Becoming an entrepreneur is the life long dream of many ambitious people. After all, who doesn’t like the idea of being their own boss? Although it isn’t the first place that springs to mind for most, a good place to set up shop is Texas. With its large population, bustling cities and accommodating population, America’s Friendship State attracts both small and large business owners.
However, no matter where you start out, getting into the nitty gritty paperwork of starting up a business can be harrowing. If you want to start an LLC in Texas there’s all sorts of things to consider: you’d either need to get (or become) a Texas Registered Agent, register your business with the state, get a company bank account started and that’s just the tip of the paperwork iceberg.
Fortunately, whether you decide to brave sailing this business rite of passage yourself or choose to hire someone to help you out, the fact that many business owners call Texas home is a testament to the fact that it’s a doable task. However, even before you get around to tackling the paperwork, the first question you should be asking yourself is: What business structure should I be using?
Sole Proprietorship
A Sole Proprietorship (sometimes also known as a sole trader), much like the name implies, is owned by a single person. The owner of a sole proprietorship pays personal income tax based on the profits of the business and oftentimes they work under their own name since there isn’t really a need to separate the company from themselves. However, this also means that any liabilities incurred by the company will inevitably have to be shouldered by the individual.
Sole Proprietorship is one of the most popular types of business structures since it’s relatively fast to set up and tear down. Additionally, compared to a company or a Limited Liability Company (LLC), there is usually significantly less paperwork involved in setting up the business. Furthermore, you usually do not have to register your business with the state if it is a sole proprietorship, which generally helps the business get off the ground faster. However, this also means that sole proprietorships are unable to take advantage of the laws that certain states have to protect corporations or partnerships.
Corporation (Corp.)
A corporation is created when it is incorporated by a group of shareholders who share ownership of the corporation. A corporation is considered a completely separate entity from its owners and shareholders. This means that should the company incur liabilities, it will not go on to affect the owners, shareholders and investors. For example, if the business goes bankrupt, the only risk a shareholder faces is the loss of their shares in the company. Any debt incurred cannot and will not affect the shareholder personally.
Corporations can legally be considered a person and as such are capable of signing documents or entering the legal deals. Although most corporations are made with the intention of turning over a profit for its owners, that is not always the case. A corporation is created by a group of people that have a similar goal, and can therefore include non-profits and charities. Corporations are often subject to and are regulated by their state’s laws whereas public corporations are regulated by federal laws. States generally require corporations to file articles of incorporation and issue stocks to the company’s shareholders. The shareholders are also required to elect a board of directors in an annual meeting.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure that protects its owners from personal responsibility from its debts and liabilities. In some ways, it can be seen as a hybrid of a corporation and sole proprietorship. Much like a corporation, the company’s assets are kept separate from the individual assets of the partners and owners, which provides some level of financial protection. Like a more traditional partnership or sole proprietorship, it allows profits to be passed directly to the owner’s personal income and will be taxed as personal income.
Some of the main attractions to this particular business model is that it offers a unique amount of flexibility while still ensuring financial security for its owners. Additionally, LLC’s owners are not taxed on a corporate level, and are only taxed on an individual level (thus avoiding being taxed “twice”). Unless you’re planning to set up a bank or an insurance company, most states don’t have many restrictions on who becomes a member of an LLC. An LLC can be managed by managers or by its members, however regardless of how the LLC decides to set up its management structure, the structure has to be declared in the certificate of formation.
Starting up a business is not exactly what most people would call a walk in the park. There’s a lot of responsibility and paperwork involved and sometimes it can take a while before business really kicks off. However, with enough research and with the right team of people, setting up the business of your dreams is actually a fairly achievable task!