Business Structures

Presented by Accounting Plus

Legal (State) Structures and

Federal Tax Structures
Legal structures are defined by the State.
Federal Tax structures are defined by the
IRS.

Texas Legal Structures

Sole proprietorships and General
Partnerships
Corporations
Limited Liability Company
Limited Partnership and Limited Liability
Partnership

Sole proprietorship and General Partnership

A sole proprietorship, is a type of
business entity that is owned and run by
one individual
A General Partnership is similar to a sole
proprietor, but instead partners share
equally in both responsibility and liability.
A SP or a GP may want to file a DBA but
is not required. A DBA is an a assumed
named that can be filed in your local
County Clerk's office.
These entities do not provide legal
protection and there is no legal distinction
between the owner and the business.
No state reporting is required.

Corporations
A Texas corporation is created by filing a
certificate of formation with the Texas Secretary
of State
A corporation is a legal person with the
characteristics of limited liability.
The owners are called shareholders
Corporations must have directors
Corporations must file an annual
Franchise Tax
Corporations must file a Personal
Information Report
Corporations must record minutes

Limited Liability Company ( LLC )

A Texas limited liability company is created by filing a
certificate of formation with the Texas Secretary of State.
The owners of an LLC are called members.
An LLC can be managed by managers or by its members.
An LLC is a legal person that provides limited liabilities to
the members
An LLC Must file a Franchise Tax and Personal Information
Report with the Texas Comptrollers Office.

Limited Partnerships and

Limited Liability Partnerships
Limited Partnerships have members that have
limited liabilities and members that have full
liabilities called General Partners.
Limited Liability Partnerships are similar, but the
General Partners have limited liabilities.
Both entities must file a certificate of formations
to the secretary of state.
Must file an Annual Franchise Tax and Personal
Information Report to the Texas Comptroller.

Federal Tax Structures (IRS)

Sole Proprietorship ( Schedule C on1040 )
Partnerships (1065)
S Corp (1120S)
C Corp (1120)

Characteristics of a Sole
Proprietorship
An individual who owns
a business as
sole proprietor
A single member LLC
Must pay federal income
taxes according to the profit of the business
on form 1040 (Tax brackets range from 10% to
39%)

Must pay self-employment tax of 15.6%

according to the profit of the business. Selfemployment taxes pay for Medicare and

Characteristics of Partnerships (1065)

General Partnerships, Limited Partnerships and Limited
Liability Partnerships
LLC with two or more members
Partnerships must file a 1065 form, which provides an
earning statement called a K1 to each of the partners or
members.
The partnership does not pay taxes, but it transfers or
passes the tax responsibility to the members or partners
individually.
Partners are liable to report the earnings of the K1 into their
personal Income tax (Tax brackets range from 10% to 39%)
General Partners or Members are liable for self-employment
taxes of 15.6% from the revenue reported on the K1 form.

Characteristics of S Corp (1120S)

LLC or Corporations
LLC or Corporations must file a 2553 with the IRS to
make an election to be treated as an S Corp.
Revenue and expenses must be reported using
form 1120S
Partners are liable to report the earnings of the K1
into their personal Income tax (Tax brackets range
from 10% to 39%)
Members who work or manage
the company must have a
reasonable salary.

C Corporations (1120)
All legal structures classified as corporations by the state
are by default C corps with the IRS.
LLCs may be classified as C corps, but form 8832 must
filed with the IRS.
C corps are subject to double taxation and the
shareholders or members receive a 1099 DIV.
C corps tax brackets range from15% to 39% and
personal tax brackets range from10% to 39%, so
members or shareholders can be taxed from 25% to 78%.
C Corps have one key advantage and that is the
company can raise capital and can eventually go public

Summary
Sole Proprietorships and General
Partnerships are easy to form, but owners
are personally liable and subject to self
employment tax.
An LLC protects members or shareholders
from personal liability and has several
options on how to be taxed (i.e. selfemployed, S corp., or C Corp.)
Corporations, provide protection from
personal liability to shareholders and this
structure is commonly used for raising
capital from investors.
The default taxation of the Corporation is
the 1120 corporate tax or it has the option
to be classified as an S corp. if some
requirements are fulfilled.

Case Study Comparison

Net Profit

Schedule C

S Corp

C Corp

$ 100,000.00

$ 100,000.00

$ 100,000.00

Exemption +
Standard Deduction
Federal Taxable
Income
Federal Taxes

$ 90,250.00
$ 18,724.00

$ 90,250.00
$ 18,724.00

$ 90,250.00
$ 18,724.00

Self-Employed Taxes
Total Tax

$ 14,406.60
$ 33,130.60

$ 7,203.30
$ 25,927.30

$ 32,500.00
$ 51,224.00

9,750.00

9,750.00

9,750.00

This Case Study delineates a single individual with no

dependents and no other credits. **S Corp example
assumes a reasonable salary of $50,000.

LLC taxation options

Tax as Self Employed

Taxed as S Corp

Taxed as Corp

Net profit

Net Profit

Net Profit

Side by side comparison

PROS

Sole Proprietorship

Click to edit the outline

text format
Easy and inexpensive to form
Unlimited personal liability
Complete control
Easy tax preparation

LLC

Corporation

Partnership

CONS

Limited Liability
Less Recordkeeping
Sharing of Profits

Hard to raise money

Second
HeavyOutline
burden
LevelLimited Life
Self-Employment Taxes*

Third Outline
Level
Limited Liability
Time and Money
Ability to Generate Capital
Double Taxing
Corporate Tax Treatment
Additional
FourthPaperwork
Outline
Attractive to Potential Employees
Level
Easy and Inexpensive
Joint and Individual Liability
Fifth Outline
Shared Financial Commitment
Disagreements
Among
Complementary Skills
Partners
Level
Partnership Incentives for Employees
Shared
Profits.
Sixth
Outline