entrepreneurs to thoroughly discuss their formation options with a business attorney.