1. Texas LLC vs. Sole-Proprietorship

Texas LLC vs. Sole-Proprietorship

Author: Real Estate Holding Company

Published Jul 18th, 2023Updated Feb 14th, 2024
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Whether you’re a full-time employee looking to start a side gig or an established storefront business looking to continue growth, we guarantee you’re searching for a best business structure that’s best suited for you.

It’s not an easy decision. When it comes to LLCs and Sole Proprietorship’s, there are many benefits to each – but there are risks associated, too.

As the most simplistic business structure, should you choose a sole-proprietorship? Keep reading as you learn the advantages and disadvantages of each.

What is an LLC?

A limited liability company (LLC) is a business structure in the United States whereby the owners are not personally liable for the company's debts or liabilities.

Just like any business dwelling, there are advantages and disadvantages to forming an LLC.

Advantages of Texas LLCs

Limited Personal Liability – When you properly form an LLC in Texas, you’re protected from the liabilities and creditors – and that’s why most people form an LLC.

Tax Advantages – As with any business entity, you can deduct or write off your legitimate business expenses from your LLC’s income. This can significantly lower the profits reported to the IRS and help you in the long run.

Flexibility – Texas is known for giving LLC members freedom to customize their LLC dwellings. This means two things: An LLC can elect management flexibility and choose tax flexibility because the LLC itself doesn’t pay federal income taxes in the state of Texas.

Privacy Protection – Texas is one of the few states that allow business owners to form an Anonymous LLC for added privacy protection. Anonymous LLCs are formed to help prevent people from easily looking up (and finding) ownership information on the Internet.

Perpetual Existence – Other business entities, such as a sole proprietorship, cannot survive when the owner(s) pass away. LLCs have the capability of surviving and thriving in the event of death or other major life events as long as the paperwork is filed correctly.

Disadvantages of a Texas LLC

Some added complexity – An LLC has more administrative requirements than a sole proprietorship. Depending on the nature of your business and how you choose to file things, there are more details that need to be added to the paperwork.

Formation Costs - If you’re a small business or freelancer just getting started, things can get pricey in the beginning. Texas does have a higher startup fee but does not have the requirements that many other states have.

What is a Sole-Proprietorship?

A sole proprietorship also referred to as a sole trader or a proprietorship, is an unincorporated business that has just one owner who pays personal income tax on profits earned from the business.

As with forming an LLC, there are also advantages and disadvantages to forming a sole proprietorship.

Advantages of a Texas Sole Proprietorship

Easy to Establish - If you’re the owner and in charge of operations, there’s no need to formally register your business or notify federal or state offices.

Cost Effective - The only fees involved to establish a sole proprietorship are those needed to register your business name, and to attain the appropriate licenses and permits.

Hire as Many Employees as You Want – Even though this is a risky move, you can easily grow your reach and your team. This can really help businesses get their feet off the ground.

Disadvantages of a Texas Sole Proprietorship

Taxes - You could potentially owe more in taxes due to everything being earned income.

Personal liability - As a sole proprietor, you’re personally liable for paying contractors, honoring debts, paying the necessary taxes and insurance for your employees, and any legal contingencies.

Difficult to grow or raise money - Banks are often hesitant to lend money or issue credit under this business structure.

Not viewed as being professional – Without a business entity to back your business up, many clients and/or customers may see your work as unprofessional and sketchy.

LLC vs Sole-Proprietorship: What’s the Difference?

Generally, sole proprietors own small or part-time businesses with no employees. It costs nothing to establish a sole proprietorship.

Unlike a sole proprietorship, an LLC is a hybrid of the partnership and corporate forms that allows the liability protection of a corporation with the tax advantages of a partnership.

The main difference between a sole proprietorship and an LLC is that an LLC protects your personal assets in the event of a lawsuit or business loss.

There are also differences in branding and the cost to register and maintain the business. When it comes to the startup process, there are also key differences in funding, management, operation, and liability.

Funding is always a topic of interest because it takes money to make money. How you fund your new business isn’t as different as how you legally file the funding and ensure the tax papers are correctly written.

When it comes to management and operation, many business owners choose sole proprietorship because they have complete ownership and control.

LLC & Sole Proprietorship Taxation

If you operate your business as a sole proprietor, you’ll be taxed as a self-employed person, and the income of your business is considered your personal income for tax purposes.

An LLC may make an election to be taxed as a disregarded entity, partnership, corporation, or s-corp. If such an election isn’t made, it’s taxed as either a disregarded entity or a partnership, depending on the number of members it has.

Should You Start an LLC or Sole Proprietorship?

If you’re wondering who is an LLC best for, and who is sole proprietorship best for? Then let us help break it down for you.

Individuals that are freelancers, growing startups, or an established business with a storefront are structured for sole proprietorships. This business structure is extremely helpful to those building a side gig who need a low cost and easy way of establishing their growing business.

If you’re interacting with other people – client’s, customer’s or vendors – it’s always smart to have the liability protection that LLCs provide. In the event of a lawsuit, a good attorney will come after your personal assets. Having an LLC to help separate your personal and professional belongings is a must if this situation ever arises.

Look at your future business goals and take this advice into consideration before choosing whether to form an LLC or sole proprietorship.

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