This a brief overview of the most popular forms of business
organization. Each tax entity selection choice listed has
certain tax advantages and disadvantages and may not be
appropriate depending on the nature of your particular
enterprise. If you are interested in starting a small business
or have any tax questions about properly structuring your
new business, please feel free to contact us. You may also
complete our Business Entity Formation Questionnaire.
SOLE PROPRIETORSHIP
This simplest form of business organization and also the
easiest to create. The sole proprietorship is not considered a
separate taxable entity from its owner and often operates in
the owners name or under a "doing business as" (DBA)
name. Income and expenses of the business are reported on
schedule C of the individuals Form 1040 income tax return.
The downside to sole proprietorships is that the business
owner is personally liable for the ALL the obligations of the
business.
GENERAL PARTNERSHIP
A partnership is an association of two or more persons to
carry on a business for profit. A partnership is generally
formed with a written partnership agreement between the
co-owners.
Although a partnership files a Form 1065 partnership tax
return, it is not considered a separate taxpaying entity. The
partnership return is a information return showing the items
of partnership income and expenses that flow through to the
partners individual Form 1040 income tax returns.
A potential downside to forming a general partnership is it
that ALL partners have the legal authority to bind the
partnership and other partners. You need to have complete
trust in your other partners since they can basically make
decisions in your name. Like a sole proprietorship, all
partners are personally liable for the obligations of the
partnership.
Note: General partnerships do not need to file or register
their partnership agreements with the Texas Secretary of
State.
LIMITED PARTNERSHIP
A limited partnership consists of one (or more) general
partners and one (or more) limited partners. A Texas limited
partnership must file a Certificate of Limited Partnership with
the Texas Secretary of State.
General partners have management authority with regard to
the activities of the limited partnership. Limited partners on
the other hand are simply cash investors in the limited
partnership and do not have management authority. General
partners have personal liability for obligations of the limited
partnership. Limited partners enjoy "limited liability" basically
risking only the amount invested in the limited partnership.
Like a general partnership, a limited partnership is not a
separate taxpaying entity. Items of income and expense flow
through to the general and limited partners tax returns.
Often a limited partnership will be formed with a C
corporation or S corporation as the general partnership. With
a corporate general partner structure, the owners of the
general partner corporation also enjoy the benefits of limited
liability. The corporate partner files a Form 1120 or 1120S in
addition to the Form 1065 for the limited partnership. The
corporation must also pay Texas Franchise Tax to the Texas
Comptroller.
Note: Limited partnership must file a Certificate of Limited
Partnership with the Texas Secretary of State.
LIMITED LIABILITY COMPANY
An LLC is also required to have an organizational agreement
similar to a partnership agreement.
The LLC may be taxed as a partnership and therefore it is
treated as a "pass through" tax entity with income and
deductions reported by its members on their respective
individual income tax returns.
All members of an LLC are shielded from personal liability for
the obligations of the LLC. Likewise, managers are also
shielded from personal liability. Unlike limited partners, LLC
members can participate in the management of the LLC
without losing their limited liability protection. Also, the LLC
can have managers separate from the member owners.
There are no restrictions on who may be an LLC member and
may have more than one type of membership interest.
Note: Limited Liability Company or LLC must file its Articles of
Organization with the Texas Secretary of State and is subject
to Texas Franchise Tax.
CORPORATIONS
A corporation is a legal entity having an existence separate
from that of its owning shareholders.
Shareholders have no personal liability for the obligations of
the Corporation, assuming the necessary corporate
formalities are followed and a creditor is not successful in
"piercing the corporate veil". In the state of Texas, a
corporation may have as few as one shareholder and one
director. The corporation must have a president, secretary,
and treasurer who may be the same individual.
An Internal Revenue Code Subchapter C corporation is
subject to federal income tax on its net income.
An Internal Revenue Code Subchapter S corporation is not
generally subject to federal income taxation on the entity
level. Items of income and deduction of an S corporation
pass through to the shareholders and are reported on their
individual Form 1040 income tax returns.
A regular C corporation may have more than one class of
stock such as preferred stock or non voting stock. This can
be of supreme importance in family business succession
planning. C corporations have no restriction on the number
of shareholders. By contrast, an S corporation may only have
one class of stock and is limited to a maximum of 75
shareholders. There are also other restrictions on the types
shareholders that may invest in a S corporation.
Note: A corporation must first file its Articles of Incorporation
with the Texas Secretary of State and is subject to Texas
Franchise Tax.
organization. Each tax entity selection choice listed has
certain tax advantages and disadvantages and may not be
appropriate depending on the nature of your particular
enterprise. If you are interested in starting a small business
or have any tax questions about properly structuring your
new business, please feel free to contact us. You may also
complete our Business Entity Formation Questionnaire.
SOLE PROPRIETORSHIP
This simplest form of business organization and also the
easiest to create. The sole proprietorship is not considered a
separate taxable entity from its owner and often operates in
the owners name or under a "doing business as" (DBA)
name. Income and expenses of the business are reported on
schedule C of the individuals Form 1040 income tax return.
The downside to sole proprietorships is that the business
owner is personally liable for the ALL the obligations of the
business.
GENERAL PARTNERSHIP
A partnership is an association of two or more persons to
carry on a business for profit. A partnership is generally
formed with a written partnership agreement between the
co-owners.
Although a partnership files a Form 1065 partnership tax
return, it is not considered a separate taxpaying entity. The
partnership return is a information return showing the items
of partnership income and expenses that flow through to the
partners individual Form 1040 income tax returns.
A potential downside to forming a general partnership is it
that ALL partners have the legal authority to bind the
partnership and other partners. You need to have complete
trust in your other partners since they can basically make
decisions in your name. Like a sole proprietorship, all
partners are personally liable for the obligations of the
partnership.
Note: General partnerships do not need to file or register
their partnership agreements with the Texas Secretary of
State.
LIMITED PARTNERSHIP
A limited partnership consists of one (or more) general
partners and one (or more) limited partners. A Texas limited
partnership must file a Certificate of Limited Partnership with
the Texas Secretary of State.
General partners have management authority with regard to
the activities of the limited partnership. Limited partners on
the other hand are simply cash investors in the limited
partnership and do not have management authority. General
partners have personal liability for obligations of the limited
partnership. Limited partners enjoy "limited liability" basically
risking only the amount invested in the limited partnership.
Like a general partnership, a limited partnership is not a
separate taxpaying entity. Items of income and expense flow
through to the general and limited partners tax returns.
Often a limited partnership will be formed with a C
corporation or S corporation as the general partnership. With
a corporate general partner structure, the owners of the
general partner corporation also enjoy the benefits of limited
liability. The corporate partner files a Form 1120 or 1120S in
addition to the Form 1065 for the limited partnership. The
corporation must also pay Texas Franchise Tax to the Texas
Comptroller.
Note: Limited partnership must file a Certificate of Limited
Partnership with the Texas Secretary of State.
LIMITED LIABILITY COMPANY
An LLC is also required to have an organizational agreement
similar to a partnership agreement.
The LLC may be taxed as a partnership and therefore it is
treated as a "pass through" tax entity with income and
deductions reported by its members on their respective
individual income tax returns.
All members of an LLC are shielded from personal liability for
the obligations of the LLC. Likewise, managers are also
shielded from personal liability. Unlike limited partners, LLC
members can participate in the management of the LLC
without losing their limited liability protection. Also, the LLC
can have managers separate from the member owners.
There are no restrictions on who may be an LLC member and
may have more than one type of membership interest.
Note: Limited Liability Company or LLC must file its Articles of
Organization with the Texas Secretary of State and is subject
to Texas Franchise Tax.
CORPORATIONS
A corporation is a legal entity having an existence separate
from that of its owning shareholders.
Shareholders have no personal liability for the obligations of
the Corporation, assuming the necessary corporate
formalities are followed and a creditor is not successful in
"piercing the corporate veil". In the state of Texas, a
corporation may have as few as one shareholder and one
director. The corporation must have a president, secretary,
and treasurer who may be the same individual.
An Internal Revenue Code Subchapter C corporation is
subject to federal income tax on its net income.
An Internal Revenue Code Subchapter S corporation is not
generally subject to federal income taxation on the entity
level. Items of income and deduction of an S corporation
pass through to the shareholders and are reported on their
individual Form 1040 income tax returns.
A regular C corporation may have more than one class of
stock such as preferred stock or non voting stock. This can
be of supreme importance in family business succession
planning. C corporations have no restriction on the number
of shareholders. By contrast, an S corporation may only have
one class of stock and is limited to a maximum of 75
shareholders. There are also other restrictions on the types
shareholders that may invest in a S corporation.
Note: A corporation must first file its Articles of Incorporation
with the Texas Secretary of State and is subject to Texas
Franchise Tax.
Strategic Tax Group
Dallas, Texas 75244
Contact Us to Schedule an
Appointment
(972) 788-1524
info@strategictaxgroup.com
Dallas, Texas 75244
Contact Us to Schedule an
Appointment
(972) 788-1524
info@strategictaxgroup.com
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