Entrepreneurship is surging in the United States. And it’s not slowing down any time soon. In 2023, a record-breaking 5.5 million new business applications were filed, according to the U.S. Chamber of Commerce. Texas alone had more than half a million new business applications in 2023—with Harris County leading the way.
When starting a business, it’s essential to choose the right business structure and the right banking partner to support your goals. The way you structure your business affects everything from day-to-day operations to taxes to personal liability. The most common business structures are sole proprietorships, general partnerships, limited liability companies (LLCs) and S corporations (S-corps). Each of these structures has unique characteristics, benefits, and drawbacks.
Sole proprietorship
Starting a sole proprietorship is the simplest and least expensive option to start a new business. In a sole proprietorship, a single individual engages in business without the need for formal organization. The owner has complete control over all decisions and operations, which can lead to swift decision making and business agility. There is no separate business tax. Instead, business income is reported directly on the owner’s personal tax return. In many cases, you only need to obtain your assumed name certificate (commonly referred to as a “Doing Business As” (DBA) certificate) in the county where your business is conducted. However, the biggest drawback is unlimited personal liability. The owner is inextricably bound to all business debts and legal actions, which can put personal assets at risk.
General partnership
Similar to a sole proprietorship structure, a general partnership is formed when two or more individuals collaborate to run a business for profit. A general partnership can be formed through a verbal or written agreement and does not require state filing unless it operates under a DBA certificate. Partners have a shared responsibility in daily operations and strategic decisions of the business; they also have shared profits and losses, and unlimited personal liability for the business' debts and obligations.
Limited liability company
An LLC is a flexible business structure that combines elements of corporations, partnerships, and sole proprietorships. This hybrid structure is popular among small business owners for its simplicity, protective features, and credibility. To file an LLC in Texas, you must file Articles of Organization and pay the $300 filing fee.
Members, which may include individuals or corporations, of an LLC are protected from personal liability for business debts and claims. This means that personal assets are generally not at risk if the business incurs debts or gets sued. An LLC also offers tax flexibility—with options to be taxed in the same manner as a sole proprietorship, partnership, or corporation depending on circumstances.
The biggest drawbacks to LLCs include additional fees, taxes, and reporting.
S corporation
If your business earns significant profits, you may save on self-employment taxes by choosing S-corp taxation. S-corps can provide tax advantages by avoiding double taxation on business profits. In an S-corp structure, the business passes taxable income, credits, deductions, and losses directly to its shareholders without paying any federal corporate tax. Shareholders become responsible for the taxes due.
S-corps have more stringent ownership rules and corporate formalities than other business structures. Shareholder, board of director, and salary requirements can disqualify or become burdensome for many small business owners.
Choosing the best structure for starting your business depends on many factors, including owner control, projected growth, risk tolerance, tax implications, and administrative burden. When deciding what structure to register, make a list of the biggest pros and cons. Also, keep in mind that you can always update your business structure down the line as your business grows.
Ultimately, consulting with legal and financial advisors can provide you with personalized insights based on your specific business goals and circumstances. No matter the size of your business or your business structure, our small business banking solutions can help you advance, achieve, and grow. At Stellar Bank, we pride ourselves on offering personalized attention and building strong relationships with our customers. Our expert guidance, combined with a deep understanding of small businesses and local needs, helps ensure the best financial solutions for your company.
Contact us today to learn more, or to schedule a visit with one of our small business banking experts.
