Limited liability company. The Texas limited liability company, or “LLC”, is currently the most popular entity structure for small business owners. It provides flow through tax treatment (to avoid double taxation that a corporation creates). The owners (called “members”) of an LLC are not required to be liable for the debts and obligations of the company. The LLC is the most flexible of all entities and requires fewer corporate formalities than a limited partnership or corporation. It can elect for federal income tax purposes to be a partnership or a corporation. If the LLC has only one member, then it may elect to be disregarded for federal income tax purposes (i.e. tax liability will flow directly to the single member). The LLC is subject to the Texas margin tax.

Corporation. The owners (called “shareholders”) of the corporation are not liable for the debts and obligations of the corporation. A Texas corporation may be classified either as a C corporation or an S corporation for federal tax purposes. A C corporation pays federal and state income tax on its income. The owners are not taxed on the corporation's income, unless the corporation distributes a dividend. An S corporation provides some federal tax advantages over a C corporation. Generally, the income of an S corporation is not taxed at the corporate level and instead flows through to the shareholders similar to a partnership (effectively avoiding double taxation). However, the S corporation is not as flexible as a partnership or LLC. Both C and S corporations are subject to the Texas margin tax.

Limited partnership. A Texas limited partnership provides flow through tax treatment (to avoid double taxation). A limited partnership has limited partners and general partners. There is typically only one general partner. Such general partner maintains all major management rights of the partnership and is held liable for the debts, obligations and contracts of the partnership. In retrospect, limited partners have no management rights and generally are not liable for the debts and obligations of the limited partnership unless they participate in the management of the partnership. However, limited partners may serve the partnership in other capacities (e.g., as an employee or an officer of the general partner) without losing their liability protection as limited partners. Because of the liability exposure of the general partner, often limited partnerships are formed with a corporation or LLC serving as the general partner. Now that limited partnerships are subject to the Texas margin tax, they are not as popular as the LLC structure and are generally only used when multiple partners are involved.

Professional entities. Certain licensed professionals are prohibited by Texas state law from practicing their profession through a corporation. Texas has created special entities for these professions. For example, doctors, dentists, accountants and lawyers must practice through a professional corporation, professional limited liability company, or limited liability partnership. The professional will remain liable for his or her own professional malpractice. The entity can protect the professional, however, from contractual liability and from the malpractice of his or her partners.

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