Texas S Corp: What You Need to Know

If you call the Lonestar State home, or are considering moving there – well played, my friend, well played. The biggest state in the contiguous U.S. has a lot going for it. For example, did you know that Amarillo is known as the “Helium Capital of the World”? (And that’s not just a lot of hot air.) 

But more importantly, Texas is one of the growing number of states creating tax laws to attract startups and small businesses to the region. The absence of any income and corporate tax benefits businesses of all sizes. In fact, you could say, everything’s bigger in Texas – except taxes. 

And woven into this big, generous blanket of tax benefits is the good old Subchapter S Corporation in Texas or S Corp to you and me. If you’ve been thinking about forming an S Corp in Texas, keep reading to get the skinny on everything related to this topic. You’ll learn the difference between S Corps and Limited Liability Companies (LLCs), whether it’s the right move for you, and the steps to take if filing an S Corp in Texas.

Does Texas Recognize S Corps?

This query may be the most important one of all if you’re a sole proprietor who’s weighing up the pros and cons of incorporating your business as an S Corp. And the answer is… drumroll please…absolutely. Texas recognizes the Federal S Corp election and doesn’t require a state-level election. 

As mentioned above, Texas works really hard to encourage businesses of any size to set up shop. 

S Corp Advantages and Disadvantages

Forming a Texas S Corp provides more advantages than disadvantages to a small business owner or freelancer. This is especially true when compared to sole proprietorships or general partnerships. But if you’re still on the fence about the tax differences between sole proprietorship taxation and S Corp taxation keep reading as we dive deeper.

Advantages:

• As an LLC taxed as an S Corp, your personal assets (home, bank accounts etc.) are protected should your biz be sued or incur any debts.
• Any business income or loss is passed through to you, the owner or shareholder, and reported on your personal income tax return. This can save you quite a bit in taxes as any losses offset other income.
• As an employee of your S Corp, you can reduce self-employment tax liability by taking a salary from the business and other distributions.
• Setting up your Business-of-One as an LLC taxed as an S Corp – especially if it’s a newbie – will appear more credible to potential customers and vendors. They’ll see that you’ve made a formal commitment to the biz.

Disadvantages:

• To get started, you’ll need to do all the formation paperwork, find a registered agent, and pay the state fees and annual report required by Texas.
• S Corps have specific requirements which LLCs and sole proprietorships are not subject to so if you fill out the S election paperwork, or other Texas S Corp tax filing requirements incorrectly or violate one of those rules – your S Corp tax status can be invalidated.
• Can have only one class of stock and a maximum of 100 investors.
• Owners need to be either U.S. citizens or permanent residents.

Get help with your Texas S Corp

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Setting Up an S Corp in Texas

There are two main ways to form an S Corp:

• First create an LLC (or convert an existing LLC) and then elect S Corp status with the IRS. 

or

• Form a traditional C corporation first and then elect S Corp status.

The second method isn’t as useful for most small businesses because by electing S Corp status, you would lose any benefits the C Corp provides.

Taxing your LLC as an S Corp 

Wondering whether you should have an LLC or S Corp in Texas? As long as you can satisfy the following criteria around ownership and organization required by the IRS, you should have no trouble having your Texas LLC taxed as an S Corp. 

• Be a U.S. based business
• Offer only one class of stock
• Limit the number of shareholders or owners  to 100
• All shareholders must be U.S. citizens or permanent residents

Then it’s a simple matter of filing form 2553 with the IRS after you’ve had the form signed by an officer of the company and all shareholders. 

If you want the S Corp election to be in effect for the entire year, make sure to file on or before March 15 or get ahead of the game and file anytime during the prior tax year.

Note: If you’ve just formed a new LLC with the purpose of converting to S Corp, you have two months and fifteen days (or 75 days) from the date your biz starts its first tax year. The IRS also allows for a retroactive S Corp election but we will not go into detail here. 

LLC or S Corp in Texas

S Corps and LLCs in Texas and in other states are often grouped together as if they belong in the same category. While closely connected, they are actually different species that have a symbiotic relationship. 

S Corp or LLC: Which Should You Choose?

When you’re trying to figure out which is best for your setup, it helps to know that an LLC is a business entity. The type of entity that makes it easy for solopreneurs to separate and protect their personal assets from their business assets. 

Whereas an S Corp is a tax classification that determines how your LLC is taxed federally and by the state. (However, there’s no state tax in Texas. Woot!) If you’re just starting out, an LLC without the S Corp tax election will probably be your best bet. You can always elect S Corp taxation down the road. (In fact, the first step to electing S Corp status is to form an LLC.) 

If you want to keep things simple and don’t want to deal with paperwork, consider remaining an LLC. As more and more of us start our own enterprises, the LLC is establishing itself as the most popular entity. And for good reason: It provides small business owners some of the key tax benefits of larger corporations. 

However, if you’re not afraid of a bit of paperwork or you’ve hired the services of a reliable company, such as Collective to help you, (clever old you) then S Corp could be your best bet. After all, you will benefit from a most conducive Texas S Corp tax rate.

Can an LLC Be an S Corp as Well?

Yes. That’s the great thing about using S Corp status. Your LLC can also use this tax classification. The best of both worlds can be yours. (Gotta love hardworking, double-duty Texas tax classifications.)

What is the Advantage of an S Corp Over an LLC?

The S Corp structure enables small businesses to thrive without them being taxed twice.

An S Corp has several advantages over an LLC. For one, it can reduce the amount of self-employment taxes you’ll be saddled with. As an LLC, if you make upwards of $80,000, Uncle Sam will take a much bigger cut – you will pay 15.3% in federal self-employment tax on top of federal income tax.

The S Corp also makes it easier if you ever want to transfer stock. But for many solo biz owners who plan to keep flying solo, this may not be such a big draw. 

S Corp Texas Cost

You can create your S Corp by filing a Certificate of Formation-for-Profit Corporation with the Texas SOS. You can do this by mail or online for a fee of $300.

But before you pay good money to register your S Corp in Texas, you should check that the name you’ve chosen for your fabulous business of one, is actually available. You can do this by checking the Texas Secretary of State’s online database. Each name search will cost you one U.S. dollar.

Forming an S Corp in Texas

Hopefully, you now know everything you need to know about forming an S Corp in Texas, including Texas S Corp tax filing requirements. So, no matter what your Lonestar gig is – helium balloon excursions or something more down to earth – you’re now able to make an informed decision. You’ll know what type of business entity and tax classification to choose to benefit you and your business of one.