TEXAS BUSINESS LAW
Texas Business Structures: Which Entity to Choose
Choosing a business structure in Texas comes down to a trade-off between liability protection, tax treatment, and administrative burden — and for most small businesses the LLC wins on all three, which is why it’s the default choice. But it isn’t the only option, and the right answer depends on how many owners you have, whether you’ll raise investment, and how you want profits taxed. This overview compares the main Texas structures so you can match the entity to your situation before you file anything with the Secretary of State.
The Main Structures at a Glance
| Structure | Liability protection | Default taxation | Formation |
|---|---|---|---|
| Sole proprietorship | None — owner is personally liable | Pass-through (personal return) | No state filing |
| General partnership | None — partners personally liable | Pass-through | No state filing |
| Limited partnership (LP) | Limited partners protected; general partner liable | Pass-through | Certificate of formation |
| LLC | Yes — members’ personal assets protected | Pass-through by default; can elect corporate | Certificate of formation (Form 205), $300 |
| Corporation | Yes — shareholders protected | C-corp (entity-level) or S-corp election | Certificate of formation (Form 201), $300 |
Sole Proprietorships and General Partnerships
These are the “default” structures — you’re a sole proprietorship the moment you do business alone without forming an entity, and a general partnership the moment two or more people do. They’re free and simple, but they offer no liability shield: your personal assets are exposed to every business debt and lawsuit. For anything beyond the lowest-risk side venture, that exposure is the reason to form a real entity.
LLCs: The Default Choice for Most
A Texas LLC gives owners (called members) personal liability protection while keeping pass-through taxation — profits flow to the members’ personal returns, avoiding the corporate “double tax.” It’s flexible (one member or many, member- or manager-managed), relatively cheap to form, and light on formalities. Forming one means filing a certificate of formation and, ideally, adopting a company agreement. For most Texas small businesses, the LLC is the right starting point.
Corporations: When You’ll Raise Capital
A corporation also shields its owners (shareholders), but it carries more formality — a board of directors, bylaws, stock, annual meetings, and minutes. Its advantage shows up when you plan to raise outside investment or issue stock: venture investors expect a corporation (often a Delaware C-corp), and stock makes equity compensation straightforward. The trade-off is the C-corp’s entity-level tax (with the S-corp election available to smaller corporations to get pass-through treatment). See our guide to forming a corporation in Texas, and, for the in-state vs Delaware question, Texas vs Delaware for your startup.
Don’t Forget the Texas Franchise Tax
Whatever entity you choose, most Texas business entities (LLCs, LPs, corporations) are subject to the state franchise tax and must file annually with the Comptroller — though entities under the no-tax-due threshold ($2,650,000 in annualized revenue for 2026) owe no tax and instead file a Public Information Report. Sole proprietorships and general partnerships of natural persons are not subject to it. It’s a modest but real compliance obligation that comes with the liability protection.
Frequently Asked Questions
What is the best business structure in Texas for a small business?
For most small businesses, the LLC is the best fit: it provides personal liability protection, pass-through taxation that avoids the corporate double tax, and relatively light formalities. The right choice still depends on owner count, investment plans, and tax goals.
What is the difference between an LLC and a corporation in Texas?
An LLC offers liability protection with pass-through taxation and minimal formality. A corporation offers liability protection but requires a board, bylaws, stock, and meetings — better suited to businesses raising outside investment or issuing equity. Both cost $300 to form.
Do I need to file anything to be a sole proprietor in Texas?
No state formation filing is required to operate as a sole proprietor or general partnership, but you get no liability protection. You may need an assumed-name (DBA) filing and local permits. Forming an LLC or corporation requires a certificate of formation with the Secretary of State.
Does every Texas entity pay franchise tax?
Most formed entities (LLCs, LPs, corporations) are subject to the Texas franchise tax and must file annually, though those under the no-tax-due threshold ($2.65M for 2026) owe no tax. Sole proprietorships and general partnerships of individuals are generally not subject to it.
The entity you choose shapes your liability, taxes, and ability to raise money for years. Reidel Law Firm helps Texas founders pick and form the right structure on transparent flat fees. Choose the right Texas entity.
