Starting a business in Texas? Consider forming an S corp – a smart choice for entrepreneurs looking to capitalize on Texas’s thriving business environment. In Texas, S corps offer the perfect blend of liability protection, tax advantages, and operational flexibility, making them a popular choice for savvy business owners.

Why choose an S corp in Texas? 

First, the state’s business-friendly climate is unparalleled. Texas is a rapidly growing economy, with a significant number of new businesses flourishing each year. This growth is partly due to the state’s favourable tax policies and robust support for startups and small businesses. For instance, Texas does not impose a personal income tax, which directly benefits S Corporation shareholders, as profits are passed through to their personal income.

Incorporating online in Texas is not only convenient but also efficient. The digital process streamlines paperwork reduces processing times and provides instant access to resources and guidance. With MaxFilings, it’s a straightforward path to officially launching your business, with the state’s online portals offering user-friendly interfaces and step-by-step instructions.

Texas S corp taxation

In Texas, an S corp differs from a C corp as it does not pay income taxes itself. When an S corp has multiple shareholders, it must file tax returns, but the shareholders individually report their share of the corporation’s income or loss on their personal tax returns. This is similar to the tax reporting process for sole proprietorships, partnerships, and Limited Liability Companies (LLCs).

To be designated as an S corp in Texas, a corporation must file IRS Form 2553 with the Internal Revenue Service. A few states require a separate state-level election to achieve Sub S Corporation status. Among these, Arkansas, New Jersey, New York, Ohio, and Wisconsin mandate state-level filings alongside the IRS filing.

How to form an S corp in Texas

Forming a Texas S corp involves several key steps:

1. Naming your business: Start by choosing a unique and memorable name for your Texas LLC that complies with Texas’s naming regulations. It should distinguish your business from other entities in Texas. Use the Texas Business Entity Search Page to check name availability. For a preliminary determination, contact the Texas Secretary of State at (512) 463-5555 or [email protected]. Remember, your LLC name must include a designator like “LLC” or “Limited Company” and avoid certain restricted terms.
2. Appointing a registered agent: Select a registered agent in Texas who will handle legal documents for your LLC. This agent can be a Texas resident or a business entity authorized to operate in Texas, available during business hours at a physical Texas address (not a PO box).
3. Filing the certificate of formation: Apply to the Texas Secretary of State to create your LLC by submitting a Texas certificate of formation. This can be done online through the Texas Secretary of State website, requiring a one-time filing fee of $300.
4. Creating an operating agreement: Draft an LLC operating agreement. Although not mandatory in Texas, this document is crucial, outlining the company’s management structure, member roles, profit sharing, and other operational guidelines.
5. Obtaining an Employer Identification Number (EIN): Acquire an EIN from the IRS, which acts like a Social Security number for your LLC. This is essential for tax purposes, hiring employees, and opening a business bank account. The application can be completed online on the IRS website or by mailing a form to the IRS.
6. Applying for S corp status: After forming your LLC or C corporation, file IRS Form 2553, Election by a Small Business Corporation, to elect S corp status. This must be done within 75 days of forming your LLC or C corp or in the preceding tax year. If your LLC misses this deadline, file Form 8832 to be taxed as a corporation, then submit both forms together.

Why form a Texas S corp?

Some points to consider when forming a Texas S corp

• To form a Texas corporation, you must file official documents with the state and pay the required state filing fees.
• File Form 2553 with the IRS to elect special tax status for your corporation.
• Texas law recognizes an S corp as a separate legal entity from its owners (shareholders).
• Texas S corps may face restrictions on the types of businesses they can operate.
• Document and maintain minutes of stockholder and board of directors meetings.
• Texas S corps are limited to 100 shareholders, and these shareholders cannot be other corporations, LLCs, partnerships, certain trusts, or non-resident aliens.

Limited liability

• Shareholders of Texas S corps usually have limited liability, risking only their investment in the corporation.
• Shareholders of Texas S corps are typically not liable for the corporation’s legal judgments, debts, or obligations.
• Protecting personal assets is a key reason business owners in Texas choose to incorporate as an S corp.
• There are exceptions where shareholders of Texas S corps may be held liable.

Raising capital

• Texas S corps can raise capital more easily than other business types by issuing and selling stock or other financial instruments.
• Selling stock may be regulated by state and federal securities laws.
• Transferring ownership in a Texas S corp is possible by selling its stock.
• Although voting rights may vary, Texas S corps are allowed only one class of stock.

Taxation

• Texas S corps usually face fewer audits than sole proprietorships and partnerships.
• Shareholders of Texas S corps benefit from pass-through taxation, avoiding double taxation.
• Texas S corps submit informational tax returns but do not pay income tax themselves.
• Shareholders of Texas S corps include their share of income and losses on their personal tax returns, using losses to offset other income.
• Income and losses are allocated according to each owner’s percentage of ownership.
• Self-employment taxes do not apply to the salaries paid to owners by the corporation.

Owners & employees

• Major shareholders may face limitations on some fringe benefits.
• Owners working in the business count as employees and qualify for fringe benefits like group insurance, retirement plans, and tax-favoured stock options.
• Employees often favour working for corporations that offer stock options and bonuses.
• Unlike other business types, corporations are essentially immortal and perpetual, not ending with a shareholder’s death.

Public perception

• The general public normally considers corporations more substantial than sole proprietorships and partnerships.