Understanding Business Entities in Texas

As a Texas attorney, I often encounter clients who are unsure about the different types of business entities available to them. Choosing the right entity is crucial as it impacts liability protection and bookkeeping requirements. In this blog post, we will explore the differences between a corporation, a limited liability company (LLC), a series limited liability company (Series LLC), a partnership, and an assumed name, shedding light on the varying levels of liability protection and bookkeeping obligations associated with each.

1. Corporation: A corporation is a legal entity separate from its owners (shareholders) and offers the highest level of liability protection. In Texas, corporations are typically formed as C corporations. Generally, under a C Corporation, shareholders’ liability is generally limited to the amount they invest in the corporation. Corporations must comply with certain formalities, such as holding regular meetings and maintaining proper records, to maintain their liability protection. They must also keep accurate financial records, including income statements, balance sheets, and cash flow statements. Notably, some people believe that an “S corporation” is a specific type of corporation. This is a misnomer, as the term “S corporation” is not a entity type per se, but rather a tax designation, as even an LLC can be taxed as a S Corp.
2. Limited Liability Company (LLC): An LLC is a popular choice for small businesses due to its flexible management structure and liability protection. The owners of an LLC are known as members. In Texas, an LLC can be managed by its members or by managers appointed by the members. Members’ liability is generally limited to their investment in the LLC. LLCs in Texas are required to maintain proper records of their activities and keep financial records, although the level of formality is typically less stringent compared to corporations.
3. Series Limited Liability Company (Series LLC): Texas is one of the few states that recognize the Series LLC, which allows for the creation of separate series within a single LLC. Each series operates as a distinct entity, with its own assets, liabilities, and members. The liability protection for each series is generally isolated from the others, offering a unique level of asset segregation. However, it’s important to note that the Series LLC structure is relatively new and complex, requiring proper maintenance and compliance to preserve the desired liability protection. Bookkeeping requirements for a Series LLC are similar to those of a traditional LLC, but additional care must be taken to track the activities and financials of each individual series.
4. Partnership: A partnership is a business entity formed by two or more individuals who agree to share profits and losses. There are two primary types of partnerships: general partnerships and limited partnerships. In a general partnership, all partners have joint and several liability, meaning they are individually responsible for the partnership’s debts and obligations. In a limited partnership, there are general partners (who have unlimited liability) and limited partners (whose liability is generally limited to their investment). Partnerships in Texas are required to maintain proper records of their activities and keep financial records.
5. Assumed Name: An assumed name, also known as a “doing business as” (DBA) name, allows an individual or entity to operate a business under a name other than their legal name. It’s important to note that an assumed name does not create a separate legal entity or provide liability protection. Instead, it is simply a way to conduct business under a different name. Assumed names must be registered with the appropriate county clerk’s office, and accurate records of the business’s transactions and financials should be maintained.

Conclusion: Choosing the right business entity is crucial for both liability protection and maintaining proper bookkeeping records. Corporations offer the highest level of liability protection but come with more formalities. LLCs provide flexibility and reasonable liability protection, while Series LLCs allow for segregation of assets and liabilities within different series. Partnerships have different levels of liability based on their type, and assumed names are a way to operate a business under a different name but don’t provide liability.  If you are planning on starting a business entity, The Woodlands Law Firm can help you.  Please set up a consultation today.