The Risks that Come with a Sole Proprietorship in Texas

The Benefits of a Single Member Corporation or Limited Liability Company

In Texas, you can create a small business without filing any legal documents, if you set your business up as a sole proprietorship. You can, however, choose to operate your business under an assumed name, but you’ll want to verify that the name is available and file an Assumed Name Certificate with the County Clerk’s office where you live.

While setting up a sole proprietorship can be easy—just start doing business—it can also put you at risk.

• As a sole proprietor, you can be personally liable for all debts and obligations of your business. That means that, if someone sues you, they can have access to your personal bank accounts, as well as your personal assets (home, car and other personal property).
• As a sole proprietor, you’ll often find it more difficult to raise necessary operating capital, as you’ll have nothing but your personal signature or guarantee to offer potential investors
• As a sole proprietor, you may have a greater tax liability, as you’ll pay taxes at your marginal personal tax rate, rather than the corporate tax rate

Choosing a Better Legal Form for Your Small Business

In Texas, there are other legal forms available to single-owner businesses that can minimize these risks. Unlike some states, Texas allows for single-member limited liability companies, as well as single shareholder corporations.

The Benefits of a Small Corporation

Under the business laws in Texas, a for-profit corporation must have at least one president, one secretary and one director, but the same person can hold all those offices. Furthermore, that same person can be the sole shareholder of the company.

When you set up a corporation, your liability to any creditor of the business will be limited to the amount of your investment in the business. In essence, the most you can lose is the amount you paid to purchase your shares of the company. Your personal assets won’t be at risk (unless you fail to properly separate assets and liabilities of the business from your personal assets). A corporation can help you raise capital, as you can sell stock to new investors or pledge shares as collateral for a loan. In addition, you may be able to reduce your tax liability by taking advantage of the fixed corporate tax rate.

The Benefits of a Limited Liability Company

Texas also allows for the creation of a single-member LLC, which also limits your liability to creditors.

Contact MCIS Law

At MCIS Law, PLLC, in Stafford, we provide comprehensive counsel to businesses in southeast Texas. For a confidential consultation with an experienced and knowledgeable lawyer, email us or call our office at (346) 297-0121. We accept all major credit cards.