Subchapter S Vs. Sole Proprietorship in Texas

by Jim Thomas
A sole proprietor has complete control over his business.

A sole proprietor has complete control over his business.

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When you go into business in Texas -- or any other state -- one of your first tasks is to decide how your enterprise will be legally structured. There is a range of options. You can operate the business as an individual, a partnership or a corporation. There are advantages and disadvantages to each legal structure, including the level of liability you assume, tax considerations and the amount of control you have over the business. Sole proprietorship and Subchapter S businesses are subject to federal regulations, particularly Internal Revenue Service requirements, so the main differences between the two legal structures will largely be the same in Texas as in North Dakota or any other state.

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Ownership

A sole proprietorship is a business owned by a single individual. You can hire hundreds of employees or contractors and as long as you remain the lone owner of the business, you can remain a sole proprietor. A Subchapter S business is a corporation, formed when two or more individuals or groups form a separate entity to operate a business in a state. It must be registered with the state and comply with of the requirements of a corporation. As Reference for Business explains, the purpose of Subchapter S is to make incorporation more attractive to small businesses by allowing them to enjoy some of the advantages of corporate status while relieving them of some of the drawbacks.

Legal Liability

If you are a sole proprietor, you are personally liable for the debts of your business. Not only can you be sued for your own unlawful acts, but those of your employees, too. In addition to your business assets, your personal assets are at risk at well, including your house and bank accounts. In short, your liability is unlimited. A Subsection S business limits your potential liability to business assets as opposed to personal assets. Also, your personal assets are protected from the negligence of your employees, although not from your own behavior.

Taxes

Taxes are handled somewhat differently. As Residual-Rewards.com explains, sole proprietors receive all of the income generated by the business and apply profits or deduct losses on their own personal tax returns. You can do some things as a sole proprietor that Subsection S companies can't do to lower your taxes, such as hiring your kids or deducting some health insurance payments. Subsection S businesses pay profits directly to shareholders. In this respect, as Reference for Business states, Subsection S businesses are treated similarly to sole proprietorships -- neither are subject to double taxation. On the other hand, Subsection C businesses, another form of incorporation, are subject to double taxation and its owners can't deduct losses from their own personal tax returns.

Other Considerations

In Texas, as in most states, it is easy to set up a sole proprietorship. You can operate under your own name or, if your business has a name of its own, file an Assumed Name Certificate with the county clerk. You maintain total control over your business. Subsection S companies require significantly more more paperwork with the IRS in terms of record-keeping as well as other required duties of a corporation, such as annual director and shareholder meetings. Control of the business rests with the shareholders. To choose Subsection S status, you must specifically request it by filling Form 2553 with the IRS. Otherwise, you are considered by default to be a Chapter C corporation.