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LLC vs. S Corporation: Factors to Consider When Structuring Your Texas Business

Starting your own business can be personally and financially rewarding. Avoiding missteps when setting up your company can help you achieve the highest degree of success possible for your new venture. Working with a firm that specializes in Houston business planning services can help you decide on the most appropriate classification for your company and can ensure that the process runs smoothly from start to finish. Here are four factors to consider when deciding between a limited liability company (LLC) and an S corporation for your enterprise.

Basic Structure

Opting for an LLC can provide much greater flexibility in structuring your new business. LLCs can operate under the leadership of one or several owners or under managers who have no ownership stake in the company. Additionally, the degree of autonomy enjoyed by owners of LLCs is far greater than that exercised under the S Corporation model. S Corporations operate under a board of directors that shares responsibility for the leadership of the corporation. These individuals can manage operations themselves or delegate that responsibility to managers chosen and employed by the board.

Liability

Both S Corporations and LLCs are designed to limit the legal and financial liability of their owners. Instead, any obligations or liabilities incurred by the company remain the responsibility of the business entity, not the owners or managers of these corporations of LLCs. This can allow a greater tolerance for financial risk and attendant rewards when making business decisions in the competitive marketplace. Enlisting the help of a Houston corporate law firm can provide real help in navigating the complexities of liability law and can ensure that you and your business are protected against financial losses caused by liability lawsuits.

Operating Requirements

Under Texas law, corporations are required to adhere to certain standard operating practices that include the following:

  • Taking minutes at all meetings of the board of directors or shareholders
  • Maintaining financial records for a certain number of years
  • Reporting any changes in address, points of contact, ownership or board of directors membership to state officials in a timely manner
  • Enacting and maintaining bylaws for the operation of the company

By contrast, LLCs are only required to maintain a current point of contact with the state of Texas to ensure that any legal matters can be handled promptly.

Tax Obligations

Corporations and LLCs have different taxation requirements. Because corporations are considered a legal entity, these business enterprises maintain responsibility for their own taxes. Any profits paid to the owners or shareholders are determined after taxes have been paid. Since the owners must then pay tax on the profits they receive as dividends, these profits are subject to double taxation:

  • Profits are taxed at the corporate level, reducing the overall earnings of the company
  • Dividends disbursed to shareholders and owners are also taxable on the personal income tax returns of these individuals.

The profits derived from operating an LLC, by contrast, are usually taxed only one time. LLCs use a system known as partnership taxation. Under this tax system, the profits and losses of the company are passed on to the owner or owners of the LLC and are reported on his or her personal income tax return. This can provide significant tax advantages for business owners who opt for the LLC model of operation.

The Houston business law experts at The Law Office of Henry Jakob, can provide you with the most accurate and relevant advice on setting up your Texas business. We specialize in corporate and commercial litigation, real estate law and business planning. Our experience and expertise can ensure that your new company enjoys the most advantageous tax situation and the greatest opportunities for profitability in the modern business marketplace. Give us a call at 832.879.2244 to schedule a consultation. We look forward to the opportunity to serve your legal requirements.

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