A Limited Liability Company (LLC) is a natural evolution a Sole Proprietorship or a small enterprise may take to protect their assets and maximize tax benefits.
The most distinct advantage of a Limited Liability Company, and the most concerning disadvantage of a Sole Proprietorship, is personal liability of assets.
Starting an LLC
If you decide to start an LLC in Texas, it is important to keep in mind what the benefits are compared to starting or staying as a sole proprietorship.
Main difference between a Sole Proprietor and a Limited Liability Company (LLC)
A sole proprietor may be personally liable for all actions of a company including the debt. This means personal assets such as property, homes, personal accounts and anything of value remains connected to the owner and thus the business. These personal assets may be used to recover obligations that are business related.
Limited Liability Company
A Limited Liability Company (LLC) is considered a legal entity that is separate from the business owners and may not create a lien on personal assets. The maximum loss a business owner might endure is the amount invested in the LLC or the LLC’s assets. In other words, an LLC protects personal assets, whereas a sole proprietor's assets are liable.
Good to know about setting up an LLC in Texas
- Forming an LLC in Texas can be inexpensive and relatively simple.
- There are tax advantages including both the state and federal levels.
- Unlike a corporation, regular meetings of the owners is not required.
- It is referred to as an artificial being created by the state.
An LLC can be considered a kind of a hybrid between a corporation and a sole proprietorship. Simply put, it benefits from the liability protection afforded a corporation with the tax advantages of a sole proprietorship.
Fundamentals of a Limited Liability Company
- It is referred to as an artificial being created by the state, a hybrid between a corporation and a sole proprietorship.
- Once it has been properly created, it will have its own tax identification number, bank accounts, taxes, address, owner(s) and manager(s).
- It is owned by its member(s) and in most cases, it is managed by a manger, which is usually a member.
- Unlike a corporation, regular meetings of the owners are not required.
- It will need to file its own tax return each year.
- It is very similar to a corporation, but is generally considered easier to operate.
When should you consider forming an LLC in Texas
If you are already conducting a business, you can convert your existing business to a Limited Liability Company. If you do, you will need to make sure you transfer the assets and contracts of your existing business to the new company. You will also need to set up new bank accounts.
- If you are concerned about liability, you might consider forming one to protect your assets from claims made against your business.
- Setting up an LLC in Texas will not prevent claims, but it may help you if you are sued. There are no guarantees.
- There may also be tax advantages for setting up an LLC.
- You may also set one up before you start business. We highly recommend this.
Primary benefits of forming an LLC in Texas
- Asset Protection
- Raising capital