REASONS TO INCORPORATE

• Protection of Personal Assets: The primary reason business people choose to incorporate their business is to protect their personal assets. In the event of a lawsuit or if your business should fail, your personal assets will not be reachable by creditors IF you have properly incorporated your business.
  
  
• Tax Advantages: Corporations and LLCs can take advantage of tax savings options that are not made available to sole proprietorships or partnerships.
  
  
• Financial Stability: Corporations can raise capital by issuing stock, bonds or other securities.
  
  
• Estate Planning Purposes: Estate planning is somewhat simplified because shares of a corporation can be easily distributed to family members.

TYPES OF ENTITIES

ASSUMED NAMES: Many people complete an assumed name certificate under the belief that you will be protected from creditors. This is not accurate. An assumed name merely states that a certain individual is “doing business as” an entity. An assumed name affords the individual no protection against creditors and leaves you personally liable on the debts of the business. The benefit to this type of filing is that it is inexpensive and can be done easily by the individual at their county records department. 

SOLE PROPRIETORSHIP: This form of business shares its identity with that of its individual owner. The sole proprietorship is not a separate taxable entity and the business owner reports all items of income and expenses of the business on his/her/their individual tax returns. The business owner is personally liable for the obligations of the sole proprietorship business.

GENERAL PARTNERSHIP: A partnership is an association of two or more persons to carry on a business for profit as co-owners. A partnership is generally formed with a written partnership agreement. General partnerships do not need to register their formation with the Texas Secretary of State. 

Although a partnership files a partnership tax return, it is not a separate taxpaying entity and items of partnership income and expenses flow through to the partners to include on their individual income tax returns. 

In a general partnership all partners have authority to bind the partnership, and all partners are personally liable for the obligations of the partnership. The profits and liabilities of the partnership are split equally.

LIMITED PARTNERSHIP: A limited partnership consists of one or more general partners and one or more limited partners. A Texas limited partnership must file a Certificate of Limited Partnership with the Texas Secretary of State.

General partners have management authority with regard to the entity and are personally liable for the obligations of the limited partnership. Limited partners are only investors in the limited partnership; they do not have management authority and are not personally liable for the obligations of the limited partnership. In fact, they are liable only up to the amount of their initial investment.

Like a general partnership, a limited partnership is not a separate taxpaying entity, and its income and deductions pass through to the general and limited partners.

LIMITED LIABILITY COMPANY: A Limited Liability Company (LLC) comes into existence on the filing of its Articles of Organization with the Texas Secretary of State. An LLC is also required to have an organizational agreement, preferably in writing, which is similar to a partnership agreement.

The LLC is taxed as a partnership and therefore it is treated as a "pass through" tax entity whose income and deductions are reported by its members on their individual tax returns. The LLC must also pay a franchise tax that is assessed by the Texas Comptroller's office. 

Unlike with a limited partnership, all members (i.e., owners) of an LLC are shielded from personal liability for the LLC's obligations. LLC managers are also shielded from personal liability. LLC members can be its managers, or the LLC can have managers separate from the members.

Unlike with an S corporation (described below), there are no restrictions on who may be an LLC member, and an LLC may have more than one type of membership interest.

CORPORATIONS: A corporation is an entity having an existence separate from that of its owners, the shareholders. A corporation comes into existence on the filing of its Articles of Incorporation with the Texas Secretary of State.

Shareholders have no personal liability for the obligations of the Corporation, assuming the necessary corporate formalities are followed and a creditor is not successful in "piercing the corporate veil". In Texas a corporation may have as few as one shareholder and one director. The corporation must have a president, secretary, and treasurer who may be the same individual(s).

An Internal Revenue Code Subchapter C corporation is subject to federal income tax on its net income. Additionally, a C corporation incorporated or doing business in must pay a Texas franchise tax on its net income.

An Internal Revenue Code Subchapter S corporation is not subject to federal income taxation on the entity level; the income and deductions of an S corporation pass through to the shareholders to be reported on their individual income tax returns. However, an S corporation incorporated or doing business in California is subject to a Texas franchise tax on its net income.

A C corporation may have more than one class of stock (e.g., common and preferred) and an unlimited number of shareholders. By contrast, an S corporation may only have one class of stock and only 75 shareholders. There are also other restrictions on the types of permissible S corporation shareholders.