As someone who is about to start a business, you have many decisions to make. One of the first decisions is the type of business structure you choose. There are many options, and they each have their own advantages and drawbacks. Two popular choices for business owners are limited liability companies (LLCs) and corporations.

If you are about to start a business, it is important to speak to a Houston business law attorney. An experienced attorney can advise on the different types of structures, help you determine which one is right for you, and guide you through the process so your business gets off to the best start possible.

Liability Protection 

Although there are many differences between LLCs and corporations, both business structures offer liability protection. With either option, your personal assets are protected from lawsuits and business debts. This is not true with sole proprietorships. With a sole proprietorship, if a creditor files a lawsuit against a business, the owner’s personal car, home, and savings are available to creditors.

The liability protection offered by both the LLC and corporation business structures is just one reason so many business owners choose one or the other. Although both structures offer this benefit, there are some significant differences to understand before choosing one.

It is true that both LLCs and corporations offer liability protection, but corporations usually have even stronger protections that are reinforced by governanc,e such as bylaws and boards.

Tax Impacts

The income generated by an LLC ‘passes through’ to its members who report it on their personal tax returns. An LLC does have the option of electing corporate taxation, if desired. In Texas, both LLCs and corporations must comply with the Franchise Tax rules in the state.

On the other hand, corporations are subject to double taxation. This means they are taxed at the corporate level and then on dividends. If a corporation is eligible, it may choose an S-Corp structure, which achieves pass-through taxation for its shareholders. Corporations typically offer options that are more structured for tax planning tied to employee benefits, payroll setup, and retained earnings.

Management

LLCs offer flexible management options. If a business is member-managed, the owners will run daily operations. If an LLC is manager-managed, the business owners will appoint managers to run the business. Corporations operate under formal governance. The shareholders select a board of directors, which then appoints officers to manage business operations.

Equity Structures

Ownership of an LLC is controlled through membership interests. If new members want to join the business or a member wants to transfer their share, the procedure is controlled by the operating agreement, which may allow flexible or restrictive rules, depending on its terms.

Ownership in a corporation is based on stock. Shares of the business are issued fairly easily and can be transferred and used in equity compensation plans. This is often attractive to employees and investors. Different classes of shares, such as common or preferred, support complicated capital structures.

Compliance Requirements

LLCs have simpler recording requirements, fewer formalities, and compliance responsibilities are more lenient. Still, it is important that basic records are maintained and that state reporting requirements are met. The procedures within a corporation are much more structured. These include holding meetings and taking and maintaining minutes, while also fulfilling filing obligations that are more detailed. A Houston business law attorney can ensure that you are in compliance, regardless of which business structure you choose.

Appeal to Investors

Investors can invest in LLCs, but the ownership agreements typically require customized agreements. These can be much more complicated, which is not as appealing to investors. Investors typically prefer corporations because equity structures and stock issuance are easier to evaluate due to the fact that they are standardized.

Growth Opportunities

LLCs are typically best for small to medium-sized businesses, such as service-based companies and real estate ventures that prioritize flexibility. Corporations are a more appropriate structure for startups that are focused on growth, seeking outside investments, and that are planning expansion on a larger scale.

Factors to Consider When Selecting the Best Business Structure for You

In addition to the above, there are other factors to consider when choosing between an LLC and a corporation. These include:

• Costs and formation requirements: To form an LLC or corporation, you must file a Certificate of Formation with the Secretary of State and pay the $300 filing fee. Establishing an LLC is generally easier, as it does not require stock issuance or a board of directors. Corporations, though, must appoint a board and outline share structures, which is much more formal.
• Flexibility: LLCs generally give owners more flexibility, as they can have multiple members with fewer restrictions. Members can appoint managers or be directly involved with the daily operations of the business. Directors operate corporations and follow governance procedures that are much stricter. This can cause delays when important decisions must be made.
• Confidentiality: Corporations must hold regular meetings, maintain detailed records, and file annual reports. These annual reports then become part of the public record. There are not as many disclosure requirements with LLCs, and internal agreements are not filed with the state. This often makes LLCs a more attractive option for business owners who value privacy.
• Distribution of profits: Another important factor to consider is that profits in an LLC can be divided in any manner that is agreed upon by the members. However, profits made by a corporation must be distributed according to the stock held by the shareholders.

Our Business Law Attorney in Houston Can Help You Choose a Structure

At Integrity Law Group, PLLC, our Houston business law attorney is here to help you make the best legal decisions for your business from the very beginning. Our experienced attorney can help you choose the right structure for your business based on your goals for the company and will set you up for long-term success. Call us now at (832) 280-8874 or fill out our online form to schedule a consultation with our seasoned attorney and to get the legal help you need.

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