Most business owners recognize the value in setting up their business as a corporation or limited liability company. The main value of either form of entity is the potential protection from personal liability for the debts and liabilities of the company. This can be a huge advantage. Along with adequate insurance, this is the obvious and easiest way to limit your personal liability as a business owner.

Limited Liability Company or S Corp?

Small business owners are often confused by the choice between a limited liability company or an S corporation.

The trend in Texas for the small business owner is towards using the limited liability company. Limited liability companies are more flexible in who can be an owner and can be easier to operate. There are a few fewer forms to fill out.

But one size does not fit all. In some instances, the S corporation still offers a tax advantage that makes it a better choice.

I don’t give advice on this issue until after I have carefully interviewed a client to determine which form of entity is going to be the best fit and have the best tax advantages. Which form is best for you depends on your facts and circumstances.

But in general, for a small family owned and operated business, with no outside investors, I still favor the S corporation because of the potential savings in payroll taxes on the owner’s salaries. In contrast, if there will be outside investors or owners who do not work for the company, I favor the limited liability company.

Speaking of investors, quite a number of small business people don’t realize that offering to sell investors an interest in your company may get you in trouble for violating securities laws if it is not done correctly. This is where a lawyer’s advice and guidance is important.

There are lots of do-it-yourself websites that will sell you some forms for incorporation, but none of them are going to help you with securities law or offer you any legal advice on how to properly maintain your corporation or limited liability company.

These online incorporation services charge too much for what little they offer. Finding and filling out the forms is the easy part. If all you want is forms, get them for free from the Texas Secretary of State’s website. Don’t waste your money paying some so-called legal website $149 for some forms you could have gotten for free.

It is the legal knowledge, experience, advice, professionalism, and service that you are paying for when you hire a lawyer to help you start a business. You can’t get that from an online incorporation service.

When I moved to Austin, it was my understanding that Texas did not recognize the “S corporation election” – that all corporations were a “C” corp. Has this changed?

The difference between an “S” corporation and a “C” corporation is a matter of federal tax law. This is a distinction that the IRS has created and recognizes. It is not a matter of state law, so Texas doesn’t have a say in the matter.

When you file your incorporation papers with the Texas Secretary of State, you don’t make any designation with them as to whether you are “S” or “C”. You are just a Texas corporation as far as the State of Texas is concerned. Making an election with the IRS to be an “S” corporation has no impact on the validity of your corporation under Texas law.



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