Associate Attorney
Texas has more than 3.2 million small businesses and a significant number of large businesses and corporations driving the economy. As business laws and the industry continue to evolve, business owners must take the necessary steps to continue to succeed. In some cases, this could mean converting their business structure to another type.
Understanding the Different Business Types in Texas
There are several types of business structures in Texas, including:
Sole Proprietorship
A sole proprietorship is the simplest form of business. One person owns and operates the business. This business type requires minimal formalities but offers no personal liability protection.
Partnership
A partnership is a type of business in which two or more individuals share ownership and responsibility. It can be a general partnership (GP) or a limited partnership (LP), each with its own liability implications.
Limited Liability Company (LLC)
An LLC offers liability protection to the company’s owners, and the business profits are passed through to the owners and taxed only once. This makes it a favored option for businesses looking to balance risk and reward.
C Corporation (C Corp)
When you form a corporation in Texas, the default form is a C Corp. A C Corp has no pass-through, and is subject to corporate tax rates. There are no restrictions on ownership with a C Corp.
S Corporation (S Corp)
An S Corp is a special type of corporation that allows profits to be passed directly to owners/shareholders, avoiding double taxation. It offers liability protection but comes with stricter regulatory requirements than either an LLC or a sole proprietorship.
As a business owner, there are some benefits to converting from your current structure to a different structure for operating your business.
Reasons for Converting Your Business Type
Some of the benefits you might get from converting your business include:
Tax Implications
Converting your business type can have significant tax benefits. For example, businesses that register under sole proprietorships and partnerships are subject to self-employment taxes on all income. By converting to an S Corp or a C Corp, you may reduce your self-employment taxes, as only salaries are subject to these taxes. Additionally, LLCs offer flexibility in tax treatment, allowing you to choose whether you want to pay taxes as a sole proprietorship, partnership, or corporation.
Liability Protection
Protecting personal assets from business liabilities is one of the most compelling reasons to change your business structure. Sole proprietorships and general partnerships offer no separation between personal and business assets. By converting to an LLC, C Corp, or S Corp, you create a legal barrier that can protect your personal assets from business debts and lawsuits.
Business Growth and Expansion
As your business grows, attracting investors and securing funding become paramount. Certain business structures, like LLCs, C Corps, and S Corps, are more attractive to investors due to their liability protection and tax benefits. Furthermore, converting to a more formal structure can enhance your business’s credibility and operational efficiency, making it easier to scale.
Compliance and Regulations
Different business structures have varying degrees of regulatory requirements. While sole proprietorships have minimal compliance obligations, corporations and LLCs must follow stricter rules, including annual reporting and record-keeping. Converting your business type can help you meet these requirements more effectively and avoid potential legal pitfalls.
Steps to Convert Your Business Type
There are certain steps you should take when converting your business type in Texas. One of the first is to decide on the type of business structure that best aligns with your needs and goals. Consider factors like liability, taxation, and administrative requirements before making your choice.
Next, you must file all of the necessary paperwork to make the changes. This includes the Certificate of Formation for LLCS or Articles of Incorporation for corporations. You must submit these forms to the Texas Secretary of State.
After submitting your forms and receiving a response, you need to update all of your licenses and permits. You must also notify any stakeholders of the changes and update your existing contracts to reflect the new business structure.
Call Our Business Lawyers Today
Our team at Sul Lee Law Firm can help you convert your Texas business. We will review all the options with you and help you select the one that will provide you with the most benefits while enhancing your business’s growth potential. Contact our law firm now for a consultation to get started.