Starting a business in Texas means making decisions that will shape your taxes, liability and growth for years to come. Choosing the right business structure, such as between a limited liability company (LLC) and an S corporation, is one of the first and most consequential decisions you will make.
These two types of entities frequently appear together under the same list of business structure options, but they operate on different levels. An LLC is a legal entity you form with the state of Texas. An S corporation is a federal tax election you make with the IRS. One defines your legal structure, the other defines how your business is taxed.
The LLC: Flexible and founder-friendly
Under the Texas Business Organizations Code (TBOC), an LLC offers flexibility in ownership, management and profit distribution. Its governing document, known as a company agreement in Texas law, is your business rulebook. A well-drafted company agreement should address:
- Ownership percentages and voting rights
- How profits and losses are distributed
- Procedures for adding members or resolving disputes
Without a company agreement, you are stuck with the state’s standard rules. This means each member’s profit share depends on the agreed value of their contribution to the business. Major decisions, such as fundamental changes to the business structure, also require a two-thirds vote of all members. This may not reflect how you and your partners intended to run your enterprise.
The S corporation election: A tax strategy, not a structure
For owner-operators, this election can reduce self-employment tax exposure, but only on profits that exceed a reasonable salary for the work performed. The IRS also imposes restrictions on eligibility:
- The business cannot exceed 100 shareholders
- All shareholders must be U.S. citizens or resident aliens for tax purposes
- The business may only issue one class of stock
If your business plans to bring on a large investor base or foreign partners, these limits could affect your long-term flexibility.
Protect what you are building
Both an LLC and a corporation create a liability shield that can protect your personal assets from business debts and legal claims. The wrong structure, a poorly drafted company agreement or missed compliance requirements can compromise that protection from the start.
Understanding your options before you file is one of the most valuable steps you can take. A qualified business law attorney can help you evaluate which structure best fits your goals.