Choosing the Right Type of Business Ownership

A sole proprietorship is owned and operated entirely by one person for their own benefit. It is the simplest form of business — no formal filing required, no governance structure, no organizational documents beyond potentially a business license or assumed name certificate if operating under a trade name.

Advantages

• Complete control — the owner makes every decision without partners, boards, or governance obligations
• All profit belongs to the owner with no sharing requirements
• Minimal paperwork and compliance burden
• Simple to start and simple to wind down

Disadvantages

• Unlimited personal liability — the owner is personally responsible for all business debts and legal liabilities, with no separation between personal and business assets
• Difficult to transfer or sell, and difficult to pass to heirs
• Limited tax planning options compared to other entity forms
• No ability to bring in co-owners without converting to a different entity structure

A sole proprietorship is simple. For a business that carries any meaningful financial risk or liability exposure, however, it offers none of the protection that formal entity structures provide. Most serious business owners operating in Texas should look elsewhere.

General Partnership

A Texas general partnership forms automatically when two or more people carry on a business for profit as co-owners — no formal filing required, no written agreement necessary. Under § 152.051 of the Texas Business Organizations Code, the partnership can be inferred from conduct: if you act like partners, make decisions like partners, share profits like partners, you are likely legally partners — with all the consequences that follow.

Advantages

• Simple to form — no filing fees, no state registration required
• Pass-through taxation — profits and losses flow directly to the partners' personal tax returns, avoiding the double taxation of a C-corporation
• Operational flexibility — partners can structure management and profit-sharing however they agree

Disadvantages

• Unlimited personal liability — every general partner is jointly and severally liable for all of the partnership's debts and obligations, regardless of how much they individually contributed
• Agency liability — each partner is an agent of the partnership, meaning one partner's unauthorized act can bind every other partner personally
• Dissolution risk — in a two-person general partnership, the death of one partner typically triggers dissolution of the entire partnership
• No liability shield — unlike an LLC or corporation, there is no formal separation between the owners' personal assets and the partnership's obligations

The unlimited personal liability exposure is the defining risk of the general partnership structure. One partner's reckless contract, negligent act, or unauthorized commitment can create personal liability for every other partner. For most multi-owner businesses operating in Texas, the LLC provides the same pass-through tax treatment with a meaningful liability shield that the general partnership does not offer.

Limited Partnership

A Texas limited partnership requires a formal agreement and registration with the Texas Secretary of State. It has two classes of partners: at least one general partner who manages the business and bears unlimited personal liability, and one or more limited partners whose liability is limited to their investment.

Advantages

• Limited partners are protected from personal liability beyond their capital contribution — they cannot be pursued personally for the partnership's debts
• Pass-through taxation — income and losses flow to the partners' personal returns
• Useful structure for investment vehicles, real estate ventures, and family limited partnerships where some owners invest capital without participating in management
• Flexibility in structuring economic rights between general and limited partners

Disadvantages

• The general partner retains unlimited personal liability — this is the structural trade-off for management control
• More complex to form and maintain than a general partnership or LLC — requires state filing, a formal partnership agreement, and ongoing compliance
• Limited partners who participate in management risk losing their limited liability status
• The general partner owes fiduciary duties to the limited partners — self-dealing, opportunity diversion, and mismanagement by the general partner are common sources of litigation

Limited partnerships are frequently used in Texas for real estate ventures, oil and gas operations, family wealth-transfer structures, and investment vehicles where passive investors contribute capital and an active general partner manages operations. The fiduciary obligations of the general partner — who controls the business and bears personal liability — are among the most significant legal considerations in any limited partnership arrangement.

Limited Liability Partnership (LLP)

A registered limited liability partnership is a general partnership that has filed for LLP status under § 152.801 of the Texas Business Organizations Code. Registration provides partners with protection from personal liability for the errors, omissions, and negligence of other partners — the most dangerous aspect of ordinary general partnership liability. LLP status does not eliminate personal liability for a partner's own wrongful acts.

Advantages

• Provides meaningful liability protection without converting to an LLC or corporation — particularly valuable for existing partnerships that want a liability shield without restructuring
• Partners are not personally liable for the professional malpractice or negligence of co-partners
• Pass-through taxation
• Modest registration fee and straightforward annual renewal in Texas

Disadvantages

• Does not eliminate all personal liability — partners remain personally liable for their own wrongful acts and for obligations they personally guarantee
• For new multi-owner businesses, the LLC typically provides equivalent or better protection with greater operational flexibility

The LLP is most commonly used by professional firms — law firms, accounting firms, and medical practices — where professional malpractice liability makes unlimited cross-partner liability unacceptable. For most new Texas businesses, the LLC structure is the more comprehensive solution.

Limited Liability Company (LLC)

The LLC is the most commonly chosen entity structure for new Texas businesses, and for good reason. It combines the liability protection of a corporation with the tax flexibility of a partnership, imposes minimal governance formalities, and can be structured to accommodate virtually any management and ownership arrangement.

Advantages

• Personal liability protection — members are not personally liable for the LLC's debts and obligations (with limited exceptions for fraud, improper conduct, or failure to maintain the entity properly)
• Pass-through taxation by default — income and losses flow to the members' personal returns, avoiding corporate-level tax; the LLC can also elect to be taxed as an S-corporation or C-corporation if advantageous
• Operational flexibility — the operating agreement governs management, profit allocation, and ownership rights, and can be customized to reflect exactly what the members agree to
• Fewer formalities than a corporation — no mandatory board meetings, no required annual meetings, fewer governance requirements
• Single-member LLCs are permitted in Texas, giving sole operators the liability shield unavailable to sole proprietors

Disadvantages

• The operating agreement matters enormously — a poorly drafted agreement creates the same disputes a well-drafted one prevents, particularly in multi-member LLCs where co-owner relationships eventually need to be managed
• Minority members in closely held LLCs can be vulnerable to freeze-outs and oppression by managing members — stronger in some ways than the corporate context, but real risks exist
• Self-employment tax considerations — depending on how the LLC is structured and taxed, members who participate in management may owe self-employment taxes on their share of income

For most Texas closely held businesses with multiple owners, the LLC is the default recommendation. The operating agreement is the most important document the members will sign — it governs every aspect of the relationship between co-owners and provides either the framework for resolving disputes or the fuel that makes them worse.

S-Corporation

An S-corporation is not a separate entity type — it is a tax election. A Texas corporation (or an LLC that elects corporate treatment) can elect S-corporation status under Subchapter S of the Internal Revenue Code, which provides pass-through taxation while maintaining the corporate governance structure.

Advantages

• Pass-through taxation — income flows to shareholders' personal returns, avoiding the double taxation of a C-corporation
• Potential self-employment tax savings — shareholders who are also employees of the S-corporation pay employment taxes only on their reasonable salary, not on their entire share of the company's income
• Liability protection equivalent to a standard corporation
• Familiar corporate governance structure — shareholders, board of directors, officers

Disadvantages

• Ownership restrictions — only US citizens or permanent residents can be S-corporation shareholders; other corporations, LLCs, and partnerships cannot hold S-corporation stock; this rules out many investment and holding structures
• 100-shareholder limit — S-corporations cannot have more than 100 shareholders
• Only one class of stock permitted — all shares must have identical economic rights, which limits the ability to create different return profiles for different investors
• More governance formalities than an LLC — shareholder meetings, board meetings, corporate minutes, and resolutions are required

The S-corporation's primary advantage over the LLC is the potential self-employment tax savings available when owner-employees pay themselves a reasonable salary and take the balance as a distribution not subject to employment taxes. Whether that advantage outweighs the ownership restrictions and governance requirements depends on the specific facts. Many closely held businesses elect S-corporation status for their LLC, getting the best of both structural forms.

Corporation (C-Corporation)

The traditional corporation — taxed as a C-corporation under the Internal Revenue Code — is the foundational form of business entity under Texas law. It predates all the modern alternatives, and its governance structure (shareholders elect a board of directors who appoint officers who manage the company) remains the model that the LLC adapted and simplified.

Advantages

• Unlimited ownership flexibility — any individual or entity can hold stock; no restrictions on number or type of shareholders
• Multiple classes of stock permitted — preferred stock, common stock, convertible instruments, and other equity structures allow sophisticated capital arrangements for investors
• Easier to attract outside investment — venture capital firms and institutional investors typically prefer the C-corporation structure
• Shareholders' personal liability is limited to their investment
• Ownership transferable through share sales without disrupting business operations

Disadvantages

• Double taxation — the corporation pays tax on its income, and shareholders pay tax again when dividends are distributed; this is the defining disadvantage of the C-corporation for closely held businesses
• More complex and expensive to form and maintain than an LLC
• Greater governance formalities — mandatory board meetings, annual meetings, resolutions, and corporate records maintenance
• Minority shareholders in closely held C-corporations face real oppression risks — the same freeze-out patterns that affect LLCs occur in corporations, with governance structures that can be weaponized against the minority

For most Texas closely held businesses, the double taxation of the C-corporation makes it an unattractive choice compared to the LLC or S-corporation. The C-corporation is the right structure when outside investment is anticipated, when equity compensation for employees is part of the plan, or when the business is expected to eventually pursue a public offering.

Professional Corporation (PC) and Professional LLC (PLLC)

Texas requires certain licensed professionals — physicians, lawyers, accountants, architects, and others — to form professional entities rather than standard corporations or LLCs. Under § 301.003 of the Texas Business Organizations Code, a professional corporation or professional limited liability company is the appropriate structure for a professional practice in Texas.

The key distinction from a standard corporation or LLC is the ownership requirement: all owners of a Texas PC or PLLC must be licensed in the relevant profession. A law firm PLLC cannot have a non-lawyer as a member. This prevents unlicensed individuals from sharing in the profits of a licensed practice.

The liability protection of a PC or PLLC is similar to that of a standard corporation or LLC — it shields members from personal liability for the entity's debts and for the professional malpractice of co-owners. Members remain personally liable for their own professional conduct.

Non-Profit Corporation

A non-profit corporation is organized to pursue a charitable, educational, religious, scientific, or other public purpose rather than to generate profit for owners. Non-profits do not have shareholders — they have members or directors. Surplus revenue is reinvested in the organization's mission rather than distributed.

Texas non-profit corporations that meet the requirements of § 501(c)(3) of the Internal Revenue Code can apply for federal tax-exempt status, which exempts the organization from federal income tax and makes contributions to it tax-deductible for donors. State tax exemptions are available separately under Texas law.

Non-profit governance involves its own specific legal obligations — conflict of interest policies, proper documentation of board decisions, restrictions on private benefit — that differ meaningfully from for-profit entity governance. Organizations considering the non-profit structure should consult counsel familiar with both the formation process and the ongoing compliance requirements.

A Note on Multi-Owner Businesses: The Governance and Dispute Dimension

The entity comparison above focuses primarily on liability protection and taxation — the considerations that drive most formation decisions. But for businesses with multiple owners, there is a third dimension that is equally important and frequently overlooked: how the entity structure affects the rights and obligations of co-owners toward each other.

In every form of multi-owner Texas business entity, majority owners owe fiduciary duties to minority owners. Those duties — of loyalty, of care, and of good faith and fair dealing — impose real legal obligations that the majority cannot simply ignore or contract away. When majority owners use their control to freeze out minority co-owners, deny them their economic rights, exclude them from governance, or manipulate the company's finances for personal benefit, Texas law provides the minority with legal remedies.

The entity structure chosen at formation shapes both the risk of these disputes and the tools available to address them. A Texas LLC with a well-drafted operating agreement that addresses compensation, distributions, governance rights, and exit mechanisms is substantially less likely to generate oppression litigation than the same business formed without those provisions. A corporation with shareholders who have no shareholders' agreement is structurally vulnerable to the same disputes.

Hopkins Centrich represents minority shareholders, LLC members, and limited partners in Texas closely held business disputes. We have seen what happens when the formation decisions are made without thinking through the co-owner relationship, and we have seen what a well-drafted governing document does when a dispute actually arrives. The formation stage is when those documents are easiest and least expensive to get right.