Organizing a business is a daunting task.
When you decide to form a business, you need to consider personal liability, equity, taxation, and operation.
An experienced Houston business lawyer can walk you through the difference between an LLC and a partnership and help you decide how to organize your business.
LLC vs. Partnership: The Basics
In Texas, there are different ways to structure your business. The best method for structuring your business depends on how you elect to operate, pay taxes, and limit your liability.
Generally, in Texas, most organize their business as one of the following:
A single person can start a sole proprietorship when they operate a business. Formal organization is not necessary for a sole proprietorship.
Two or more people form a general partnership when they start a venture with the intent to “carry on a business for profit.”
General partnerships require a partnership agreement. However, Texas does not require you to write a formal agreement. Therefore, it is easy to form a general partnership in Texas.
Nonetheless, forming a general partnership vs. an LLC has profound legal ramifications. Thus, you should consult with a Texas business lawyer before entering any business venture.
To form a corporation, you must file a certificate of formation with the Texas Secretary of State. The owners of the business become shareholders.
Therefore, a correctly created corporation creates a legal fiction. Under legal fiction, the corporation operates, directs, and controls the business rather than the owners.
Thus, a corporation shields the shareholders (owners) from liability.
Limited Liability Company (LLC)
The difference between an LLC and a partnership is that an LLC has similar elements to a corporation—specifically, a liability shield equal to a corporation.
However, in Texas, the owners of the LLC are called members, and they are free to participate in the management of the business.
Is an LLC a Partnership?
Partnerships vs. an LLC in Texas have some similarities: usually, two or more people participate in a business venture to make a profit.
However, organizing your business as an LLC will limit your liability in Texas and give you choices in filing taxes.
LLC or Partnership: Liability
You must be careful when starting a business venture with another person. In Texas, you do not need to file documents with the state to form a partnership in Texas.
Also, you do not need a written agreement for a general partnership. Therefore, it is easy to create a general partnership inadvertently.
If you form a partnership, you are personally liable for all partnership expenses.
For example, if your partner purchases business supplies on a business account, you can be held financially responsible if the business cannot pay for the supplies.
In a partnership, it does not matter that you did not buy the supplies. However, an LLC may protect you from liability from business debts.
Generally, the amount you can be liable for is limited to the amount you contributed to the LLC.
Partnership vs. LLC: Taxes
Forming an LLC will give you greater control of how you can file your taxes. If you form your business as an LLC, you can elect to file taxes as a corporation or partnership.
Corporations are subject to “double taxation” because the corporation pays taxes on profits and the shareholders also pay taxes on their distributions.
Partnerships, on the other hand, avoid double taxation because the taxes “pass-through” to the individual members.
The option to file as a corporation or partnership may allow you to save money on taxes.
General Partnership vs. LLC: Formation and Operation
Unlike a partnership, an LLC must be registered with the state through a Certificate of Formation.
Therefore, you should consult with a Texas business lawyer before forming an LLC to make sure you comply with all government requirements.
A lawyer can help you file your Certificate of Formation and stay up to date on other business filings.
Whether you have a partnership or an LLC, it’s important to draft a governing document that outlines the partners’ or members’ rights and obligations and how the company will function.
For a partnership, this document is called a partnership agreement. For an LLC, it’s a “company agreement” or “operating agreement.”
Although the State of Texas does not require a formal agreement for either a partnership or an LLC, having one can provide more certainty for your business and help you avoid conflicts down the road.
If you don’t have an agreement, state law will govern any disputes that arise.
A poorly drafted agreement can tank your business before you get started. Thus, it’s essential to consult an attorney to ensure that your agreement addresses the specific needs of your business.
Should You Hire an Attorney for Your LLC or Partnership?
Deciding between a partnership vs. an LLC in Texas can be confusing. A partnership will give you flexibility, whereas an LLC will limit your personal and financial liability.
Deciding how to organize your business is a personal choice between you and your partners.
However, a Texas business lawyer can guide you and your partners through the multiple ways to form your Texas business and help you figure out which business organization structure is proper for you.
Houston business lawyer Adam Curley has over ten years of business experience helping small and large businesses.
Call Adam today or use our online form to schedule a case evaluation.