Business
LLC vs corporation for Texas small businesses
Updated February 10, 2026
Most Texas small businesses that form an entity choose either a limited liability company (LLC) or a corporation. Both can protect owners' personal assets from business debts, and both are created with the same state filing. They differ in how they're managed, how they're taxed by default, and how much paperwork they require. A sole proprietorship or general partnership needs no state filing but offers no liability shield.
What LLCs and corporations have in common
- Formation: both are created by filing a certificate of formation with the Texas Secretary of State (SOS). The state filing fee is $300 for either.
- Limited liability: owners generally aren't personally liable for the company's debts. That protection can be lost in some situations, and it doesn't cover personal guarantees or an owner's own wrongful acts.
- Registered agent: both must maintain a registered agent and registered office in Texas.
- Franchise tax: both are generally subject to the Texas franchise tax. Many small businesses owe no tax because their revenue falls below the Comptroller's threshold, but they still file an annual report, generally due May 15.
How an LLC works
An LLC's owners are called members. The certificate of formation states whether the LLC will be managed by its members or by managers. The owners' rights and responsibilities are set out in a company agreement, the Texas name for an operating agreement, which can be tailored in many ways, such as sharing profits differently from ownership percentages.
LLCs generally require fewer formalities than corporations. For federal income tax purposes, a single-member LLC is disregarded by default, so its income is reported on the owner's return, and a multi-member LLC is taxed as a partnership by default. An LLC can elect to be taxed as a corporation, including as an S corporation.
How a corporation works
A corporation's owners are shareholders. Shareholders elect a board of directors, the board appoints officers to run the business day to day, and bylaws set the internal rules. Corporations have more formalities, including shareholder and board meetings or written consents, minutes, and stock records.
By default, a corporation is taxed as a C corporation: the corporation pays income tax on its profits, and shareholders pay tax again on dividends. An eligible corporation can elect S corporation status, which generally passes income through to the shareholders. Corporations are also a familiar structure for stock options, and venture capital investors often prefer them.
Side by side
| Topic | LLC | Corporation |
|---|---|---|
| Owners | Members | Shareholders |
| Governing document | Company agreement | Bylaws |
| Management | Members or managers | Board of directors and officers |
| Default federal tax treatment | Pass-through | C corporation |
| S corporation election | Available | Available if eligible |
| Formalities | Fewer | More |
| Texas SOS filing fee | $300 | $300 |
| Our formation fee | $950 single-member, $1,250 multi-member | $1,250 |
Keeping your liability protection
- Open a separate bank account, and don't mix business and personal money.
- Sign contracts in the company's name, with your title.
- Keep your company agreement or bylaws, ownership records, and major decisions in writing.
- Keep state filings current. In Texas, a company that doesn't file its franchise tax reports can lose its right to do business, and its officers or managers can become personally liable for certain debts created after that happens.
Taxes: talk with your CPA
Choosing an entity and making tax elections have real tax consequences. We don't give tax advice or prepare tax elections, and we're happy to coordinate with your CPA.
Questions owners often consider
- How many owners will there be, and will that change?
- Do you plan to bring in investors or offer equity to employees?
- How should profits be shared?
- How much ongoing paperwork are you comfortable with?
- What are your long-term plans for selling or passing on the business?
Which entity fits depends on your answers and your tax picture, which is what we discuss in a consultation. See our business fee schedule.
This is general information, not legal advice.