Texas is one of the most popular states at the moment for small businesses across the United States at the moment, with over 72,000 new businesses opened last year in this state alone. This state has one of the best business environments across the US with significant tax benefits and the highest GDP percentage spending on incentives.

This article will attempt to explain in more detail the reasons behind why Texas is this attractive to new businesses. It will involve an evaluation of the benefits associated with initiating an LLC in this state, followed by some initial considerations new LLCs should bear in mind.

Securing A Name

The first benefit of becoming an LLC in this competitive state is that this business structure will help you secure a name. Furthermore, when your LLC is registered, a legal name must be selected as part of its registration process. When this process is completed, no other business can opt to use this name as you have been granted its unique use.

By contrast, two of the other most common business structures for small companies: sole proprietorships and partnerships, are only able to use the names of their owners for their name, unless they apply for a DBA.

Pass-Through Taxation

One of the core benefits of forming a business in the LLC structure is the way in which it is taxed. LLCs are not subject to corporation tax, only regular income tax. This works because the revenue generated by a business ‘passes through’ the organization to its owners, who are then taxed individually by personal income and self-employment taxes. This can help save money.

The only two other business structures that are taxed in an analogous way do not provide the same liability protection afforded by LLCs (or any other flexibility regarding tax for that matter).

This is particularly beneficial in Texas, where corporations are ‘double taxed’. This leaves less profits for the business as its revenue is taxed twice: once before the owners have been paid their salary, and once after said owners report their earnings on their tax forms.

More Tax Options & Flexibility

There are a number of tax options that LLCs can begin to consider as they progress and grow in size. For example, the S-Corp (S Corporation) tax option starts to become beneficial for small businesses when they can concurrently pay a minimum of $10,000 in distributions per annum and can pay its managers what a court would deem a ‘reasonable salary’.

At this point, an S corp might be optimal as, in these situations, it will reduce the overall tax liabilities of a company by shrinking the amount it must pay in self-employment taxes. Alongside this option, there are two additional ways an LLC can choose to pay income tax.

Limited Liability Status

Limited liability protection is an inherent characteristic of LLCs. It is the term used to describe the way in which an LLC’s business assets are viewed as completely distinct from its owners’ personal assets by the law. The purpose of this is to ensure that the owners’ personal assets (e.g. personal savings, house etc.) cannot be used for business debts, or as compensation for the creditors of a company that has gone bankrupt.

Less formal business structures don’t offer this protection to owners’ assets, and while corporations do, it is not ideal for small businesses to structure themselves as a corporation because they are often not economically optimal for small businesses.

Considerations For New LLCs

Many newly established small businesses are struggling from a liquid point of view. They require funding for a plethora of reasons, but cannot yet raise it by themselves and so are reliant on loans.

One such cost to businesses that is effective immediately is that of payroll, which makes it extremely common for businesses to engage in a payroll loan. This is to help companies pay their workforce and quickly meet their payroll obligations.

Closing Statement

There are numerous reasons to start an LLC in Texas, both the business structure have their own individual benefits that make them attractive, but the combination of the two provides the perfect environment for small businesses to flourish.