TEXAS BUSINESS LAW
Texas Business Entities: Which One to Choose
The business entity you choose in Texas decides three things: whether your personal assets are shielded from business debts, how the business is taxed, and what you have to file with the state. Most Texas small businesses land on an LLC for its liability protection and light formality, but sole proprietorships, partnerships, and corporations each fit specific situations. Pick deliberately — the structure is far easier to set up correctly than to unwind later.
The Four Common Structures Compared
| Entity | Liability protection | Taxation | Texas state filing |
|---|---|---|---|
| Sole proprietorship | None — personal assets exposed | Pass-through on your 1040 | None to form |
| General partnership | None — partners personally liable | Pass-through to partners | None to form |
| Limited partnership (LP) | Limited partners shielded; general partner liable | Pass-through; owes franchise tax | Register with Secretary of State |
| LLC | Members shielded from company debts | Pass-through by default; owes franchise tax | Certificate of formation + annual report |
| Corporation | Shareholders shielded | C-corp taxed separately (possible double taxation) | Certificate of formation + governance filings |
Texas has no state personal or corporate income tax, so the franchise (margin) tax and federal income tax drive most of the tax analysis below.
Sole Proprietorship
A sole proprietorship is one person doing business in their own name. There is nothing to file with the state to create it, no separate entity, and no franchise tax — which makes it the simplest option to start. The trade-off is total: there is no separation between business and personal assets, so a business debt or lawsuit reaches your house and savings. Income is reported on your personal Form 1040. Even with no state formation, some cities, counties, and occupations require a local or occupational license, so check with your local chamber of commerce and the Texas Department of Licensing and Regulation before you open.
Partnerships
A partnership is two or more people or entities carrying on business together for profit. Texas recognizes two main forms:
- General partnership. Like a sole proprietorship with more owners — no state filing required, and every partner is jointly and severally liable for the partnership’s obligations. Each partner can also bind the others as an agent.
- Limited partnership (LP). Has at least one general partner (who runs the business and remains personally liable) and one or more limited partners (who are shielded from liability but cannot manage). An LP must register with the Texas Secretary of State, keep a registered agent and office, and include “Limited Partnership,” “Limited,” or an abbreviation in its name.
Partnerships are pass-through entities for income tax — owners report their share on their individual returns — but an LP owes the Texas franchise tax.
Limited Liability Company (LLC)
The LLC is the most popular structure for Texas small businesses, and for good reason: it combines a corporation’s liability shield with a partnership’s flexibility. Members — who can be individuals, corporations, partnerships, or other LLCs — are generally not personally liable for the company’s debts. An LLC is formed by filing a certificate of formation with the Secretary of State and maintaining a registered agent and office in Texas.
Internally, an LLC can be member-managed or manager-managed, and the members set most of the governance rules themselves, avoiding the rigid formalities a corporation must observe. For taxes, an LLC is a pass-through by default — Texas imposes no income tax, but the IRS taxes income distributed to members on their personal returns. The LLC owes the Texas franchise tax and must file an annual report with the Comptroller (see below). An out-of-state LLC must register with the Secretary of State before transacting business in Texas.
Corporation
A corporation is owned by shareholders and governed by a board of directors under bylaws, with required formalities — meetings, minutes, resolutions, and filings — that the other structures avoid. Shareholders are shielded from corporate debts, but directors and shareholders can lose that protection if the company fails to observe corporate formalities (the “piercing the corporate veil” risk).
The classic drawback is double taxation: a C-corporation pays tax on its profits, and shareholders pay again on dividends. (Electing S-corporation status with the IRS can avoid this for businesses that qualify.) Corporations owe the Texas franchise tax and file with the Secretary of State. Corporations make the most sense when you plan to raise outside investment or issue multiple classes of stock.
The Texas Franchise Tax and Annual Report
Every LLC, corporation, and LP owes an annual franchise (margin) tax filing with the Texas Comptroller — even if no tax is due. For 2026 reports, a business with $2.65 million or less in annualized total revenue owes no franchise tax, but it must still file a Public Information Report. Texas retired the separate “No Tax Due Report” form effective January 1, 2024, so qualifying entities simply file the information report. Missing these filings can cost the entity its right to do business in Texas, so calendar the deadline.
Foreign (Out-of-State) Entities
A “foreign” entity is any LLC, corporation, or LP formed in another state. Before transacting business in Texas, it must register with the Secretary of State and maintain a Texas registered agent and office. Registering lets the entity operate legally, sue in Texas courts, and preserve its liability shield. If you’re weighing where to form, see our comparison of forming your startup in Texas or Delaware.
Frequently Asked Questions
What is the best entity for a Texas small business?
For most owners, an LLC — it shields personal assets, is taxed as a pass-through, and avoids the formalities of a corporation. The right answer depends on liability exposure, tax goals, and whether you plan to raise investment.
Does an LLC protect my personal assets in Texas?
Generally yes. Members are not personally liable for the LLC’s debts, provided the company is properly formed and maintained as a separate entity. Commingling funds or ignoring formalities can put that protection at risk.
Do I have to file anything every year?
Yes. LLCs, corporations, and LPs file an annual franchise tax report with the Texas Comptroller, including a Public Information Report, even when no tax is owed. Sole proprietorships and general partnerships have no state entity filing.
Is there a Texas income tax on my business?
No. Texas imposes no personal or corporate income tax. Most entities do owe the franchise (margin) tax, and federal income tax still applies to business income.
Setting up or restructuring a Texas business? Reidel Law Firm advises owners on entity selection, formation, and compliance with direct attorney access — see how we help Texas businesses.
