The United States government has expressed its support for small businesses over the years. The government has put in place a variety of initiatives and programs to encourage entrepreneurship in the country. The U.S Small Business Administration provides funding programs, local assistance, and business guides to help make the process easier.
When starting a new business, be it as a corporation or LLC, a common question to ask is “Which state should the business be incorporated in?” At first, most entrepreneurs opt to incorporate in their home state; however, this may not be the most profitable option. Since factors such as liabilities, taxation, and asset protection will depend on the chosen state, it is vital to conduct proper research before committing. Texas for instance has proven to be a popular choice for incorporation.
Structure of an LLC
LLCs combine elements of a sole proprietorship or partnership and that of a corporation. This gives the business entity a level of flexibility and allows for either single-member or multi-member ownership. The owner of an LLC will receive financial and legal protection while avoiding double taxation.
There is also a distinction between the debt and assets of owners and that of the business. In the event of the company owing money and being unable to pay, only the assets of the business are at risk. LLCs also use pass-through taxation, meaning that the business itself will not pay taxes. However, owners are required to report business income and pay taxes based on their personal tax returns.
The top states for LLC formation are:
- Texas
- Nevada
- Wyoming
- Delaware
- Florida
Why Texas is the Top State for LLC Formation in the U.S
Limited Liability Protection
An LLC in Texas will benefit from a “corporate veil.” This legal barrier separates the owner’s assets from that of the business. In the case of informal business structures, for example, with sole proprietorships, the business owner will be held financially responsible. However, in the case of an LLC, personal finances are distinct from business finances.
Texas Secretary of State Support
LLCs in Texas will receive a notable amount of support from the Texas Secretary of State (SOS). The Texas SOS provides businesses with a comprehensive list of resources and services that have been specifically developed to support the growth of new startups and small businesses. The platform is able to assist with business registration, informative guides, and resources.
Easy to Setup and Maintain
Entrepreneurs can opt to form an LLC using the DIY method; however, there can be hassles if the proper protocol has not been followed. This issue can be mitigated by hiring an attorney to form the LLC; however, this option can be out of budget for most startups. A way around this is to employ an LLC formation service since they are usually more cost-effective than hiring an attorney while still providing expert service and advice.
The maintenance of an LLC in Texas requires only the filing of an annual report — avoiding all of the complexities that come with operating a corporation.
Lower Registration Fees
When forming an LLC in Texas, entrepreneurs will save money during the registration process, especially compared to other business structures, e.g., Limited Partnerships. Registering an LLC in Texas will only cost a single filing fee to the Secretary of State, whereas Limited Partnerships will require payment for each partner.
State Taxation Laws
The business structure of a limited liability company is set by federal law– Texas chose to adopt a law that allows limited liability companies to select a federal tax structure that will operate as a corporation or as a partnership. Since Texas does not impose a state tax, entrepreneurs will benefit from the leniency. However, businesses have to register with the state of Texas for Franchise Tax.
No Requirements for Record Keeping
Record keeping can be time-consuming and a tedious task, mainly when business owners are preoccupied with setting up and growing a business brand. Corporations are often required to keep copious records and track minutes of meetings; however, a Texas limited liability company does not have to conform to these structures– meaning that there is no need to establish or maintain these business records.
Final Thoughts
Starting a new business takes both hard work and determination. Entrepreneurs will have to conduct thorough research before they are even able to begin the registration process. Texas is an excellent choice when looking for a state to incorporate; however, the right choice will ultimately depend on the unique needs of the business owner.
