How to Choose a Structure for Your Business—and Why You Need a Lawyer

Why It’s Essential to Hire an Attorney When Choosing a Business Structure

As the business landscape has evolved, so have the available entity types, giving entrepreneurs more choice than ever—while also introducing complexity. For individuals starting a business in Texas, choosing a business structure is one of the most critical early decisions you’ll need to make, and an attorney can help ensure you take your business in the right direction regarding your day-to-day operations, taxes, personal liability, and investing opportunities. 

At Merritt Law, we help Texas business owners navigate these decisions every day. With more than 40 years of experience drafting business agreements, we believe choosing the right structure early on can prevent costly problems later. Here’s what you need to know.

How Business Structures Have Evolved

Business organizations are creatures of state law, and states have long competed to offer business-friendly structures that attract filings and tax revenue beneficial to a state’s revenue. 

Historically, Delaware led the charge, developing some of the most flexible and business-friendly frameworks for the formation of legal entities. Today, though, many other states have expanded and modernized their business structure offerings, including Texas, largely eliminating the advantage of entity incorporation/formation elsewhere.

What Business Structures Are Available?

Business owners have many entity types to choose from in establishing their company, including:

Sole Proprietorships

The simplest option, a sole proprietorship is simply one person doing business without forming a distinct legal entity. While easy to start, this structure provides no liability protection, meaning all personal assets are exposed to business risks. As such, doing business as a sole proprietorship is not advisable in most cases. 

General Partnerships (GPs)

When two or more individuals work together without forming a separate entity, they form a general partnership by default. Like sole proprietorships, general partnerships carry unlimited personal liability, an often-overlooked risk. For example, if a general partnership faces litigation, each partner’s personal assets may be used to satisfy a judgment. Like sole proprietorships, doing business as a general partnership is generally not advisable.

Limited Partnerships (LPs)

LPs were created to allow passive investors to participate without managing the business. This structure includes a general partner (with full liability) and limited partners (liable only for their investment). While LPs still have specific uses, particularly in agriculture and in dealings with certain federal agencies, they are less common today.

Corporations (C-Corps)

Corporations introduced limited liability for investors, but they also introduced double taxation: the corporation pays taxes on income, and shareholders pay taxes again on dividends. 

Limited Liability Companies (LLCs)

The most significant development in the last decade is the rise of the LLC. Today, a large portion of new business formations choose this structure, both in Texas and nationally, because this structure combines the liability protection of a corporation with operational flexibility and favorable tax treatment. 

As a law firm that frequently works with small to mid-sized businesses in Texas, we believe it is typically in a new Texas business’s best interest to form as an LLC, with the exception of certain agricultural operations, where federal agencies tend not to recognize LLCs.

Key Factors to Consider When Choosing a Business Structure

In choosing the right business structure, individuals, alongside a trusted business attorney, should weigh their business goals, operational needs, and the potential risks imposed by each structure available to them. In advising our clients, we typically evaluate the following factors:

1. Liability Protection

This is usually the single most important consideration. A wrong choice can put your personal assets at risk, including your home, life savings, or vehicles.

For example, one general partnership our firm worked with resisted forming an LLC because they relied heavily on insurance. When an explosion at their business caused injuries, both the partnership and its individual owners bore liability. If the partnership were an LLC, only the LLC would likely have been liable for the injuries.

2. Operational Structure and Control

A proper business structure should outline several operational items to ensure there are no loose ends or ambiguities about how the business is run. Key considerations here include:

• How decisions are made
• What authority managers or owners have
• What approvals are required for major expenditures
• How disputes are resolved
• How ownership can transfer after death, divorce, or withdrawal

An LLC’s company agreement provides this roadmap. Without it, even basic questions (such as whether a manager can authorize a $100,000 purchase) can derail operations.

3. Taxes

Tax treatment between the various business entities varies widely. A shareholder of a C-Corp’s dividends faces double taxation, while a member of an LLC’s distributions are only taxed once. An LLC, unlike a C-Corp, is typically a pass-through entity, meaning profits flow through to members’ individual tax returns. Single-member LLCs may even be treated as disregarded entities for federal tax purposes. 

While the specifics vary from state to state, entity to entity, and even industry to industry, a business’s tax profile can substantially influence which structure is best.

What Happens if You Choose the Wrong Business Structure?

Choosing the wrong business structure can cause issues ranging from relatively minor to significant, including:

• Overexposure to taxation
• Problems bringing in investors
• Confusion or disputes over day-to-day operations and decision-making
• Personal liability exposure
• Difficulty selling or winding down the business
• Complications in ownership changes, or in the event of an owner’s death or divorce

Further, restructuring later can sometimes be expensive and time-consuming. While Texas does allow conversions between entity types, it’s almost always easier and cheaper to start with the right foundation from the beginning.

Can Businesses Outgrow Their Structure?

Businesses can outgrow the usefulness of their original structure, but this happens less often than it used to. 

There were periods when certain entities, such as limited partnerships, enjoyed tax advantages that LLCs did not. When this changed, many businesses needed to convert structures. These days, however, states generally compete to make structures like LLCs flexible and protective, meaning an entity being an LLC will promote, rather than hinder, growth.

Still, regulatory environments change. A structure that works today may not make sense ten years from now, which is another reason ongoing legal guidance matters.

Are There Downsides to an LLC?

Not every entity should be an LLC, as it is not a one-size-fits-all entity structure. A business owner should consider the following potential downsides to forming their business as an LLC:

• Upfront setup costs
• The need for a long and detailed Company Agreement 
• A potentially steep learning curve for new owners
• More involved tax filings in some cases

However, nearly all these drawbacks are far outweighed by the protections, clarity, and flexibility LLCs provide.

Why You Need an Attorney When Choosing a Business Structure

Entrepreneurs sometimes assume they can form an entity using a copy-and-paste agreement from the internet—or worse, that they can navigate the early stages of business without a formal agreement at all. Unfortunately, generic templates:

• Lack the provisions needed for real-world situations
• Fail to address ownership changes
• Don’t protect against liability properly
• Don’t clearly define management authority
• Aren’t tailored to Texas law

And of course, with no agreement in place, changes in the business or the separate desires of business partners can lead to conflicts that cost both time and money.

At Merritt Law, our team has spent more than 40 years refining business agreements that comprehensively address these issues. In many cases, forming an entity (including drafting a tailored company agreement) costs around $1,000 or less, which is significantly cheaper than litigating disputes or restructuring an entity later.

In choosing and establishing a business structure, an experienced attorney can:

• Recommend the right structure
• Draft clear, well-defined governing documents
• Ensure compliance with Texas law
• Reduce the risk of personal liability
• Provide guidance as the business grows and needs evolve

In short: it’s far easier and less expensive to set your business up correctly from the beginning.

Forming a Business? Reach Out to Merritt Law for a Consultation 

Choosing a business structure is one of the most important strategic decisions you’ll make as a business owner. Texas offers some of the strongest and most flexible entity options in the country, but selecting the right one requires careful evaluation of liability, taxes, management, and long-term goals.

If you’re forming a business or considering restructuring, Merritt Law is here to help. Our team provides experienced guidance, tailored Texas-specific agreements, and clear direction so you can build and protect your business with confidence. Call 737-279-7290 or reach out to our team online to get started.