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Sole Proprietorship vs LLC in Texas: What to Choose?

Max Smith

Reading Time: 6 minutes

As a new entrepreneur, the first question you will ask is “sole proprietorship vs LLC in Texas: what to choose?” There is a natural confusion since both have exciting features. However, understanding your business needs and goals is the key to making the right choice.

You may explore the benefits and drawbacks of having an LLC or a sole proprietorship. However, you can analyze them with your current situation and make a fantastic decision to choose either an LLC or a sole proprietorship. 

We are here to help you through your confusion and decision-making. Lastly, there will be factors to consider while choosing between them. 

Let’s find out what to choose for you. An LLC or a sole proprietorship?

The word ‘LLC’ stands for Limited Liability Company. This business structure has the features of both a corporation and a partnership. Moreover, the LLC owners are called members.

An LLC has its own legal identity, so it can perform transactional activities, sue others, and contact third parties. In fact, it has its own business account. 

Overall, it saves your personal assets from liability and gives your business a formal structure to follow and maintain.

Now, let’s talk about its pros and cons.

Advantages & Disadvantages of an LLC

First, here are the LLC advantages:

  • LLCs protect members’ personal assets from liabilities.
  • LLC has flexibility in management.
  • The profits and losses are added to the members’ tax reports.
  • Forming an LLC requires less paperwork.
  • LLCs appear more professional to customers and vendors.
  • An LLC will help protect your brand.

Now, the disadvantages of an LLC:

  • LLC formation and maintenance impose expenses.
  • LLC members must pay self-employment taxes.
  • The LLC protection is lost if the corporate veil is pierced.
  • Investors might find LLCs less credible to fund.
  • Without an operating agreement, disagreements arise in a multi-member LLC. 

Now, you have the idea of an LLC. But what about a sole proprietorship? Let’s discuss that in the next section.

What is a Sole Proprietorship?

A sole proprietorship is the simplest business structure. There is no legal distinction between its owner and operator; they are legally the same person.

A sole proprietorship can be a wise option if you have a small business and capital. You are the one and only boss here. So you will operate, maintain, and handle all the business tasks. Moreover, you can hire an employee if you need help.  

Like an LLC, a sole proprietorship has pros and cons, too. Let’s also learn about them.

Advantages and Disadvantages of a Sole Proprietorship

Here are a few sole proprietorship advantages:

  • Forming a sole proprietorship needs almost no paperwork or formalities.
  • You will have complete control over all decisions and operations.
  • You can pay less because the individual tax rate applies to all profits.
  • A sole proprietor enjoys 100% of the business profits.
  • A sole proprietorship requires minimal investment with no legal or registration fees.

Now, the disadvantages of sole proprietorship:

  • Your personal assets are at risk if there are business debts or lawsuits.
  • Business expansion meets challenges because your capital is finite.
  • Operations might cease due to the owner’s death or incapacitation.
  • You will have to pay self-employment taxes at a higher rate. 

After learning about LLCs and sole proprietorships, let’s examine a table showing their fundamental differences.

Sole Proprietorship vs LLC in Texas: X-Factors of Difference

Here are the key differences between sole proprietorship and LLC: 

Factors

Sole Proprietorship

LLC

Liability Protection

Liability for business debts and lawsuits

Protection from business liabilities

Taxation

Taxed as a pass-through entity

Option to be taxed as a corporate or a pass-through entity

Registration Costs

Minimal registration costs with no additional charges

Fees for Articles of Organization and potential legal assistance

Formalities and Compliance

Minimal formalities and reporting obligations

More paperwork and state rules compliance

Management

Full autonomy

Flexible structure

Perception

Perceived as less established

Perceived as more credible

Continuity

Directly depends on the owner

Perpetual existence

Franchise Tax

Generally not applicable

Applicable based on gross receipts

Ownership Transfer

Difficult to transfer

Sell or transfer is easier

LLCs and sole proprietorships sound promising, but choosing one requires proper analyzing. You can create different types of LLCs in Texas, or sole proprietorships. 

Before selecting the appropriate option for your business, consider some essential factors. Do you know what the crucial factors are? Find out about them in the next section!

Choosing Between LLC vs Sole Proprietorship in Texas

When choosing between an LLC and a sole proprietorship in Texas, there are factors to consider.

1. Liability Concerns

Your personal assets need protection if you have a business with liability concerns. They are at risk in the event of debts or lawsuits.

In this case, LLCs are preferable because they provide limited liability protection. Meanwhile, a sole proprietor is exclusively liable for all business obligations.

2. Tax Implications

Both sole proprietorships and LLCs are pass-through entities by default. However, if corporate taxation is more beneficial for your business, you should choose an LLC. Moreover, LLCs can be taxed as corporations.

3. Cost and Complexity

For the cheapest business startup, a sole proprietorship is the better option. Setup and maintenance are affordable, and little documentation is required.

LLCs, on the other hand, have potential fees and more obligations.

4. Future Plans

LLCs are more suitable when your business objective is long-term growth. They can better facilitate business continuity and succession planning.

In contrast, sole proprietorships depend on the owner’s capacity or age.

5. Management

As a sole proprietor, you will make all the decisions and run the business yourself. However, you can choose an LLC if you have other wants, such as flexible business running.

6. Legal Compliance

Generally, sole proprietorships have fewer regulatory and reporting obligations. For LLCs, you must adhere to many state rules and regulations.

7. Perception

Some people find sole proprietorships less stable and credible. If you want to attract customers and investors seamlessly, we suggest forming an LLC. 

Conclusion​

We hope we have clarified your confusion on “sole proprietorship vs LLC in Texas: what to choose?” If you value liability protection and flexible management, you should choose an LLC. Otherwise, you can choose a sole proprietorship to easily form and manage your business without much formality. 

You can choose an LLC if liability protection is vital, and you plan to grow your business, or if you want flexible management.

But if simplicity or a cheaper formation are your priorities, sole proprietorship is the way to go. However, if you need clarification, we suggest you seek legal advice from expert service providers.

Key Points

  • Here are the key points in the entire discussion:

    • LLC is a business entity that combines a corporation’s and a partnership’s features.
    • LLC Advantages:
      • Limited liability protection
      • Management flexibility
      • Pass-through taxation
      • Easy formation
      • Credible image
      • Brand protection
    • LLC Disadvantages:
      • Formation and ongoing Costs
      • Self-Employment taxes
      • Potentiality of piercing the corporate veil
      • Less credibility
      • Challenges in management
    • In a sole proprietorship, the owner and the operator are legally the same person.
    • Sole proprietorship advantages:
      • Simple formation
      • Complete control
      • Tax benefits
      • Entire profit
      • Low startup costs
    • Sole Proprietorship Disadvantages:
      • Infinite liability
      • Restricted growth
      • Risky continuity
      • Higher tax rates
    • Significant differences between sole proprietorship and LLC:
      • Sole proprietors are liable for business debts and lawsuits. LLC members are protected from them. 
      • Although LLCs can be taxed as corporations, both are pass-through entities.
      • Sole proprietorships are cheaper than LLCs.
      • LLCs have more formalities than sole proprietorships.
      • A sole proprietor has full autonomy, but an LLC owner enjoys a flexible structure.
      • Some people find LLCs more credible than sole proprietorships.
      • Unlike a sole proprietorship, an LLC can stay in business indefinitely.
      • Franchise tax is generally not applicable to sole proprietorships but is to LLCs.
      • It is more difficult to transfer ownership in sole proprietorships than in LLCs.
    • Factors to consider while choosing between LLC and sole proprietorship:
      • Liability concerns
      • Tax implications
      • Cost and complexity
      • Future plans
      • Management
      • Legal compliance
      • Perception

Frequently Asked Questions

What is a sole proprietorship Texas form?

If you have a sole proprietor and want to use a legal name instead of your name, you may need to file the Assumed Name Certificate (DBA). In that case, you may file Form 503, the Name Certificate form in Texas.

How do you start an LLC in Texas for free?

You must pay the state filing fee, which is $300. You can minimize your other expenses, but filing an LLC in Texas is not absolutely free.

What are the Texas LLC filing requirements?

The Texas LLC filing requirements are:

  • Select business anime.
  • File a certificate of formation.
  • Get an EIN.
  • Hire a registered agent.
  • Make an operating agreement.
  • Get licenses.
  • Pay franchise tax.

 

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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