Published: December 22, 2025
Author: Darryl V. Pratt, JD, CPA

Starting a business in Texas is an exciting journey, but one of the first and most important decisions you’ll need to make is choosing the right business structure. Two of the most common options are forming a Texas Limited Liability Company (LLC) or operating as a sole proprietorship. Each structure has its own benefits and drawbacks, and the right choice depends on your business goals, risk tolerance, and financial situation.

In this blog, we’ll provide a detailed breakdown of the advantages and disadvantages of both options, along with examples and key considerations to help you make an informed decision.

What is a Texas LLC?

A Texas LLC is a formal business structure that provides limited liability protection to its owners (called members). It is a flexible and popular choice for small and medium-sized businesses.

Benefits of a Texas LLC

1. Limited Liability Protection
   • Explanation: Members of an LLC are not personally liable for the business’s debts, obligations, or lawsuits. This means personal assets like your home, car, and savings are protected from business creditors.
   • Example: If your LLC is sued for $50,000 due to a defective product, only the LLC’s assets are at risk, not your personal property.
   • Additional Detail: This protection is not absolute. If you personally guarantee a loan or fail to maintain proper business practices, you could still be held personally liable.
2. Credibility and Professionalism
   • Explanation: An LLC is often seen as more professional and trustworthy than a sole proprietorship.
   • Example: A consulting firm named “Bright Ideas, LLC” may attract more corporate clients than “John Doe Consulting.”
3. Flexible Taxation Options
   • Explanation: LLCs can be taxed as pass-through entities by default, but can elect S-Corp or C-Corp taxation.
   • Example: A single-member LLC earning $100,000 can use S-Corp taxation to reduce self-employment taxes by splitting income between salary and distributions.
4. Ease of Ownership Transfer
   • Example: A real estate investor can sell their ownership interest without dissolving the LLC.
5. Separation of Personal and Business Finances
   • Example: A bakery LLC uses a business bank account for all transactions, ensuring cleaner bookkeeping.
6. Perpetual Existence
   • Explanation: The business can continue even if a member leaves, depending on the operating agreement.
7. Customizable Management Structure
   • Example: A tech startup can appoint one manager while other members focus on product development.
8. Access to Funding
   • Example: Banks are more likely to fund “GreenTech Innovations, LLC” than a sole proprietor.

Drawbacks of a Texas LLC

1. Formation and Maintenance Costs
   • Includes a $300 filing fee plus potential legal costs.
2. Administrative Complexity
   • Requires an operating agreement, detailed records, and more paperwork.
3. Franchise Tax
   • Texas LLCs must pay franchise taxes based on revenue.
4. Limited Liability Can Be Pierced
   • If you mix personal and business finances or act fraudulently, you can lose liability protection.

What is a Sole Proprietorship?

A sole proprietorship is the simplest and most common business structure. It is an unincorporated business owned and operated by one individual.

Benefits of a Sole Proprietorship

1. Simplicity and Low Cost
   • No formation documents required unless using a DBA.
2. Full Control
   • The owner makes all decisions.
3. Pass-Through Taxation
   • Income is reported directly on the owner’s personal return.
4. Minimal Regulatory Requirements
5. No Franchise Tax in Texas

Drawbacks of a Sole Proprietorship

1. Unlimited Personal Liability
   • Personal assets are at risk if sued.
2. Lack of Credibility
3. Difficulty Raising Capital
4. Limited Growth Potential
5. No Perpetual Existence
6. Tax Burden
   • All profit is subject to self-employment tax.

Key Considerations

When choosing between an LLC and a sole proprietorship, consider:

• Liability: Need asset protection? Choose an LLC.
• Cost: Sole proprietorship is cheaper for low-risk businesses.
• Taxation: Evaluate franchise tax vs. self-employment tax.
• Growth Plans: LLCs offer scalability and partnership flexibility.
• Administrative Burden: Sole proprietorships are simpler to run.

Conclusion

Choosing the right business structure affects your liability, taxes, and long-term growth. LLCs offer protection and flexibility, while sole proprietorships are best for simple, low-risk ventures.

If you’re unsure which option fits your business, we’re here to help! Call (972) 712-1515 to speak with Prestige Law Group, PLLC and get personalized guidance.