Texas Corporation vs. Texas Limited Liability Company

By Larissa Bodniowycz, J.D.

Texas Corporation vs. Texas Limited Liability Company

By Larissa Bodniowycz, J.D.

Choosing which type of business form is the most advantageous for you is a difficult decision when starting a company. In Texas, many future business owners find themselves torn between forming a limited liability company (LLC) and forming a corporation. Each has its own advantages and disadvantages.

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Formation Process

To have a business recognized in Texas, both LLCs and corporations form by filing a certificate of formation. In addition to the certificate, a business must pay a filing fee with the Texas Secretary of State.

The filing fee varies depending on the specific make-up of your business. For corporations, the base fee is slightly higher.

Limited Liability Protection

Both company designations provide liability protection for their owners. Limited liability protection generally prevents an LLC's creditors from pursuing the company's owners, called members, for the company's debts.

For example, if a company takes out a business loan that it cannot repay, the lender generally cannot recover the amount owed from one of LLC members' personal bank accounts. To keep this protection intact, members must be sure to follow procedures correctly.

Company Structure

LLCs are owned by members and managed by managers. Decision making usually goes faster than corporate decision making because they must follow fewer formalities. Under Texas law, these companies have a great deal of flexibility in determining their management structure.

Corporations do not have the same flexibility as LLCs in creating their structures. Corporations are owned by shareholders and managed at the highest level by a board of directors. The board of directors usually appoints officers to help manage the day-to-day operations of the corporation. Corporate decision making can be slow because it often requires formal processes that include meetings and votes.

Profit Distribution

One of the biggest differences between these company types is how they distribute profits. In a corporation, all shareholders of the same class must share profits equally in proportion to the number of shares held.

In contrast, in an LLC, members can agree to split profits in any manner they choose. This is determined in advance and included in the company's bylaws or operating agreement. Members can decide to split profits proportionally according to their ownership percentages or disproportionately.

Tax Treatment

By default, the income earned by LLCs is taxed only once. Like partnerships, these companies have pass-through taxation. The income generated by the business passes through to the members, who pay taxes on it on their individual income tax returns. In contrast, corporations are subject to double taxation by default. The corporation, as an entity, pays taxes on its income, which it distributes to its shareholders. The shareholders then pay taxes on their distributions with their individual tax returns. For businesses that do not earn a high annual income, pass-through taxation usually results in more tax savings.

Each entity type can change its tax status if it meets certain criteria. An LLC can choose to be taxed like a corporation by filing an Entity Classification Election (Form 8832) with the Internal Revenue Service (IRS). A corporation can elect to be taxed on a pass-through basis by filing an Election by a Small Business Corporation (Form 2553) with the IRS. However, there are restrictions that come into play when selecting these non-default tax options. For example, S corporations are limited in the number of shareholders they can have.

Duration

Under Texas law, if a member of an LLC dies, the company must be terminated unless the remaining members vote to continue it or provide for the event in their operating agreement. Corporations, in contrast, continue in existence after their owners' deaths.

Choosing a business entity type can be a difficult decision. Both of these two share some advantages—the main one being liability protection—but each has its own distinct disadvantages. They differ in structure, profit allocation, and tax classification.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.