How do you choose the right business entity in Texas?

What business entity types are available under Texas law?

The Texas Business Organizations Code governs the formation and operation of business entities in the state. The most commonly used structures are:

Limited Liability Company (LLC): Flexible governance structure; profits and losses flow through to members for federal income tax unless an S or C corporation election is made; personal liability protection for members. Professional Limited Liability Company (PLLC): LLC structure for licensed professionals (attorneys, physicians, accountants). Provides the same pass-through tax treatment and limited liability, but individual members remain liable for their own professional malpractice. S Corporation: Pass-through tax treatment; shareholders who work in the business are employees paid a reasonable salary, with remaining profit distributed as dividends not subject to self-employment tax. Ownership restrictions apply (100 shareholder limit, one class of stock, US citizens/residents only). C Corporation: Entity-level tax on income; dividends taxed again at the shareholder level. Used where the business expects to reinvest profits rather than distribute them, for venture-backed companies, or for businesses planning to pursue a public offering. Limited Partnership (LP): One or more general partners (unlimited personal liability) and one or more limited partners (liability limited to investment). Used in family wealth transfer planning and real estate investment structures. Limited Liability Partnership (LLP): Partnership structure where partners have liability protection from the negligence or misconduct of other partners. Commonly used by professional service firms in Texas.

How does the LLC compare to the corporation for most Texas small businesses?

For the majority of small businesses in Texas, the LLC is the starting point. It provides limited liability protection, requires fewer ongoing formalities than a corporation, and offers flexibility in how profits are distributed and how the business is governed.

An LLC can be treated as a sole proprietorship (if single-member), a partnership (if multi-member), or a corporation (by election) for federal income tax purposes. That flexibility allows the structure to adapt as the business grows and the owner's tax situation changes.

A corporation becomes relevant when the business intends to raise outside equity investment, issue multiple classes of stock, or pursue a structure that requires the formality of a board of directors and officer roles. Many businesses that start as LLCs convert to corporations, or elect to be taxed as S corporations, as they mature.

How does community property affect business ownership in Texas?

Texas is a community property state. Assets acquired during a marriage using community funds are generally owned equally by both spouses, regardless of whose name is on the business documents.

This matters for entity formation in two ways. First, a business owner's spouse may already be a co-owner of the business interest under Texas law, even if they have not signed the operating agreement or any other business documents. Second, if the business is transferred in the estate plan, the community property character of the interest determines how it passes and what transfer tax rules apply.

Some married business owners address this by entering into a marital property agreement that converts the business interest from community property to the owner's separate property. Others structure the entity documents to account for both spouses' interests directly. The right approach depends on the family's goals and the nature of the business.

What role does entity choice play in an estate plan for business owners?

The entity type determines how a business interest can be transferred at death, gifted during life, or placed in a trust. An LLC interest is generally more flexible to transfer than corporate stock, because the operating agreement can be drafted to specify exactly what rights, if any, a transferee receives.

Family limited partnerships and family LLCs are also used in wealth transfer planning because the interests they issue may carry valuation discounts for lack of control and lack of marketability. Those discounts reduce the taxable value of a gift or estate transfer without reducing the economic value of the underlying assets.

Getting the entity choice right at formation is significantly less expensive than restructuring years later when the business has appreciated and a conversion or transfer triggers tax consequences.

When should you speak with a Houston business attorney about entity formation?

This article provides general legal information, not legal advice. Entity selection involves state law, federal tax law, and the specific facts of the business and its owners, including their marital status, tax position, and long-term plans for the business.

The business advisory attorneys at Edison Legal work with Houston-area business owners and entrepreneurs on entity formation, operating agreements, and the integration of business structures into broader estate plans. Request a planning consultation before you form the entity, not after the fact when correcting the structure is more complex.