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If you are considering starting a small business, you're most likely trying to sort out the different types of businesses and trying to decide which type is best for you. There are 6 entity types in Texas: sole proprietorships, corporations, s-corporations, limited liability companies, professional corporations, and partnerships. The right type for your situation will depend on your taxes, liability, and ability to control the profits and losses of the business.

A sole proprietorship is a business operated by one individual (or a couple). The business is considered an extension of the individual (or couple), not a separate entity. The business profits and losses are included on the individual's personal tax return, and the individual retains personal liability for the business debts and lawsuits.

A limited partnership is just another type of partnership. It is different from a general partnership because it has both general partners and limited partners. A limited partnership is also considered a distinct entity from its partners.

Although they have similar names, an LLP (limited liability partnership) and an LLC (limited liability company) are different types of business structures.

Oftentimes, I have clients come to me asking for an S-Corp, not knowing what this really means. An S-Corp is not a different form of corporation, but rather a special tax treatment of one or more standard Texas corporations. The incorporation with the Texas Secretary of State actually has nothing to do with the S-Corp status.

A primary reason for incorporation is to protect your personal assets from claims of creditors of the business. You want to be able to keep your personal assets if you cant pay the bills of the business, or have some other large liability claim against the business not covered by insurance.

A corporation is a separate legal entity from its owners. A corporation can be owned by one person or many people. The corporation is formed under the laws of the state in which it is operating, with Articles of Incorporation or Certificate of Formation.

Limiting potential personal liability of investors or owners is often the biggest consideration favoring incorporation or LLC formation. These two entities limit the exposure to liability of investors or owners for business debts or liabilities to the amount invested and protect other personal assets of the investors from those debts.