In this video, we break down the complexities of choosing a business entity by using a simple “baby” analogy. Don’t have time to watch the video? Scroll down for a written version.
The Written Version
When you start a business without registering anything, you are, by default, a sole proprietor. This means you and your business are one and the same.
However, when you create an entity like an LLC or a corporation, it is like having a baby. At first, the idea seems like fun, but then the process becomes more difficult. Labor and delivery are painful, the baby arrives, and you think, “Okay, I’m done.”
Then you realize you have to care for and maintain that baby. You want it to grow up, be self-sufficient, make its own money, be a good person, and move out by the time it is 18. I explain it this way because, in the eyes of the law, an LLC or a corporation is a legal person.
In Texas, both an LLC and a corporation provide similar protections from personal liability. If someone were to sue your business, they aren’t suing you; they are suing the “baby.” The business holds all the assets and all the liabilities. This separation is how you avoid personal liability—because any legal action is directed at the entity, not at you personally.
Most people gravitate toward the LLC because the internet says it is the easiest option. It is slightly simpler because an LLC, especially for a solo owner, does not require as much in writing. Conversely, a corporation should have written bylaws—a document that outlines how the company is run. A corporation also requires written minutes from an annual meeting.
I own my own corporation; I hold a meeting with myself once a year where I make resolutions and take a vote. It is always unanimous. I sign it, date it, and it is done for the year. It really isn’t that big of a difference. During COVID, we saw that corporations had a slight advantage regarding PPP funds because they generally kept better records than LLCs.
Both entities protect you about the same; it is simply a matter of preference. To know what you prefer, you must be educated and make an informed decision. Honestly, you really can’t make a bad choice. If you are interested, I can also discuss other structures like partnerships and limited liability partnerships.
