SHOULD MY NEW TEXAS BUSINESS BE FORMED AS AN “S” CORP OR AN LLC?

While deciding which business structure will best serve your needs, always consider several key factors. For example, look at how many employees you plan on hiring and how much time you want to spend managing the company. You should also make sure you’re fully protecting your personal assets against future lawsuits and not incurring any excess taxes.
One excellent way to choose the best structure for your company is to meet with your Houston business law attorney. The two of you can discuss all that you might gain (or lose) by starting your company as either an LLC (limited liability company) or an “S” corporation.
Before noting some of the basic steps involved with forming an LLC and an “S” corporation, here’s a brief overview of the unique offerings and drawbacks of both structures.
What are some chief advantages and drawbacks of starting an LLC?
Depending on the size of your business and the types of goods or services you’re selling, you may prefer an LLC for the following reasons.

• It offers a less formal structure. An “LLC” is also often easier to manage than an “S” corporation, especially when you have few employees. And you’ll never need to have any board meetings to tackle problems tied to issuing stock certificates;
• You can readily change this business structure (once all proper paperwork is filed). If

you’re running an “S’ corporation, you’ll first have to arrange a formal board meeting before trying to change the business structure);

• All members of an “LLC” do not have to be permanent residents or U. S. citizens;
• You can more easily divide up who handles most of the daily work – while allowing others to just be investors. You can also simply divide up the profits based on each person’s initial investment and daily work contributions;
• Disadvantages of an “LLC” compared to an “S” corporation. These can include having all the company profits subjected to self-employment taxes. Your growth may be limited since your business cannot issue any stock shares. Always ask your Houston business law attorney about any other potential disadvantages that may apply to your unique situation.

Why do some entrepreneurs prefer forming “S” corporations – despite the limitations?

• Formality is viewed more favorably by some. Outside businesses often prefer interacting with companies that employ a more formal corporate structure;
• You can often use this structure to avoid double taxation of income;
• Profits are passed on to the shareholders (by way of their paid dividends). Therefore, the company does not have to pay taxes on those profits;
• Possible drawbacks. All shareholders must be permanent residents or U.S. citizens. There can be no more than 100 shareholders. Added state filing fees may apply. Also, the IRS

tends to monitor “S” corporations very closely since some people try to improperly avoid certain taxes by wrongfully using this business structure.
What are some basic issues that must be addressed while forming an “LLC” in Texas?

• Membership. You’ll need to decide how many owners or members you’ll have and if they’ll share all the managerial duties;
• Naming your business. You must choose a unique name to avoid confusion with already existing companies;
• File all required forms. You’ll need to start with a certificate of formation (Form 205) that must be filed with the Texas Secretary of State’s Office;
• Registered agent. You must name a registered agent who can accept the service of process on behalf of your company;
• You’ll need to create an operating agreement. It’s usually best to ask your Houston business law attorney to draft this document for you after you’ve

discussed the precise nature of your new business;

• Fully satisfy all state and federal paperwork requirements;
• Obtain all required state and local business licenses that may be required for your industry.

(Note: Some of these same steps may also be required while forming an “S” corporation below, regardless of whether they’re listed).
Here’s a brief review of key issues involved in starting an “S” corporation in Texas

• The drafting of Articles of Incorporation. These must be filed with the Texas Secretary of State’s Office;
• Stock certificates must be issued to all initial shareholders;
• All applicable business licenses and certificates must be obtained in a timely manner;
• You’ll need to file Form 2553 with the Internal Revenue Service. (Your lawyer can first check to be sure you meet all the qualifying terms for creating an “S” corporation).

Please feel free to contact one of our Murray Lobb lawyers so we can answer your questions about each of these business structures. We can also help you draft all the documents you’ll need to transact business throughout the year.

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