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 Business Entity

Do you know which business entity is best suited to your specific circumstances for your trading business?

The first step in starting a business is to determine the basic legal structure of the business, and to properly record the business name. Each business entity will have different financial and tax implications. These range from a corporations responsibility for annual franchise tax fees to personal liability for business dealings as a sole proprietorship. Each trader needs to determine the priority for his/her trading business, whether it is limiting tax liability, retirement plans, or legal liability protection. Each entity structure has its pros and cons.

The following are the basic business entities:

  • Sole Proprietorship-A sole proprietorship exists when a single individual operates a business and owns all assets. A sole proprietor is personally liable for all debts, and business ownership is nontransferable. All income and expenses of the business is reported on the individual's tax return.

  • General Partnership-A general partnership exists when two or more individuals or business join to operate a business. A separate business entity exists, but creditors can still look to the partners' personal assets for satisfaction of debts. A general partnership requires a separate information tax return but all income and losses flow through to the individual partners.

  • Limited Partnership-A limited partnership is a partnership formed by two or more persons or entities, and having one or more general partners and one or more limited partners. The limited partnership files an information tax return and all income or loss flows through to the partners.

  • Limited Liability Partnership-Similar to a limited partnership except that a partner is not individually liable, under some circumstances, for debts and obligations of the partnership due to others on the partnership.

  • Limited Liability Company-The limited liability company is designed to provide its owners with limited liability and pass-through tax advantages without the restrictions of an S-corporation or limited partnerships. In Texas, an LLC is subject to the state franchise tax.

  • Corporation-A corporation has its own legal identity, separate from its owners. The corporation offers protection to the business owners' personal assets from debts and liabilities relating to the operation of the corporation. Taxation of the corporation depends on whether the corporation is a C-corporation or an S-corporation. An S-corporation is taxed as a partnership, filing an information tax return and income and losses flow through to the shareholders . A C-corporation files a separate tax return and pays tax based on rates specifically for C-corporations. Both S-corporations and C-corporations are subject to Texas franchise tax requirements.