Spec notes
- In Texas, LLCs, corporations and limited partnerships are formed by filing with the Secretary of State; a sole proprietorship needs no state filing.
- The IRS says your form of business determines which income tax return you file.
- LLCs and corporations are subject to the Texas franchise tax, but for 2026 and 2027 reports no tax is due at or below $2,650,000 in annualized revenue.
Austin attracts founders of every kind, from solo consultants and food trucks to software startups planning to raise money. Before you register a name or open a bank account, you need to pick a legal form for the business. It affects your personal liability, your paperwork, your taxes and, for startups, what investors will accept. This guide compares the main choices using what the Texas Secretary of State and the IRS publish.
Key takeaways
- A sole proprietorship is the default if you simply start doing business alone; nothing is filed with the state.
- LLCs and corporations are created by filing a certificate of formation with the Texas Secretary of State.
- Your structure decides which federal tax return you file.
- Texas does not have a personal income tax, but entities like LLCs and corporations are subject to the franchise tax.
The main options
| Structure | How it is created | Owner liability | Federal tax basics |
|---|---|---|---|
| Sole proprietorship | No state filing; file an assumed name if you use one | Owner personally responsible | Profit reported on the owner’s return (Schedule C); self-employment tax applies |
| General partnership | No state filing required | Partners personally responsible | Partnership return; partners report their shares |
| Limited liability company (LLC) | Certificate of formation filed with the Secretary of State | Generally shielded from the entity’s debts | Depends on how the LLC is classified for tax purposes |
| Corporation | Certificate of formation filed with the Secretary of State | Generally shielded from the entity’s debts | Corporate return, or S corporation election if eligible |
Sole proprietorship
If you start doing business on your own without forming an entity, you are a sole proprietor. There is nothing to file with the state. If you use a name other than your own, Texas law requires an assumed name certificate with the county clerk; in Austin, the city points owners to the Travis County Clerk’s office. See Assumed Names (DBAs) in Texas: When and Where to File.
The IRS taxes a sole proprietor’s net earnings on the owner’s individual return, and those earnings are generally subject to self-employment tax, which the IRS puts at 15.3 percent: 12.4 percent for Social Security and 2.9 percent for Medicare.
LLCs and corporations
The Texas Secretary of State explains that corporations, LLCs, limited partnerships and other entities each shield their owners from personal liability for the entity’s debts and obligations, and may offer tax advantages not available to sole proprietorships and general partnerships. They are created by filing a certificate of formation with the Secretary of State. The office notes that it cannot help you choose the best entity type for your business; that is a question for an attorney or accountant.
An LLC is formed on Form 205, and the filing fee is $300. It must keep a registered agent and a registered office in Texas. See Forming an LLC in Texas: Form 205 Step by Step.
If you plan to raise money
Founders who expect to take money from outside investors should settle the entity question with an attorney before accepting any funds. Investors, stock options for employees and later funding rounds all depend on how the company is set up, and restructuring after money comes in is harder. The IRS business structures page lists the corporation, the S corporation and the LLC as distinct choices with different tax filings, which is one more reason to decide early.
Taxes that follow the choice
The IRS says plainly that your form of business determines which income tax return you file. On the Texas side, the franchise tax applies to taxable entities such as LLCs and corporations, not to sole proprietors. For reports due in 2026 and 2027, an entity with annualized total revenue at or below $2,650,000 owes no franchise tax, but it still must file a Public Information Report or Ownership Information Report each year. See The Texas Franchise Tax for Startups: Who Files, Who Pays and When.
Tip: Write down three things before you decide: how much personal risk the business creates, whether you will hire, and whether you will raise outside money. The answers usually point to the right structure.
Changing later
Many businesses start as sole proprietorships and form an LLC or corporation once they have revenue, employees or investors. Changing structure later is possible, but it means new filings, possibly a new EIN and new contracts and bank accounts in the entity’s name. If you expect to grow quickly, setting up the right entity early can save that work.
Questions to take to a professional
- How much personal liability does my type of work create, and does insurance cover it?
- How would each structure be taxed for my expected income?
- Will I need to issue equity to partners, employees or investors?
- What ongoing filings does each structure require in Texas?
The bottom line
A sole proprietorship is simplest but leaves you personally exposed; an LLC or corporation adds filings and the franchise tax report in exchange for a liability shield and more flexibility. Make the choice with your growth plans in mind, then follow the next steps in Forming an LLC in Texas: Form 205 Step by Step and Getting an EIN for Your Austin Business: Free, Online and in the Right Order.