Business Structure Explained: Sole Proprietorship, Partnership, LLC, S Corporation and C Corporation
In Short
A Business Structure is the legal form of a business, such as a sole proprietorship, partnership, limited liability company (LLC) or corporation. The choice affects whether owners are personally liable for business debts, how the IRS taxes the profits and which state filings apply. Business owners at every stage review it when starting, adding partners, raising money or selling.
TL;DR
- Sole proprietorships and general partnerships need no Texas Secretary of State filing, but their owners have unlimited personal liability [1][6].
- LLCs and corporations are created by filing a certificate of formation, which costs $300 for most Texas for-profit entities [1][7].
- An LLC's federal tax treatment is a choice: disregarded entity or partnership by default, or a corporation by filing Form 8832 or Form 2553 [2][3].
- Texas franchise tax applies to LLCs and corporations, but entities with revenue at or below $2.65 million owe no tax for reports due in 2026 [5].
- FinCEN no longer requires U.S. companies to file beneficial ownership information (BOI) reports [8].
Quick Facts
| Legal Reference | Texas Business Organizations Code; Treas. Reg. §301.7701-3 (entity classification) |
|---|---|
| Complexity | Medium |
| Setup Cost | None for a sole proprietorship; $300 Texas filing fee for most LLCs and corporations, plus legal and accounting fees |
| Time to Implement | Same day to a few weeks, depending on the structure and agreements |
| Illustrative Example | Illustrative example, not a projection. Two partners open a consulting firm. As a general partnership, a $200,000 judgment against the business could be collected from either partner's personal savings. If they had formed an LLC, kept business and personal funds apart and not signed personally for the debt, the claim would generally be limited to the LLC's assets. Actual outcomes depend on the facts, the contracts and the court. |
Key Numbers & Limits
| Item | Limit or Rule | Notes |
|---|---|---|
| Sole Proprietorship | No state formation filing; owner personally liable; profit reported on Schedule C | Assumed name certificate filed with the county clerk if a trade name is used [1][6]. |
| General Partnership | No state formation filing; every partner personally liable; files Form 1065 | Can be formed by an oral or written agreement [1][6]. |
| LLC (Single-Member) | Disregarded entity for income tax by default | Treated as separate for employment and excise taxes [2]. |
| LLC (Multi-Member) | Partnership for income tax by default | Can elect corporate treatment on Form 8832 [2]. |
| S Corporation | No more than 100 shareholders; one class of stock; domestic | Election on Form 2553 [3]. |
| C Corporation | Federal income tax of 21% of taxable income at the entity level | IRC §11(b) [4]. |
| Form 2553 Deadline | No more than 2 months and 15 days after the start of the tax year the election is to take effect | Or any time in the year before [3]. |
| Texas Certificate of Formation Fee | $300 (LLC or for-profit corporation); $750 (limited partnership) | Texas SOS Form 806 fee schedule [7]. |
| Texas Franchise Tax No-Tax-Due Threshold | $2,650,000 annualized total revenue (reports due in 2026) | Rates: 0.375% retail/wholesale, 0.75% other; EZ computation 0.331% for revenue up to $20 million [5]. |
| Federal BOI Report (FinCEN) | Not required for U.S. companies | Only certain foreign companies registered to do business in a state still report [8]. |
What Is a Business Structure and What Are the Options?
A business structure is the legal form a business is organized under. The Texas Secretary of State describes the main choices as the sole proprietorship, general partnership, limited partnership, limited liability company and corporation [1]. A sole proprietorship is one person doing business without forming an entity, and a general partnership is two or more people carrying on a business together; neither requires a state filing, and the owners are personally liable for the business's debts [1][6]. An LLC or corporation is a separate legal entity created by filing a certificate of formation with the Secretary of State; generally, owners' liability is limited to what they invested [1].
Tax treatment is a separate layer. For federal income tax, a single-member LLC is a disregarded entity reported on its owner's return, and a multi-member LLC is a partnership, unless the LLC elects otherwise [2]. An LLC can elect to be taxed as a corporation on Form 8832 [2]. A corporation, or an LLC taxed as one, can elect S corporation status on Form 2553 if it is a domestic entity with no more than 100 shareholders, only allowable shareholders and one class of stock [3]. An S corporation generally passes its income through to shareholders. A C corporation pays federal income tax of 21% of its taxable income [4], and shareholders generally pay tax again when profits are paid out as dividends.
Holding company structures use one entity to own other entities. A common pattern is a parent LLC or corporation that owns an operating company and a separate company that holds real estate, equipment or intellectual property and leases it to the operating company. The goal is to keep a claim against one business from reaching the assets held in another. Texas also allows a series LLC, which can set up separate series of members, managers, interests or assets, each with its own rights, obligations and liabilities [6]. A series created by filing a certificate of registered series costs $300 to file [6].
Limited liability is not absolute. Owners remain liable for their own wrongful acts and for debts they sign for personally. Courts can also disregard an entity — often called piercing the corporate veil — in cases involving fraud, commingled funds or an entity used as a sham. Formation choices also bring ongoing duties, such as Texas franchise tax reports [5].
How Do You Set Up a Business Structure?
- Owners compare structures on liability, taxes, the number and type of owners, plans to raise money and ongoing paperwork. Sole proprietorships and general partnerships begin simply by doing business; a trade name requires an assumed name certificate with the county clerk [1][6].
- To form an LLC, corporation or limited partnership in Texas, the owners file a certificate of formation with the Secretary of State. The filing fee is $300 for an LLC or for-profit corporation and $750 for a limited partnership [7].
- Owners sign a company agreement (LLC), bylaws and shareholder agreements (corporation) or a partnership agreement. A series LLC places the required series language in both its certificate of formation and company agreement and keeps separate records for each series' assets [6].
- The entity obtains an employer identification number and, if it wants a tax treatment other than the default, files Form 8832 (corporate classification) or Form 2553 (S corporation) within the deadlines [2][3].
- Each year, Texas LLCs and corporations file franchise tax reports or the required information report with the Comptroller, due May 15 [5]. The business keeps separate bank accounts, signs contracts in the entity's name and documents major decisions.
The Good: What Are the Benefits of Choosing a Business Structure?
- LLCs and corporations generally limit owners' liability for business debts to the amount they invested [1].
- An LLC can choose its federal tax treatment — disregarded entity, partnership, C corporation or S corporation — without changing its legal form [2][3].
- Sole proprietorships and general partnerships cost nothing to form at the state level, which suits testing an idea [1].
- Holding company and series LLC structures can separate a risky operating business from valuable assets such as real estate [6].
- Most small Texas entities owe no franchise tax because their revenue is at or below the no-tax-due threshold [5].
The Bad: What Are the Drawbacks of Each Business Structure?
- Sole proprietors and general partners are personally liable for all business debts, including debts caused by a partner [1].
- C corporation profits can be taxed twice: once to the corporation and again to shareholders as dividends [4].
- S corporations have strict limits — 100 shareholders, one class of stock and only allowable shareholders — and a late or invalid election can leave the company taxed as a C corporation [3].
- LLCs and corporations bring ongoing costs: formation fees, registered agent, separate books, tax returns and Texas information reports [5][7].
- Series LLCs are less familiar to lenders, courts and other states, and their protection depends on keeping each series' records separate [6].
The Ugly: What Are the Serious Risks With Business Structures?
- Commingling personal and business money, skipping required formalities or using an entity to commit fraud can lead a court to pierce the veil and hold owners personally liable.
- Owners who sign loans or leases personally remain liable for those debts no matter which structure they use.
- A Texas entity that does not file its franchise tax reports can receive a notice of intent to forfeit its right to transact business in the state [5].
- Scam messages claiming to be from FinCEN have targeted business owners about BOI reporting; FinCEN has warned about fraudulent attempts to collect information [8].
Who Uses Each Business Structure?
Who It's Commonly Used By
- Freelancers and solo owners testing an idea, who often start as sole proprietors [1].
- Owners of service businesses and rental properties who use single-member or multi-member LLCs for liability protection and flexible taxation [2].
- Profitable small businesses whose owners are active in the business and elect S corporation status [3].
- Companies planning to raise outside capital, issue different classes of stock or reinvest profits, which often use C corporations [4].
- Owners with several businesses or properties who use a holding company or a series LLC to separate assets [6].
Who It's Generally Not Suited For
- Sole proprietorships and general partnerships are generally not suited to businesses with significant liability exposure, such as construction or food service [1].
- S corporations are generally not suited to companies with nonresident alien owners, partnership or corporate owners, or investors who want preferred stock [3].
- C corporations are generally not suited to owners who plan to take most profits out each year, because of the second tax on dividends [4].
- Series LLCs are generally not suited to owners who will not keep separate records for each series [6].
What Are the Key Rules for Business Structures?
- LLCs, corporations and limited partnerships in Texas exist only after a certificate of formation is filed with the Secretary of State [1].
- A single-member LLC is a disregarded entity and a multi-member LLC is a partnership for income tax unless it elects otherwise [2].
- A Form 8832 election cannot take effect more than 75 days before or more than 12 months after it is filed [2].
- Form 2553 is filed no more than 2 months and 15 days after the start of the tax year the S election is to take effect, and every shareholder consents [3].
- Sole proprietorships and general partnerships directly owned by natural persons are not subject to Texas franchise tax; LLCs and corporations are [5].
- Texas franchise tax reports are due May 15 each year [5].
- A Texas series LLC includes the language required by Business Organizations Code §101.602 in its certificate of formation and company agreement and keeps separate records for each series [6].
What Are Common Mistakes With Business Structures?
- Paying personal bills from the business account, or depositing business income in a personal account.
- Signing contracts in an owner's own name instead of the entity's name.
- Running a business as a general partnership by default because no one signed a written agreement [6].
- Missing the Form 2553 deadline and assuming S corporation status applies anyway [3].
- Forming an LLC but never filing the Texas franchise tax information report [5].
- Paying for BOI filing services based on letters or emails that claim U.S. companies still have to report [8].
What Should Texans Know About Business Structures?
- Texas filing fees are $300 for a certificate of formation for an LLC or for-profit corporation and $750 for a limited partnership or professional association; an assumed name certificate filed with the Secretary of State is $25 [7].
- Individuals and general partnerships doing business under an assumed name file the assumed name certificate with the county clerk in each county where they have business premises [6].
- For franchise tax reports due in 2026, the no-tax-due threshold is $2,650,000, the rate is 0.375% for retail and wholesale and 0.75% for other businesses, and the EZ computation rate is 0.331% for revenue up to $20 million [5].
- Texas recognizes series LLCs. A series formed by filing a certificate of registered series with the Secretary of State costs $300 to file; a protected series does not require a statutory filing [6].
- Texas does not have a state personal income tax, so pass-through profits from an LLC, partnership or S corporation are taxed federally but not by the state at the owner level; the entity may still owe franchise tax [5].
Frequently Asked Questions
What Is the Difference Between an LLC and an S Corporation?
An LLC is a legal structure created under state law; an S corporation is a federal tax election [1][3]. An LLC can keep its default tax treatment or elect to be taxed as a corporation and then as an S corporation [2][3]. A corporation can also elect S status if it meets the eligibility tests [3].
Does an LLC Protect Personal Assets?
Generally, LLC members' liability for the company's debts is limited to their investment [1]. That protection does not cover debts an owner signs for personally or the owner's own wrongful acts, and a court can disregard the LLC if it is used for fraud or its funds are mixed with the owner's.
How Much Does It Cost to Form an LLC in Texas?
The Texas Secretary of State charges $300 to file a certificate of formation for an LLC [7]. Other costs can include a registered agent, legal help drafting the company agreement and accounting setup.
Do Texas LLCs Pay Franchise Tax?
LLCs are subject to Texas franchise tax, but for reports due in 2026 an entity with annualized total revenue at or below $2,650,000 owes no tax [5]. Since the 2024 report year, those entities no longer file a No Tax Due Report but still file an information report.
Do Small Businesses Still Have to File a BOI Report?
No, not if they are U.S. companies. FinCEN removed the requirement for U.S. companies and U.S. persons in a March 2025 interim final rule and made it permanent in 2026; only foreign companies registered to do business in a U.S. state still report [8].
Sources
- Selecting a Business Structure — Texas Secretary of State
- Limited Liability Company (LLC) — Internal Revenue Service
- Instructions for Form 2553, Election by a Small Business Corporation — Internal Revenue Service
- 26 U.S. Code §11 — Tax Imposed — Legal Information Institute, Cornell Law School
- Franchise Tax — Texas Comptroller of Public Accounts
- Formation of Texas Entities FAQs — Texas Secretary of State
- Form 806, Fee Schedule — Texas Secretary of State
- Beneficial Ownership Information Reporting — Financial Crimes Enforcement Network (FinCEN)
Primary sources only: the Internal Revenue Code, Treasury regulations and official agency guidance. Read how Zentavos researches these reports.