Texas LLC vs Corporation

Texas LLC vs Corporation

Texas's two most popular entity types are the LLC (limited liability company) and the corporation. This article will compare and contrast these two entity types and outline the main similarities and key differences.

What is an LLC?

The LLC is a hybrid business entity that combines the best attributes of a corporation with the simplicity and tax benefits of a partnership or sole proprietorship.

The LLC is the most popular legal entity and, like a corporation, is commonly used by businesses to protect the owners' personal assets from the business's debts and liabilities.

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What is a corporation?

A corporation is a business structure, usually owned and governed by a group of people, registered with the state as a separate and distinct entity.

The corporation is the oldest entity type and is often viewed as more formal and rigid than an LLC. Like an LLC, a corporation will insulate its owners from the business's liabilities.

How are LLCs and corporations similar?

LLCs and corporations are both legal entities that are separate and distinct from their owners. In addition, they are similar in the following ways:

  • Cost. The cost to form a Texas LLC and a Texas corporation is the same.
  • Liability protection. LLCs and corporations both provide a liability barrier between the business's liabilities and the owner's assets. In other words, the owners of both entity types are generally not personally responsible for the business obligations.
  • Registered with the state. LLCs and corporations are both created by filing formation documents with the state.
  • No annual costs. There are no annual costs for the Texas LLC or the Texas corporation.
  • Perpetual existence. LLCs and corporations both have perpetual existence, meaning they can continue to exist even if one or more owners leave the business or pass away.
  • Legal formalities. LLCs and corporations are both required to follow certain legal formalities, such as filing a Certificate of Formation with the state. Read more about Texas LLC formation.
  • Annual reporting. LLCs and corporations are both required to file an annual report with the Texas Comptroller.
  • One or more owners. LLCs and corporations can both have just one owner or multiple owners. When an LLC has only one owner, it is called a single-member LLC.
  • EIN. LLCs and corporations will both require an EIN (federal tax ID) to open a bank account.
  • Professional varieties. LLCs and corporations both have professional varieties (i.e., PLLC or PC).

What are the differences between an LLC and a corporation?

The key differences between an LLC and a corporation are:

  • History. The first US corporations were incorporated in the 1700s, while the LLC was not authorized until 1977 in Wyoming. All 50 states had enacted LLC statutes by 1996, including Texas in 1991.
  • Ownership. The owners of a corporation are called shareholders, while the owners of an LLC are called members. Both entities have few restrictions on who can be an owner.
  • Flexibility. A corporation is considered more formal and rigid, while an LLC is less formal and flexible. An LLC is flexible in how it will be taxed, governed, etc.
  • Taxation. A corporation must pay federal tax on its profits, and then the shareholders will pay additional income tax on the dividends they receive. An LLC is considered a "pass-through" entity, meaning that the profits and losses of the business are reported on the member's tax returns. If desirable, an LLC can elect to be taxed like a corporation (C-Corporation or S-Corporation). Read more about LLC taxation.
  • Management. A corporation must have both shareholders AND directors. It is the directors of a corporation that govern it. In contrast, an LLC can be managed by either (a) its owners (i.e., members) or (b) one or more "managers." A manager-managed LLC resembles the management structure of a corporation, and the corporation does not have a member-managed equivalent.
  • Protection of business assets. Both entity types will protect their owners from the business liabilities, but only the LLC insulates the business assets from the personal creditors of the business owners.
  • Governing documents. The corporation is governed by "bylaws," while the LLC is governed by an "operating agreement," also known as a company agreement.
  • Naming. An LLC name must end with the words limited liability company or limited company (or an accepted abbreviation like LLC). In contrast, the name of a corporation must end with incorporated or corporation (or an accepted abbreviation like Inc or Corp). See more about the rules for naming a Texas LLC and how to check if a Texas LLC name is available.

What are the advantages of a corporation?

The advantages of a corporation are:

  • better for businesses that intend to be traded on a public stock exchange
  • better for businesses that need venture capital

What are the advantages of an LLC?

The advantages of an LLC are:

  • better asset protection
  • perfect for small businesses
  • easier to use
  • tax flexibility
  • management flexibility
  • pass-through taxation
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Zachary Copp, Esq.

Attorney at Copp Law Firm, PC

Mr. Copp is a graduate of the University of Texas at Austin and the founder of the Copp Law Firm. He has been licensed in Texas for 20 years and has personally formed over 3,500 Texas LLCs since 2015. He was recognized as a Rising Star by SuperLawyers® for seven straight years. See full bio →