Six ways to hold a business. Answer four questions and we'll show you which one fits — then exactly what it saves you, what it costs you, and what you stay personally responsible for no matter what you choose.
Two decisions, not one: the legal shell you file, and the tax hat you elect on top of it. Six combinations actually work — besides a sole proprietorship, which is what you have if you file nothing at all. That one is below. Tap any card for the detail.
If you haven't formed anything, you're a sole proprietor by default — and if there's a second person in it with you, you're a general partnership, which is worse. Nobody chose it. It's what happens when nothing gets filed. Here's what that costs.
15.3% on all profit, with no way to split it into wages and distributions. That split is the entire reason the S election exists — and it isn't available to you here.
There is no shell between the business and you. A business debt or judgment reaches your personal accounts, your savings, and your home.
In a general partnership, liability is joint and several. Your partner's decision becomes your debt, whether you agreed to it or not.
No entity means no separation. Your own name and address are what customers, vendors, and anyone in a dispute are dealing with.
There's nothing to transfer, nothing to sell, and nothing that continues. The business and the person are the same legal thing.
No entity, no separate credit file, no clean books to underwrite. Banks and lenders treat it as personal borrowing.
A true sole proprietor pays no Texas franchise tax. Form a single-member LLC around the identical business and you enter that system — same income, same person, a new obligation. That's a genuine cost of forming that almost nobody prices in when comparing structure 01 to doing nothing at all. It's usually worth it. It isn't free, and we're not going to pretend it is.
Everything above, side by side. Green means it works in your favor; red means it costs you.
| 01Single-Member LLC | 02Single-Member + S | 03Multi-Member LLC | 04Multi-Member + S | 05C Corporation | 06Corporation + S | |
|---|---|---|---|---|---|---|
| Self-employment tax | All profit | Wages only | All profit | Wages only | N/A | Wages only |
| Payroll required | No | Yes | No | Yes | Yes | Yes |
| Flexible splits | N/A | No | Yes | No | No | No |
| Debt basis | N/A | No | Yes | No | No | No |
| Fringe benefits | Limited | Partial | Limited | Partial | Full | Partial |
| QSBS §1202 | No | No | No | No | Yes | No |
| Outside investors | Hard | Hard | Possible | Limited | Built for it | Limited |
| Second layer of tax | No | No | No | No | Yes | Legacy E&P only |
| Money out is called | Owner's draw | Distribution | Distribution | Distribution | Dividend | Distribution |
| TX franchise tax | Applies | Applies | Applies | Applies | Applies | Applies |
This is the part most people get wrong. None of the six structures protect you from any item on this list. The entity is irrelevant to all of it — choosing a structure to escape these is choosing the wrong tool.
Withheld employee income tax, Social Security, and Medicare are held in trust for the government. Any responsible person who willfully fails to remit is personally liable for the full amount — and "willful" means knowing and voluntary, not evil intent. Paying a supplier ahead of the IRS qualifies. It reaches owners, officers, bookkeepers, and anyone with check-signing authority and knowledge. It survives the entity, survives dissolution, and generally survives bankruptcy.
A responsible individual who willfully fails to remit collected sales tax is personally liable. Same logic as trust fund taxes. The entity does not help.
Bank loans, equipment leases, commercial real estate, vendor credit lines, SBA loans, merchant cash advances. Small-business banks require them almost universally, and every one is a deliberate hole punched in your protection. Read them — and ask whether the guarantee burns off after a performance period, because sometimes it can.
If you personally cause the harm, you are liable. Driving, malpractice, assault, negligent supervision where you were the supervisor. The entity may also be liable, but that does not remove you.
Structural note: structures 02, 04, 05 and 06 all run payroll and therefore all carry the trust-fund exposure. Structure 03 carries it once it has employees. Structure 01 with no employees has none.
The corporate form creates a paper trail by law and a public forum by default. The LLC lets you contract your way into privacy on both. If a fight is plausible and you want it quiet, the LLC shell is the better shell — regardless of which tax hat sits on top.
| In Texas, for every structure | Public? |
|---|---|
| Certificate of Formation | Yes — SOS filing |
| Registered agent name and address | Yes |
| LLC: initial managers / managing members | Yes, on the certificate |
| Corporation: initial directors | Yes, on the certificate |
| Annual Public Information Report | Yes — officers, directors, managers |
| Operating agreement | No |
| Bylaws | No |
| Shareholders and non-managing members | No |
| Cap table, ownership percentages | No |
| Financial statements | No — private companies |
Texas is not an anonymity state like Wyoming or New Mexico. But the ownership itself is not filed — what's filed is who runs it, not who owns it. And the operating agreement is a private contract that never gets filed anywhere.
Same money, six different names, six different tax results on the way out. This is where the double-taxation problem actually shows up — and where "it depends" finally resolves.
| # | Structure | What it's called | Tax on the way out | Second layer |
|---|---|---|---|---|
| 01 | Single-Member LLC | Owner's draw | None. Non-event. | No |
| 02 | Single-Member LLC taxed S | Distribution | Tax-free to extent of AAA and basis; excess is capital gain | No |
| 03 | Multi-Member LLC (partnership) | Distribution or guaranteed payment | Distribution tax-free to extent of basis; guaranteed payment is ordinary + SE tax | No |
| 04 | Multi-Member LLC taxed S | Distribution | Same as 02 — must be strictly pro rata | No |
| 05 | C corporation | Dividend | 0 / 15 / 20% qualified rates plus 3.8% NIIT | Yes |
| 06 | Corporation taxed S | Distribution | Same as 02, but old C-corp E&P can force ordinary dividend treatment | Legacy E&P only |
The part people overthink: Texas has no income tax, so your federal election is invisible at the state level. There is no Texas S corporation. All six structures are treated identically for franchise tax.
Corporations, LLCs, LPs, LLPs, professional associations, and business trusts. Not sole proprietorships, and not general partnerships owned entirely by natural persons.
A true sole proprietor pays no franchise tax. Form a single-member LLC around the identical business and you enter the system — same income, same person, new obligation.
The lowest of four options: 70% of total revenue, revenue minus cost of goods sold, revenue minus compensation, or revenue minus $1 million.
0.75% of taxable margin — 0.375% for entities primarily in retail or wholesale. EZ computation is 0.331% of total revenue, available under $20 million. The compensation deduction is capped per person (roughly $450,000 on recent reports, indexed), and the COGS definition is narrow — it does not follow federal COGS.
What actually decides it, once the detail is stripped away.
All six give the same inside-out shield. The shell and your operating discipline do that work — separate bank account, adequate capital, no commingling, real records. How you're taxed does not make the wall thicker or thinner.
Charging order exclusivity, waivable fiduciary duties, a private operating agreement, contractible dispute resolution, no derivative-suit tradition, no appraisal rights. Any tax result you want is reachable from inside an LLC.
You buy self-employment tax savings. You pay with debt basis, special allocations, profits interests, §754 step-ups, and tax-free property distributions. For a simple service business that's a good trade. For anything holding assets or taking on partners, it's usually a bad one.
The one-class-of-stock trap cannot exist with one owner. Multi-member electing S carries a retroactive termination risk that the single-member version simply doesn't have.
§1202 QSBS and incentive stock options require C-corp stock. If a large exit is genuinely on the table, that requirement outranks the annual tax math.
Set it too low and the savings you elected for become the thing that draws the audit. Payroll has to actually run, and the number has to be defensible.
Trust fund taxes, sales tax, personal guarantees, and your own torts follow you through all six. No structure escapes them, so don't pick one hoping it will.
That's normal — the right answer depends on numbers most people haven't run yet. Sit down with us for twenty minutes and we'll tell you straight, including when the answer is "you're already set up right."