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Corporation vs LLC in Texas: Choose the Best One (2024)

Max Smith

Reading Time: 5 minutes

Do you want to build a business in Texas? Both corporations and LLCs are beneficial for entrepreneurs. But you should know about ‘Corporation vs LLC in Texas.

You can buy stocks and create a corporation. So you will become a shareholder and enjoy profit or loss. Again, you can also create an LLC, a legal entity. It offers taxation advantages and management flexibility. 

Moreover, corporations and LLCs have their own features, benefits, and potential to explore. Indeed, you must know the pros and cons of both to make a decision. 

So now let’s start the discussion on corporations vs LLCs.

A corporation is a type of business structure that can be sued, produce a profit and own property. It exists as a distinct legal entity from its owners, who are called shareholders and buy stock in the company.

If you want to form a corporation, file your Articles of Incorporation with the state and pay the required fees. Moreover, most big companies are corporations because:

  • Shareholders get limited liability protection.
  • Shareholders earn in two ways: dividends and stock appreciation.
  • Corporations are capable of existing even with ownership changes.

Corporations can be non-profit, too. They are formed for charitable purposes rather than making profits.

The features of the corporation:

  • Management: Shareholders elect a board of directors, appointing officers such as the CEO and CFO. These officers run the company.
  • Taxation: Corporations can be subject to tax in two ways:
  • C corporation: double taxation
  • S corporation: pass-through taxation
  • Compliance: Corporations are legally required to maintain bylaws. There are also state-specific regulations that govern corporations. Besides, there are a few annual compliances, too.

That was all about the corporation. Now, let’s jump into the LLC. 

What is an LLC?

An ‘LLC’ is a legal business entity. Its owner, or a member, can be an individual or a corporation. Even another LLC can own an LLC.

To form this legal entity, you must file a Certificate of Formation with the state and pay a filing fee.

Small businesses prefer LLCs more often because they combine corporation and sole proprietorship features. Like:

  • Limited liability protection,
  • Pass-through taxation,
  • Flexible management & more.

An LLC’ has a few notable features.

The features of the LLC:

  • Management: Members can manage the LLC themselves. Or, they can appoint managers.
  • Taxation: By default, LLCs are taxable as pass-through businesses. However, if the owner finds it fitting, the LLC can be taxed as a corporation.
  • Compliance: There are few formalities to maintain in an LLC structure. You only need to be careful of the financial records to avoid any claim of piercing the veil.

In the following section, let’s discover the differences between corporations and LLCs.

Difference Between LLC an Corporation in Texas

Both corporations and LLCs provide their owners with limited liability protection. However,  there is a difference between LLC and Inc. in Texas. Here are the key ones:

  1. Formation Requirements:
  • LLC: You must submit a Certificate of Formation to the Texas Secretary of State and pay a filing fee. An operating agreement is not required but is recommended.
  • Corporation: You must file an Articles of Incorporation with the Texas Secretary of State and pay a filing fee. Bylaws are not recommended but are required.
  1. Management Structure:
  • LLC: The structure is flexible. You can choose whether it is managed by members or appointed managers.
  • Corporation: Its management system is more structured. The shareholders elect a board of directors appointing officers like the CEO and CFO.
  1. Taxation:
  • LLCs: LLCs are treated as pass-through entities for taxing. Profits and losses are carried over to the member’s tax filings. Alternatively, you can also choose to tax your LLC like a corporation.
  • Corporation: C corporations are liable to double taxation. First, the corporation pays tax on its profits, and then the shareholders pay tax on their dividends. On the other hand, S corporations are taxed similarly to LLCs, which are also treated as pass-through entities.
  1. Compliance Obligations:
  • LLC: Texas LLCs are less obligated to maintain compliance. For example, they do not need to hold annual meetings or keep extensive corporate records. You will need to keep the LLC’s financial records accurate and up-to-date.
  • Corporation: Texas corporations are strictly obligated to maintain formalities. For example:
  • There must be regular shareholder and board of director meetings.
  • Detailed corporate records should be maintained.
  • They should comply with the formalities of the Texas Business Organizations Code.

Now, let’s glance at a table of the pros and cons of corporations and LLCs. 

Corporation vs LLC in Texas: Pros and Cons

Here is a table comparing the pros and cons of LLCs and corporations.

Feature

LLC

Corporation

Limited Liability

Members have limited liability

Shareholders have limited liability

Taxation

Pass-through taxation with an option for corporate taxation

C Corp: Double taxation; S Corp: Pass-through taxation

Self-Employment Taxes

Not applicable

Members pay on their profit shares

Formation Cost

Lower cost and simpler

Higher cost and more complex

Management

Member-managed or manager-managed

Board of Directors and officers

Operational Requirement

Flexible on formalities

Rigid on formalities

Maintenance

Simpler with less paperwork

More complex, more filings

Professional Image

Perceived less credible

Perceived more prestigious

Access to Capital

Attracts less investors

Attracts more investors

Profit Distribution

Not tied to ownership percentage

Based on the shareholding percentage

Ownership Transfer

Transfer can be complex

Easy transfer of shares

Employee Benefits

Limited stock-based benefits

Extensive stock benefits and incentives

Perpetual Existence

It usually dissolves when a member leaves/dies

Capable of continuing when ownership changes

Conclusion

In the end, we hope you have learned everything there is to know about corporation vs LLC in Texas. Whether you should choose a corporation or an LLC to build depends on your current situation and future plans. You may analyze the features, benefits, and risks and decide whether to create a corporation or an LLC. 

Furthermore, there are many types of LLCs to form. So you can choose a particular LLC to create and operate. If you still have more queries, we suggest you seek professional advice.

Key Points

Here are the key points:

  • A corporation is a type of business structure. Its owners are called shareholders.
  • An ‘LLC’ is a business structure that has its own legal value. Its owners are called members.
  • Difference between LLC and Corporation in Texas:
    • Formation: To form an LLC, file a Certificate of Formation with the state. To create a corporation, file Articles of Incorporation with the state.
    • Management: LLCs are member-managed or manager-managed. In corporations, shareholders elect a board of directors, which appoints officers.
    • Taxation: LLCs can be treated as pass-through entities or corporations. C corporations are subject to double taxation, but S corporations are taxed as pass-through entities.
    • Compliance: LLCs are less obligated while maintaining formalities, whereas corporations are strictly obligated.

Frequently Asked Questions

How to start an LLC in Texas for free?

You cannot create an LLC in Texas for free—there is a $300 filing fee and a registered agent fee. However, you can reduce expenses by saving money and avoiding extra costs.

How do I register an LLC in Texas?

Apply for an LLC with the SOS and pay the filing fees ($300). You must also submit the necessary documents and registered agent information. You can apply online, in person, or via mail. 

What is the Texas Secretary of State?

One of the six state officials is the Secretary of State (SOS), designated in the Texas Constitution to form the Executive Department of the State. The governor appointed the secretary, who was confirmed by the Senat. So the secretary is bound to serve the governor. 

Max Smith - LLC Formation

He is a seasoned entrepreneur and legal expert at LLC Formation Hub. With a stellar track record in both business and law, Max simplifies the complexities of LLCs. His practical insights, featured on LLC Formation Hub, empower entrepreneurs across the USA. Max merges business finesse with legal acuity to guide businesses toward success.


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