Anyone engaged in business must decide which type of entity to use to conduct their business. In Texas we now have multiple choices. In order to decide which business entity to choose it is helpful to know some of the features of each type of entity.

Sole proprietorship - is comprised of an individual who is the sole owner of the business. Typically, the individual will want to conduct the business under an assumed name such as Ready Eddie Construction Services, which should be registered with the county in which the business is located. Once this is completed a bank account and books should be established for the company. The sole proprietor is now ready to do business. The biggest advantage to this type of entity is its simplicity. Other advantages are that the individual is taxed at individual tax rates and there is no state margin tax. Then why don't all businesses use this form? The individual owner is personally liable for all of the liabilities of the business, including any personal injuries negligently caused by its employees.

General Partnership - is comprised of two or more people or companies. Typically the partners will enter into a written partnership agreement governing the relationship. The agreement can be very simple. Also, the partnership does not have to pay the state margin tax as long as the partners are individuals. The downside is that the partners are personally liable for the liabilities of the partnership.

Limited Partnership - is similar to the general partnership except it is comprised of a general partner and numerous limited partners. The limited partners are not personally liable for the liabilities of the partnership.  Although, the general partner is personally liable, this can be circumvented by making a corporation the general partner. The limited partnership is now subject to the state margin tax.

Corporation - is still a very popular choice of entity. The major advantages to this entity are that there is limited liability, there is long standing legal precedent as to how it should be governed, and it is generally recognized both nationally and internationally. Disadvantages are that the corporation is subject to the state margin tax and there is double taxation of dividends. However, for small corporations, the double taxation can be avoided by making an S-corporation election.

Limited Liability Company - Is a relatively new breed of entity in Texas. It is set up in much the same way as a corporation. Instead of having shareholders you have members. The management of the company is governed by the Company Agreement, similar to bylaws of a corporation. The members are not personally liable for the liabilities of the entity. A major advantage of this type of entity is its flexibility. From a federal income tax standpoint it can be treated like a partnership or a corporation. However, it is subject to the state margin tax.

Limited Liability Partnership - This is simply a partnership that has registered to do business with the state as a limited liability partnership. However, unlike the general partnership, the partners have protection from personal liability. Many professionals such as doctors and lawyers seem to be electing to use this form of entity. This entity is now subject to payment of the state margin tax.

With all these choices how does one chose? Probably, the best starting point is to consult with your CPA and determine which entity is best for you from a tax and accounting standpoint. Next, consult with an attorney to determine which choice of entity best suits you from a legal standpoint.

This article is not intended to be a substitute for legal advice. If you have a legal problem, you should consult a lawyer.