Entrepreneurs forming a business must decide which type of organizational structure best suits them. There are several types of business entities recognized under Texas law, among them partnerships and corporations. A third type — the limited liability company, or LLC — combines elements of both, in that it is subject to lesser regulation than corporations while offering virtually the same legal protection. In addition, an LLC incurs no taxes of its own.
While a partnership affords business owners an easily adjustable management model along with simplified tax treatment, a corporation provides the owners with limited legal exposure. Yet, a traditional corporate entity is in essence double-taxed — first as to money earned by the business and second as to dividends paid to shareholders.
An LLC offers a useful crossover of these two structures. It is considered a “pass-through” entity, which means that the LLC does not pay taxes but its members pay taxes on the profits they draw. Additional tax benefits under Texas state law are that LLC operating costs and depreciation of assets are tax deductible.
Another benefit of utilizing an LLC is the protection it gives to the members’ personal assets. If an LLC is sued and a judgment is obtained against it, the personal assets of the individual LLC members are not permitted to be seized in order to satisfy a judgment. By contrast, a partnership has at least one partner who is personally liable.
Like a partnership, the LLC structure permits a business owner to operate a business owner without many of the reporting and record keeping requirements that corporations must adhere to. An LLC is also not required to maintain a board of directors or hold meetings for shareholders and directors.
For anyone starting a business, the trade name they choose is an important long-term decision. The name becomes valuable due to the reputation, good will and brand associated with the business. Texas Law protects the name of an LLC that is registered in Texas, so that no other business can use the name or a name so similar as to create confusion.
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