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Making choices as an entrepreneur is a big challenge, especially when choosing what business structure to form in Texas. When it comes to a business structure, you can choose whether to have a C-corporation, S-corporation, Sole Proprietorship or an LLC in Texas. Before you start Texas LLC filing, you must compare which structure suits you. You might be considering two popular options: a Limited Liability Company (LLC) or an S Corporation (S-Corp). Both of these structures offer distinct advantages and protections, but selecting the right one depends on various factors, including your business goals, tax preferences, and management style.
If you are confused with Texas LLC vs. S-Corporation, and thinking which one is better and more suitable for the business that you will form, there are a few things that you should consider. Before we get through this article, you should understand what an LLC and S-Corporation mean in Texas.
On this page, you’ll learn about the following:
LLC vs. S-Corp: Definition
While forming an LLC, you must follow some major steps. It is a business structure that protects your personal assets from getting affected by business liabilities. On the other hand, the S Corp is not a conventional business structure, but it is tax status that your can file with the IRS. S Corp does not provide personal asset protection like an LLC. Here are the detailed definitions of the two-
What is an LLC in Texas?
A limited liability company (LLC) is a formal business structure that provides personal asset protection. Under this structure, the LLC owner/member can save his/her personal assets in case the business is in debt or is being targeted with a lawsuit. In some special cases, if your company is legally sued, the other party can go after your personal assets. This is called piercing the corporate veil, where you become personally liable for the company’s debt.
Forming an LLC in Texas gives you a pass-through tax benefit where you don’t have to pay an income tax based on your business revenue; instead, the income tax will be calculated based on your personal income.
What is an S-Corp in Texas?
An S-Corporation (S-corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other business structures. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-Corporation is similar to LLC, except that the IRS treats it as a corporation for tax purposes.
S-corp is a prominent alternative to the LLC. Unlike a conventional C-corp, S-corp is more suitable for small and medium businesses, such as businesses with 100 shareholders.
LLC Vs. S-Corporation: Which is More Preferable in Texas?
In Texas, forming a business is crucial since you need to be adequate in your decision, especially when you think if Texas LLC or an S-Corporation in Texas is preferable. An S-Corporation is a tax classification that some small businesses are qualified for, whereas an LLC is a legitimate company form. By submitting a document to the Internal Revenue Sector (IRS), corporations and LLCs can choose S-Corporation taxation. An S-Corporation can be less formal than forming an LLC and doesn’t normally provide the same protection. Also, unlike LLC, S-Corporation in Texas doesn’t provide the same protections entrepreneurs seek from an LLC. It’s important to consider your options when launching a business from a legal and tax point of view.
It is better to consult a legal professional before you set up an LLC or S-corp. We shared basic differences and how you can form an LLC and S-corp. But it is always recommended to consult a professional before making any decision.
– LLCBuddy Editorial Team
Tax Difference Between Texas LLC and S-Corp in Texas
There is a difference between LLC and S-Corporation when it comes to paying taxes. Based on Federal and State Tax differences between the two, you can determine if S-Corporation or LLC in Texas is suitable 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 in terms of 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 are required to 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 scenario where you are the only owner of an LLC in Texas with a $150,000 annual profit. And let’s say that $100,000 is a fair wage in your location for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $150,000 profit. But, if your company is taxed as a Texas S-Corp, you will only be responsible for paying payroll taxes on the standard wage of $100,000. Income tax will still apply to the remaining $50,000.
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 that can be paid to the UT Department of Commerce. Of course, before forming the whole LLC, you must pay the initial fee of $300.
On the other hand, you also need to pay taxes if you form an S-Corporation in Texas; besides, you must pay the S-Corp filing fee and an annual report fee after a year of establishing your S-Corp. You must also go to the UT Department of Commerce to pay this.
How do Texas LLCs and S-Corporations Handle Liability Protection?
In Texas, you have no personal responsibility for the financial and legal liabilities of an LLC you will form. An S-Corporation does not provide liability protection because it is a tax designation rather than a distinct business entity. Whatever liability defense an S-Corporation provides is provided by the underlying business entity that chose the tax status. You will have the liability protection the LLC offers if it chooses S-Corporation status for tax purposes.
LLC Vs. S Corporation Ownership Requirements Comparison
Strict ownership requirements exist for LLCs and S-Corporations in Texas. LLC ownership regulations are strict because a new member can only be accepted with the approval of all existing members. On the other hand, S-Corporation ownership regulations are also strict because only specific people are permitted to become shareholders. Also, an S-Corporation can’t have more than 100 shareholders and needs one class of stock.
The following are the reasons why some cannot be shareholders in the S-Corporation in Texas.
- Insurance business
- Domestic and International sales corporations
- Partnerships
- Corporations
- Unauthorized Immigrants
- Certain financial institutions
Although you know most of the reasons regarding the ownership requirements of both LLC and S-Corporation, you should still seek legal advice in preparation for your business and it is best to visit LLCBuddy for your Texas LLC or Texas S-Corp.
Which is Easier to File in Texas: LLCs or S-Corporations?
Filing an LLC or S-Corporation in Texas takes time and preparation. Even though it is not as easy as it seems, something manageable still makes it not difficult. LLC and S-Corporation can be filed by Texas Registered Agent. However, in order to establish an LLC in Texas, you must submit a Certificate of Formation to the Texas Secretary of State. Your Certificate of Formation must contain information for your LLC, along with payment of the associated filing fee.
In addition, you need to submit more papers to make the Texas S-Corporation election. File a Form 8832 to inform the Internal Revenue Sector (IRS) that you prefer to tax your LLC as a corporation rather than a partnership. Then you will then submit Form 2553 to choose S-Corporation status.
Do not forget that you must submit annual tax returns and reports after creating your LLC in order to maintain legal compliance.
Important Information
Who Pays More Taxes, an LLC or S-Corporation?
Taxes differ for LLC and S-Corporation in Texas because it depends on the tax purposes and how much profit will be generated. Usually, LLCs are frequently taxed at personal rates and LLC owners can elect to be treated as a separate company with its own federal tax identification number.
On the other hand, owners of S-Corporations must receive a salary that includes Social Security and Medicare taxes. The owner, however, can get dividend income or some of the leftover profits, but not as an employee; thus, they won’t be subject to Social Security and Medicare taxes on that money.
Should I Convert an LLC to S-Corporation?
Since your business assets are separated from your personal assets if you’re a sole proprietor, it may be advisable to form an LLC. You are not restricted to modifying the structure of your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and adhere to more regulations, it would be ideal for more companies with more shareholders.
How to Structure an LLC to S-Corporation?
To structure an LLC to S-Corporation in Texas, you must submit Form 2553, Election by a Small Business Corporation, to the IRS in order to choose S-corp taxation. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or not more than 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, in order 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 .
FAQs
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Why Texas LLC Vs S Corp is So Important
One of the key reasons why the choice between a Texas LLC and an S corp is so important is the issue of liability protection. Both LLCs and S corps offer limited liability protection to their owners, meaning that the personal assets of the owners are generally protected from the debts and liabilities of the business. However, there are important differences in terms of the level of protection offered by each entity type.
In Texas, LLCs are known for their flexibility and simplicity. They are easier to form and maintain compared to S corps, making them an attractive option for many small businesses. LLC members are not personally liable for the debts of the business, which can provide a significant level of protection for personal assets.
S corps, on the other hand, are subject to more formalities and regulations compared to LLCs. While they also offer limited liability protection to their shareholders, they come with stricter rules regarding ownership and management structure. S corps are required to hold regular director and shareholder meetings, keep detailed financial records, and comply with various regulations outlined by the state.
Additionally, S corps have certain restrictions on who can own shares in the company, with limits on the number and types of shareholders allowed. This can make it more difficult for S corps to raise capital or attract investors compared to LLCs, which have more flexibility in terms of ownership.
Another important factor to consider when choosing between a Texas LLC and an S corp is taxation. LLCs are considered pass-through entities for tax purposes, meaning that the profits and losses of the business are passed through to the individual members and reported on their personal tax returns. This can be beneficial for some business owners, as it provides for a more straightforward tax structure and avoids double taxation.
S corps, on the other hand, are subject to double taxation. The corporation itself is taxed on its profits, and then the shareholders are taxed on any dividends or distributions they receive. While this can lead to higher overall tax liabilities for S corps, there are also certain tax advantages available to S corp shareholders, such as the ability to deduct health insurance premiums and other expenses.
In conclusion, the choice between a Texas LLC and an S corp is a critical decision for any business owner to make. While both entity types offer limited liability protection and other benefits, there are important differences in terms of flexibility, management structure, and taxation that can make one more suitable than the other depending on the specific needs and goals of the business. It is important for entrepreneurs to carefully consider these factors and consult with legal and financial professionals before making a decision on which entity type is right for their business.
Conclusion
Even though you can choose a different corporate structure, consider whether it will primarily assist your organization. Striking the perfect balance between corporate benefits and legal protection that suits your particular needs is important. In forming an LLC or S-Corp in Texas, you must be aware that every detail is well-formed so that starting your business will be successful. And, if you would like us to help you form a Texas LLC and S-Corp in Texas, read our other business guides.