LLC vs S-Corp | What Entrepreneurs Need to Know in Texas

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LLC vs S-Corp in Texas

When starting a small business in the Texas, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in Texas. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in Texas. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in Texas

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in Texas?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in Texas?

Unlike a limited liability company (LLC) or other business structures, Texas S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in Texas

Creating a business in Texas requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming Texas Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in Texas does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Texas.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Texas

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in Texas is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Texas. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in Texas are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Texas are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Texas to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in Texas with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

Texas State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Texas, it costs $0 because it is not mandatory, which can be paid to the UT Department of Commerce. Of course, before forming the whole LLC, you must pay the initial fee of $300 to the Texas Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Texas have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

Texas LLC: An LLC can have any number of owners, called members, from starting Texas Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

Texas S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

Texas LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in Texas.

Texas S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

Texas LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

Texas S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

Texas LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the Texas Operating Agreement.

Texas S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

Texas LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in Texas: LLC or S-Corp?

Filing an LLC or S-Corporation in Texas requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Registered Agent. To establish an LLC in Texas, you must submit the Certificate of Formation to the Texas Secretary of State. Your Certificate of Formation must include information about your Texas LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the Texas S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in Texas: LLC or S-Corp?

Taxes for LLCs and S-Corporations in Texas depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the Texas LLC Cost for detailed information.

Texas S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate Texas LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in Texas?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in Texas. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520​ in Texas.

FAQs

Are there any tax differences between an LLC and S-corp in Texas?
Yes, there are different tax structures that LLCs and S-corps in Texas can choose from.
Can an LLC in Texas have only one owner?
Yes, a single-person LLC is allowed in Texas.
Is there a limit to the number of owners an LLC in Texas can have?
No, there is no limit to the number of owners that an LLC in Texas can have.
Can an S-corp in Texas have only one shareholder?
Yes, an S-corp can be owned by a single shareholder in Texas.
Are there any limits to the number of shareholders that an S-corp in Texas can have?
Yes, an S-corp cannot have more than 100 shareholders in Texas.
Which entity type requires more paperwork, an LLC or S-corp in Texas?
Generally, S-corps require more paperwork due to ongoing formalities and requirements.
Can I form a professional LLC in Texas?
Yes, Texas allows for the formation of professional LLCs for certain types of professionals.
How do state taxes differ for an LLC and S-corp in Texas?
There may be different tax requirements and rates for LLCs and S-corps in Texas depending on various factors like income and other specific rules and exemptions.
Can a foreign resident form either an LLC or S-corp in Texas?
Yes, foreign residents and non-US citizens are allowed to form either an LLC or S-corp in Texas.
Which entity type provides better protection for personal assets in Texas?
Both LLCs and S-corps provide limited liability and protection for personal assets in Texas.
Are there any restrictions on foreign ownership of an LLC or S-corp in Texas?
No, there are no restrictions on foreign ownership of an LLC or S-corp in Texas.
Can an LLC in Texas change to an S-corp later on?
Yes, an LLC in Texas can typically change to an S-corp with the proper filings and approvals.
Which entity type is subject to more rules and regulations by the state in Texas?
S-corps generally are subject to more rules and regulations due to their status as a corporation.
Do both LLCs and S-corps in Texas require a registered agent?
Yes, both LLCs and S-corps must have a registered agent in Texas.
Is it easy to create an LLC or S-corp in Texas?
It is relatively easy to create an LLC or S-corp in Texas, but like any state, it has its own requirements that must be met.
Which entity type is subject to more taxes in Texas ?
Both entities types have taxes imposed by the State, but specific details and amounts may vary.
Can a sole proprietor upgrade to an LLC in Texas?
Yes, a sole proprietor can upgrade to an LLC in Texas and might offer some benefits related to personal property protection.
What kind of documentation do I need to form an LLC or S-corp in Texas?
Legal documentation, an Operating Agreement(which is optional but required to dividing income proportionally with an LLC )and licenses and permits that may apply.
Can my small business apply for taxpayer identification in Texas?
Yes, most small businesses in Texas can apply for a taxpayer identification number (TIN) from the state and declare their type of entity.
How do I dissolve an LLC or S-corp in Texas?
You must file specific final returns with the Texas Secretary of State and take care of debts and taxes during dissolution process.
Can a corporation convert to an LLC in Texas?
Yes, corporations in Texas may be able to convert into an LLC after proper preparations and governing board resolutions.
What happens to liability if a Texas company becomes insolvent?
Shareholders receive limited liability protection if a company is deemed insolvent or declares bankruptcy and its unique case details may involve specifying its operating structure.
Can any type of business be an LLC in Texas?
There are limitations to businesses to qualify as an LLC in Texas and it is best checked beforehand.
What are the formation fees for an LLC in Texas?
State processing fees may take different prices based on LLC types.
Are there tax advantages if my business incorporates in Texas?
Texas has low taxes in general, but each business may have unique tax qualification details.
Can an LLC or S-corp in Texas have subsidiaries?
Yes, Texas LLCs and Texas S-corps can both form and own subsidiaries.
Are LLCs and S-corps required to produce and maintain meeting minutes in Texas?
S-corps are generally required to hold formal meetings and maintain minutes in Texas, while LLCs are not always treated under the same requirements.
What is an LLC in Texas?
An LLC in Texas is a limited liability company.
What is an S-Corp in Texas?
An S-Corp in Texas is a type of corporation that has elected to pass-through corporate income, losses, deductions, and credits to its shareholder(s).
Which business entity is better for my business in Texas, LLC or S-Corp?
The answer depends on many factors, including your business goals, tax situation, management structure, and liability concerns.
How are LLCs taxed in Texas?
LLCs in Texas are generally treated as pass-through entities and do not pay taxes at the federal or state level. Instead, LLC profits and losses are passed through to the owners’ individual tax returns.
How are S-Corps taxed in Texas?
S-corps in Texas are also pass-through entities and avoid double taxation by passing profits and losses through to the shareholder’s personal income tax returns.
Can an LLC be an S-Corp in Texas?
Yes, an LLC in Texas can elect to be taxed as an S-Corp with the IRS.
How do I form an LLC in Texas?
You can form an LLC in Texas by filing a Certificate of Formation with the Texas Secretary of State and paying the required filing fee.
How do I form an S-Corp in Texas?
First, you form a corporation in Texas and then file as an S-Corp for federal taxation purposes by submitting Form 2553 to the IRS.
How many shareholders does an S-Corp in Texas need?
An S-Corp in Texas can have between 1 and 100 shareholders.
How many members can an LLC in Texas have?
An LLC in Texas can have multiple members, including individuals, corporations, and other LLCs.
Can an LLC in Texas have just one member?
Yes, a Texas LLC can have just one member and is known as a “single-member LLC.”
How flexible is an LLC’s management structure in Texas?
LLCs in Texas are very flexible and can be managed by the owners, hired managers, or a combination of both.
Can an S-Corp in Texas have multiple classes of stock?
No, an S-Corp in Texas can only have one class of stock.
What are the liability protections of an LLC in Texas?
LLC owners in Texas are generally not personally liable for the company’s debts and obligations beyond their investment in the business.
What are the liability protections of an S-Corp in Texas?
S-Corp owners in Texas are generally not personally liable for the company’s debts and obligations beyond their investment in the business.
What is the cost of filing a Texas LLC or S-Corp?
The filing fee for a Texas LLC is $300, while the filing fee for an S-Corp in Texas varies depending on the size of the company.
Does Texas require annual reports for LLCs?
Yes, Texas requires LLCs to file an annual report each year with the Secretary of State and pay a fee along with it.
Does Texas require annual reports for S-Corps?
Yes, Texas requires S-Corps to file an annual report each year with the Secretary of State and pay a fee along with it.
How can I dissolve my Texas LLC or S-Corp?
Texas LLCs and S-Corps can be dissolved by filing a certificate of termination with the Secretary of State.
Can an LLC or S-Corp in Texas change its legal status in the future?
Yes, an LLC or S-Corp in Texas can change its legal status at any time if it meets the requirements of the new legal structure.
Which state offers better tax advantages for LLCs and S-Corps, Texas or Delaware?
Depending on your specific needs, Delaware or Texas may offer better tax advantages. Seeking a local tax expert for comparison would provide more clarity to help individuals decide.
Is a Texas S-Corp required to hold annual shareholder meetings?
Yes, a Texas S-Corp is required to hold annual shareholder meetings to conduct internal business, elect directors and take shareholder action.
Are Texas LLCs required to hold annual member meetings?
Texas LLCs are not required to hold annual member meetings, unless otherwise stated in the LLC’s governing documents.
Are there cybersecurity concerns when forming an LLC in Texas?
Yes, Texas businesses will need to safeguard their digital data storage and networks through robust cybersecurity measures.
Which entity offers better personal asset protection, LLCs or S-Corps in Texas?
Both LLCs and S-Corps in Texas offer limited liability protection against personal asset risks, subject to certain liabilities.
Is it more expensive to form an LLC or S-Corp in Texas?
Both entities require similar filing fees and ongoing charges, hence considering specific purposes will provide better guidance.
Can businesses convert from one entity type to another in Texas?
Yes, Texas businesses might have to get consent from the state office or other regulatory authorities before making such a legal resolution happen.
Can you recoup the filing fee if your Texas business entity filing is rejected?
The filing fee is non-refundable if rejected, the only exception is cancellations can result in recouped fees.
What are the do’s and don’ts for maintaining a Texas LLC or S-Corp status?
One must take full advantage of taxpayer identification, organization agreements, protection from legal risks, proper record-keeping, with consistent governance processes for smooth operation.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Texas will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in Texas and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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