How to Start an S-Corporation in Texas (2024 Guide)

Start an S-Corporation in Texas

If you want to start an LLC in Texas, there are things that you should consider. Texas is the home to a thriving business community, making it an attractive location for entrepreneurs. One popular business structure is the S-Corporation, which offers several tax and operational advantages. This comprehensive guide will explore the process of starting an S-Corporation in Texas, including the costs, steps, advantages, and disadvantages associated with this business structure.

Webinarcare Editorial Team will help you gain knowledge through thorough research and market study. Before starting your S-corp, all the steps in this article must guide you.

What is an S-Corporation?

An S-Corporation is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. This tax treatment allows S-Corporations to enjoy pass-through taxation, meaning the corporation’s income, deductions, and credits flow through to the shareholders, who report this information on their individual tax returns. This structure helps to avoid the double taxation experienced by C-Corporations.

An S corporation (S corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other companies. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

Limitations and Requirements of S-Corp

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

You can apply for an S-Corp in Texas if qualified for the limitations and requirements.

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How to Form an S-Corporation in Texas?

To create S-Corp in Texas, you must follow the below guidelines that include forming a business name, hiring a Registered Agent, filing your Certificate of Formation, creating an operating agreement, requesting an EIN, and filing a form 2553.

Step 1: Register a Business Name in Texas

After you have decided on the idea to start an S-Corp in Texas, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an S-Corp, there is a complete guide on Texas Business Name Search for a proper business name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in Texas.
  • Limit of restricted words that need a license in Texas
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hire a Registered Agent

The next step in starting an S-corp in Texas is hiring a Registered Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence. Forming an LLC with an S-corp will be easier if you have Registered Agent in Texas.

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Step 3: File For Certificate of Formation

The Certificate of Formation is an important document to start your limited liability company (LLC). Texas Certificate of Formation is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. For the Certificate of Formation to be filed in UT Department of Commerce, you need to pay a filing fee of $300. In Texas, the filing fee of forming an LLC is $300.

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Step 4: Creating an Operating Agreement

After you have filed your Certificate of Formation, the next step is to create an operating agreement in Texas. The operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following:

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure.

Step 5: Request for an EIN

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

The application of an EIN in Texas can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

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Step 6: File Form 2553 for your S-Corp Business

Once you have obtained your EIN and Certificate of Formation to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or at most 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS.

In Texas, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520 .

Costs of Forming an S-Corporation

There are several costs associated with forming an S-Corporation in Texas, including:

  1. Filing Fees: When forming a corporation in Texas, you must file Certificate of Formation – For Profit Corporation with the Texas Secretary of State and pay a filing fee of $300 for filing online, by mail, in person filing, or by Fax.
  2. Statement of Information: After forming the corporation, you must file a Statement of Information (Form SI-550) within 90 days and pay a filing fee (currently $25). This statement must be filed annually after that.
  3. Franchise Tax: S-Corporations in Texas are subject to the annual franchise tax, which is the greater of a minimum tax (currently $800) or a calculated tax based on the corporation’s net income.
  4. Other Costs: Depending on the nature of your business, additional costs may include obtaining licenses and permits, registered agent services, and professional fees for legal and accounting services.

Advantages of Forming an S-Corporation

There are numerous advantages to incorporating an S-Corp, but you should be aware of certain problems. Consider the following benefits of an S corporation:

Pass-through Taxation

S-Corporations enjoy pass-through taxation, which helps to avoid the double taxation faced by C-Corporations. This can result in potential tax savings for shareholders. Pass-through taxation is a tax system where the income, deductions, and credits generated by a business entity, such as Texas General Partnership, limited liability company (LLC), or S-Corporation, are passed through to individual owners or shareholders instead of being taxed at the corporate level.

In this system, business profits and losses are reported on the owners’ or shareholders’ individual tax returns, and taxes are paid at their individual income tax rates. This avoids the issue of double taxation, which occurs in C-Corporations where income is taxed at both the corporate level and again when distributed to shareholders as dividends. Pass-through taxation is generally advantageous for small businesses and their owners, as it simplifies tax filings and often results in lower overall taxes.

Limited Liability Protection

Shareholders of an S-Corporation have limited liability protection, meaning their personal assets are protected from the corporation’s debts and obligations. Limited liability protection in an S-Corporation refers to the legal separation between the personal assets of the shareholders (owners) and the business assets, which protects shareholders from being personally responsible for the company’s debts and legal obligations.

In an S-Corporation, shareholders’ personal assets, such as their homes, cars, and personal savings, are not at risk if the business faces financial difficulties or lawsuits. The shareholders’ liability is limited to the amount they have invested in the company. This limited liability is a significant advantage of incorporating a business as an S-Corporation, as it provides a safeguard for the personal financial well-being of the business owners.

It is important to note that limited liability protection can only be supported if the shareholders maintain proper corporate formalities, such as keeping separate business and personal finances, holding regular shareholder meetings, and maintaining accurate business records. In such cases, courts may “pierce the corporate veil” and hold shareholders personally liable for the company’s debts and obligations.

Transferability of Shares

Shares in an S-Corporation are more easily transferable than those in an LLC, allowing for greater flexibility in ownership changes. Transferability of shares in an S-Corporation refers to the ability of shareholders to sell, gift, or otherwise transfer their ownership interest in the company to another person or entity. This is an important aspect of an S-Corporation’s structure, as it allows for flexibility in ownership and the potential for raising capital through the sale of shares.

However, there are certain restrictions on the transferability of shares in an S-Corporation, which are imposed by the Internal Revenue Service (IRS) to maintain the company’s eligibility for S-Corp status:

  • Shareholders: The number of shareholders in an S-Corporation is limited to a maximum of 100. Only individuals, certain trusts, and estates can be shareholders; other corporations and partnerships are generally not allowed.
  • Eligible Shareholders: Only U.S. citizens and resident aliens can be shareholders in an S-Corporation. Non-resident aliens are not allowed to hold shares.
  • One Class of Stock: S-Corporations can only have one class of stock. All shares must have the same rights and privileges, such as voting rights and distribution preferences. However, differences in voting rights are allowed if they are not tied to economic rights (e.g., distribution preferences).
  • Perpetual Existence: Perpetual existence refers to the concept that a business entity, such as an S-Corporation, can continue to exist indefinitely, regardless of changes in ownership or management. This means the corporation can outlive its original founders and shareholders and continue to operate even if individual shareholders pass away or decide to sell their shares.

This characteristic of an S-Corporation provides stability and continuity for the business, as it ensures that the corporation’s operations, contracts, and legal obligations remain unaffected by changes in ownership. It also makes it easier for the company to attract investors and raise capital. Potential investors can be confident that the business will continue to exist even if the original owners are no longer involved.

Disadvantages of Forming an S-Corporation

Despite these advantages, moving to an S corporation only sometimes makes sense – or at the very least, necessitates a thorough review of certain situations. The following issues may arise in particular:

Restrictions on Shareholders

S-Corporations are subject to specific restrictions, such as a maximum of 100 shareholders and limitations on the types of eligible shareholders (e.g., only individuals, certain trusts, and estates).

Single Class of Stock

S-Corporations are limited to issuing only one class of stock, which can limit flexibility in raising capital or creating different ownership structures. A single class of stock in an S-Corporation refers to the requirement that the corporation only issues one type of stock with equal rights and characteristics for all shareholders. This means that all shares of stock must have the same economic rights, such as dividend distribution preferences and liquidation rights, as well as voting rights. The single class of stock requirement is one of the key criteria the Internal Revenue Service (IRS) sets for a corporation to qualify for S-Corp status.

Increased Complexity

Forming and maintaining an S-Corporation requires more paperwork, record-keeping, and compliance with state and federal regulations than simpler structures like LLCs.

Franchise Tax

S-Corporations in Texas are subject to the annual franchise tax, which can financially burden some businesses.

In an Texas S-Corporation context, the franchise tax is usually based on the company’s income, net worth, or a combination of both. Since S-Corporations are pass-through entities for federal income tax purposes, meaning that their income is not taxed at the corporate level but rather passed through to individual shareholders, they may be exempt from or subject to lower franchise tax rates in some states than traditional C-Corporations.

However, S-Corporations must still comply with Texas franchise tax requirements, which may include annual filings and tax payments. It is crucial for S-Corporation owners to understand the specific rules and regulations in their state of operation and to consult with a tax professional to ensure compliance and minimize their tax.

FAQs

What is an S-corporation?
An S-corporation is a type of corporation that is organized under Subchapter S of the Internal Revenue Code, which allows the corporation to pass its income, losses, deductions, and credits through to its shareholders for federal income tax purposes.
How do I form an S-corporation in Texas?
To form an S-corporation in Texas, you must file Articles of Incorporation with the Texas Secretary of State, and then acquire any required licenses and permits for your business at both the local and state level.
What are the advantages of forming an S-corporation in Texas?
Some advantages of forming an S-corporation in Texas include limited liability protection for your personal assets, pass-through taxation for federal income tax purposes, and the ability to raise capital by issuing stock.
What is the maximum number of shareholders an S-corporation in Texas can have?
An S-corporation in Texas can have up to 100 shareholders.
Can a sole proprietorship or partnership in Texas elect to become an S-corporation?
Yes, a sole proprietorship or partnership in Texas can elect to become an S-corporation by filing Form 2553 with the Internal Revenue Service (IRS).
What are the residency requirements for a Texas S-corporation?
There are no residency requirements for shareholders of an S-corporation in Texas.
Can a Texas S-corporation have subsidiaries?
Yes, a Texas S-corporation can have subsidiaries, but they must be organized as separate legal entities.
Can a Texas S-corporation pay salaries to its shareholders?
Yes, a Texas S-corporation can pay salaries and other compensation to its shareholders, but it must comply with all legal and tax requirements.
Are there annual reporting requirements for Texas S-corporations?
Yes, Texas S-corporations must file an annual report with the Texas Secretary of State and must also file an annual tax return with the IRS.
Can an S-corporation in Texas own property?
Yes, an S-corporation in Texas can own property, but it must comply with all legal and tax requirements.
What is the minimum amount of capital required to start a Texas S-corporation?
There is no minimum amount of capital required to start a Texas S-corporation.
Can a Texas S-corporation allocate tax credits to its shareholders?
Yes, a Texas S-corporation can allocate tax credits to its shareholders, but they must adhere to the allocation rules set out by the IRS.
How are profits and losses distributed to shareholders in a Texas S-corporation?
Profits and losses in a Texas S-corporation are allocated to shareholders based on their percentage of ownership.
How do I dissolve a Texas S-corporation?
To dissolve a Texas S-corporation, you must file Articles of Dissolution with the Texas Secretary of State.
Can a Texas S-corporation convert to a regular corporation?
Yes, a Texas S-corporation can convert to a regular corporation by filing Articles of Conversion with the Texas Secretary of State.
What are the tax obligations of a Texas S-corporation?
A Texas S-corporation must file an annual tax return with the IRS and pay any applicable federal, state, and local taxes.
Can a Texas S-corporation decrease its stock in order to meet the 100 shareholders threshold?
Yes, a Texas S-corporation can decrease its stock in order to meet the 100 shareholders threshold.
Can a Texas S-corporation change its business entity type?
Yes, a Texas S-corporation can change its business entity type, but it must follow the legal and tax requirements for the new entity type.
Can a Texas S-corporation distribute assets upon dissolution?
Yes, a Texas S-corporation can distribute assets upon dissolution, but it must also satisfy any outstanding debts or obligations.
What is the timeline for a Texas S-corporation election?
A Texas corporation must make an S-corporation election within 75 days of incorporation or within a year of the start of business operations.
What are the liabilities of a Texas S-corporation?
The liabilities of a Texas S-corporation are limited to its assets, and shareholders are not personally liable for the corporation’s debts.
What is the franchise tax rate for a Texas S-corporation?
The franchise tax rate for a Texas S-corporation is 1% of earned surplus.
Can a Texas S-corporation receive tax-exempt status?
Yes, a Texas S-corporation can receive tax-exempt status for its federal income taxes by meeting the eligibility requirements set forth by the IRS.
What forms do I need to file to establish a Texas S-corporation?
To establish a Texas S-corporation, should file Articles of Incorporation (Form 201) with the Texas Secretary of State and IRS Form 2553 with the IRS.
How do I register my Texas S-corporation for state taxes?
To register your Texas S-corporation for state taxes, you need to file for a sales and use tax permit with the Texas Comptroller of Public Accounts.
Can a Texas S-corporation have classes of stock?
Yes, a Texas S-corporation can have different classes of stock, but the classes must all have the same voting rights.
How does a Texas S-corporation tax withholding work?
Texas S-corporations do not have tax withholding, but they may need to make estimated tax payments throughout the year to cover their tax obligations.
What is the process for forming an s-corporation in Texas?
First, you must file articles of incorporation with the Texas Secretary of State’s office.
How much does it cost to form an s-corporation in Texas?
The filing fee for articles of incorporation in Texas is currently $300.
What is the advantage of forming an s-corporation in Texas?
One of the main advantages is that s-corporations allow for pass-through taxation, meaning the business’s profits and losses are passed through to the owner’s personal tax return.
Who is eligible to form an s-corporation in Texas?
Any small business with less than 100 shareholders and only one class of stock is eligible to become an s-corporation in Texas.
Can an out-of-state corporation form an s-corporation in Texas?
Yes, out-of-state corporations can form an s-corporation in Texas.
Does Texas have any residency requirements for shareholders in an s-corporation?
No, there are no residency requirements for s-corporation shareholders in Texas.
How long does it take to form an s-corporation in Texas?
It typically takes about 3-5 business days for the Texas Secretary of State’s office to process articles of incorporation.
Can a foreign national form and own an s-corporation in Texas?
Yes, foreign nationals can form and own s-corporations in Texas.
What is required to file taxes as an s-corporation in Texas?
Every s-corporation must file Form 1120S with the Internal Revenue Service. In Texas, s-corporations are also required to file state-level taxes.
What is the deadline to file S-Corp taxes in Texas?
S-Corporation taxes are due on March 15 each year in Texas.
Are S-Corporations taxed differently in Texas compared to other States?
No, S-Corporations are taxed based on the Federal tax regulations, so regardless of where a business is located, they will all be taxed the same.
Are there any filing requirements after registering an S-Corporation in Texas?
Yes, every Texas s-corporation is required to file an annual report with the Texas Comptroller of Public Accounts.
What is the process for changing an LLC to an S-Corporation in Texas?
To change from LLC to S-Corporation, an LLC owners have to file Form 2553 and meet all the S-corp state eligibility requirements.
How many months can a Texas S-Corporation elect to make a contribution of appreciated assets instead of circulating cash gains or a percentage of gains among its shareholders?
S-corporations in Texas can elect to contribute appreciated assets up to six months after filed an S-election.
Are there limitations of ownership for S-Corporations in Texas?
Yes, in Texas, S-Corporations cannot have more than 100 shareholders.
Is there a need to share business documents other than articles of incorporation with Texas Secretary of State?
No.
Does Texas have special rights to do departmental or state-level assessment and lien in businesses?
Yes, the Texas Tax Code outlines the requirement to pay franchise tax and other taxes by limited liability companies and S-Corps.
What is the expected tax rate for the net earnings of Texas LLCs or S corporations?
In Texas, each corporation pays a four-tenths percentage state-based tax called the franchise tax.
What is the process for applying for federal-level S-election in Texas?
Every Eligible Texas S-Corporation must file Form 2553 with the necessary documents.
Can owners of an Texas S-Corporation provide medical insurance to employees of businesses?
Allowable perm sustaining is the purchase of group health insurance by an S-Corp and then for various company executives.
Do fully owned Texas S-Corporations require employment federal or state unemployment taxes for their employees?
Yes.
Does Texas charge conjoined permit, sales tax or asset taxes to S-Corporation and LLCs?
It depends upon the business type as LLCs in Texas required to pay a franchise tax and S-Corporations are determined by the type of asset or sales.
Are Tax filings for Texas S-Corp entities subject to assessment costs?
Yes, Texas itemizes a calculation and assessments for our franchise grouping, which applies to all corporations doing work inside this state.
Is sales & use tax necessary to operate for an Texas S-Corp?
It depends upon if an S-corporation sells taxable items or operates in taxable activities and an administrator refers to separately in various instances.
What happens if Texas S-Corporation fails to file an annual report? Will Texas wound up the corporation’s business?
If S Corporations fail to file their annual tax report in Texas at the state or federal level, including Texas’s required Comptroller Formate report, the corporations’ status closes.
Can you get S-Corporation status immediately during the formation process of a business in Texas while leavening SOS office?
No, Form 8832 should be used to choose from Co to get the S-Corporation vote status. After completion of this federal form, Texas S-Corp elections apply to the Texas franchise tax debt by filing a Form 1120-S.
Can one S-corporation create a subsidiary of S-corporation?
Yes, it is possible to create a subsidiary of an S-corporation.
Are Small Business Administrations (SBAs) available to S-Corp owner/employees under Texas state listed programs?
Yes, Texas SBC can help owners or employees of S-Corporations as long as they entirely meet the requirements.
If I choose to dissolve or deactivate my S-Corporation, what’s the legal way, and what things do I render if my S-Corp in Texas has been functioning for a few years?
Dissolving, Abolishment/Extinguishment Procedures of S-Corporation in Texas involve filing the cancelation form and paying requesting balances of liabilities or returns are on file that need assistance.

Also Read

Why You Should Start Texas S Corp

One of the primary reasons to consider forming an S Corp is the significant tax benefits it can provide. Unlike traditional C Corporations, S Corporations are treated as pass-through entities for tax purposes. This means that the corporation itself does not pay income taxes. Instead, the profits and losses “pass through” to the shareholders’ personal tax returns. This can result in substantial tax savings for small business owners, as they can potentially avoid double taxation on corporate income.

Additionally, S Corporations offer flexibility and versatility in terms of structuring your business. While traditional C Corporations require a strict hierarchy of shareholders, directors, and officers, S Corps allow for a more straightforward and streamlined management structure. This can be particularly beneficial for smaller companies looking to avoid excessive administrative burden and maintain a more nimble decision-making process.

Furthermore, forming an S Corp can provide added credibility and professionalism to your business. By incorporating your company, you demonstrate to potential customers, partners, and investors that you are committed to operating in a formal and accountable manner. This can help build trust and credibility in the marketplace, which can be invaluable for growing your business and expanding your customer base.

From a legal perspective, establishing an S Corporation can also offer increased protection against personal liability. While no business structure can completely shield owners from all liability, forming an S Corp can help to safeguard your personal assets in the event of lawsuits or other legal issues. This can provide peace of mind and protect your financial well-being as you continue to grow your business.

Finally, forming an S Corp can pave the way for potential future growth and expansion opportunities. As your business evolves and grows, you may find yourself looking to attract additional investors, secure financing, or even go public. Being structured as an S Corporation can make it easier to raise capital, sell shares, and transition to a more complex corporate structure if needed.

In conclusion, if you’re a small business owner in Texas looking to maximize tax benefits, streamline management, enhance credibility, protect personal assets, and position your company for future growth, starting an S Corporation could be the right move for you. Consider speaking with a legal or financial advisor to explore whether this business structure is the best fit for your specific needs and goals. The benefits of forming an S Corp can be substantial and could make a significant difference in the success and longevity of your business.

Conclusion

Forming an S-Corporation in Texas can be a beneficial decision for small business owners seeking liability protection, pass-through taxation, and easier transfer of ownership. By meeting the requirements set by the IRS and following the necessary steps, business owners can take advantage of an S-Corp’s unique structure and benefits. However, it is essential to consider the potential drawbacks, such as increased paperwork and limitations on ownership, before making a final decision. Consulting with a legal or financial professional can help business owners determine if an S-Corporation is right for their needs and goals.

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