LLC vs S-Corp in Texas


Steve Goldstein
Steve Goldstein
Business Formation Expert
Steve Goldstein runs LLCBuddy, helping entrepreneurs set up their LLCs easily. He offers clear guides, articles, and FAQs to simplify the process. His team keeps everything accurate and current, focusing on state rules, registered agents, and compliance. Steve’s passion for helping businesses grow makes LLCBuddy a go-to resource for starting and managing an LLC.

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LLC vs. S Corp in Texas

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.

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

What are the differences between an LLC and an S-Corp in Texas?
An LLC in Texas is a limited liability company, which is a type of business entity that is separate from its owners and provides them with limited liability protection. An S-Corp in Texas is an S Corporation, which is a type of corporation that is treated as a separate entity from its owners for tax purposes. Both LLCs and S-Corps provide limited liability protection to their owners, but they differ in how they are taxed and structured.
What are the advantages of an LLC in Texas?
An LLC in Texas provides limited liability protection to its owners, meaning that their personal assets are not at risk if the business incurs any debts or liabilities. LLCs can also be taxed in a variety of ways, including pass-through taxation, which means that the business’s income and losses are passed through to the owners. Additionally, LLCs are relatively easy to form and maintain in Texas.
What are the advantages of an S-Corp in Texas?
An S-Corp in Texas offers several advantages over an LLC, including the ability to deduct business expenses, the ability to issue stock, and the ability to issue different classes of stock. Additionally, S-Corps are taxed differently than LLCs, meaning the owners may pay less in taxes.
What are the disadvantages of an LLC in Texas?
One disadvantage of an LLC in Texas is that it can be more difficult to attract investors than an S-Corp, as S-Corps can issue stock and different classes of stock. Additionally, LLCs are subject to certain restrictions on the number of owners and the types of businesses they can do, and they may be more costly to maintain than S-Corps.
What are the disadvantages of an S-Corp in Texas?
One disadvantage of an S-Corp in Texas is that it can be more costly to form and maintain than an LLC. Additionally, S-Corps are subject to more stringent rules and regulations than LLCs, and they are required to hold regular meetings and keep detailed records.
What is the difference between an LLC and an S-Corp in Texas?
An LLC in Texas is a limited liability company that provides limited liability protection to its owners. An S-Corp is a formal business structure that offers limited liability protection, pass-through taxation, and other benefits to its owners.
What are the advantages of setting up an LLC in Texas?
LLCs in Texas provide limited liability protection, flexibility in management structure, ability to raise capital, and pass-through taxation.
What are the advantages of setting up an S-Corp in Texas?
S-Corps in Texas provide limited liability protection, pass-through taxation, flexibility in management structure, and ability to raise capital.
What are the filing requirements for an LLC in Texas?
To form an LLC in Texas, you must file a Certificate of Formation with the Texas Secretary of State and make a public filing. You must also pay the associated filing fees.
What are the filing requirements for an S-Corp in Texas?
To form an S-Corp in Texas, you must file an Initial Report of Organization with the Texas Secretary of State and make a public filing. You must also pay the associated filing fees.
Is an LLC required to file taxes in Texas?
Yes, LLCs are required to file taxes in Texas. The LLC must file a Texas Franchise Tax report each year, even if the LLC is not doing business in Texas.
Is an S-Corp required to file taxes in Texas?
Yes, S-Corps are required to file taxes in Texas. The S-Corp must file a Texas Franchise Tax report each year, even if the S-Corp is not doing business in Texas.
Does an LLC in Texas need to have a registered agent?
Yes, an LLC in Texas must have a registered agent who is located in Texas and is available during normal business hours to receive important documents on behalf of the LLC.
Does an S-Corp in Texas need to have a registered agent?
Yes, an S-Corp in Texas must have a registered agent who is located in Texas and is available during normal business hours to receive important documents on behalf of the S-Corp.
What is the minimum amount of capital required to form an LLC in Texas?
There is no minimum capital requirement to form an LLC in Texas.
What is the minimum amount of capital required to form an S-Corp in Texas?
There is no minimum capital requirement to form an S-Corp in Texas.
What is the residency requirement for forming an LLC in Texas?
There is no residency requirement for forming an LLC in Texas.
What is the residency requirement for forming an S-Corp in Texas?
There is no residency requirement for forming an S-Corp in Texas.
Are there any restrictions on the types of activities an LLC in Texas can engage in?
No, there are no restrictions on the types of activities an LLC in Texas can engage in.
Are there any restrictions on the types of activities an S-Corp in Texas can engage in?
No, there are no restrictions on the types of activities an S-Corp in Texas can engage in.
What are the reporting requirements for an LLC in Texas?
LLCs in Texas are required to file an annual information report with the Texas Comptroller of Public Accounts.
What are the reporting requirements for an S-Corp in Texas?
S-Corps in Texas are required to file an annual information report with the Texas Comptroller of Public Accounts.
Does an LLC in Texas need to have an operating agreement?
Yes, an LLC in Texas must have an operating agreement that outlines the rules and regulations governing the LLC.
Does an S-Corp in Texas need to have an operating agreement?
No, an S-Corp in Texas does not need to have an operating agreement.
Are there any restrictions on the types of owners an LLC in Texas can have?
No, there are no restrictions on the types of owners an LLC in Texas can have.
Are there any restrictions on the types of owners an S-Corp in Texas can have?
Yes, an S-Corp in Texas must have at least one owner who is a US resident or citizen and all owners must be over 18 years of age.
What is the process for dissolving an LLC in Texas?
To dissolve an LLC in Texas, you must file a Certificate of Cancellation with the Texas Secretary of State and make a public filing. You must also pay the associated filing fees.
What is the process for dissolving an S-Corp in Texas?
To dissolve an S-Corp in Texas, you must file a Certificate of Cancellation with the Texas Secretary of State and make a public filing. You must also pay the associated filing fees.
How does an LLC in Texas pay taxes?
An LLC in Texas pays taxes as a “pass-through” entity, meaning that the LLC’s profits and losses are passed through to the owners who are then responsible for reporting and paying taxes on their individual tax returns.
How does an S-Corp in Texas pay taxes?
An S-Corp in Texas pays taxes as a “pass-through” entity, meaning that the S-Corp’s profits and losses are passed through to the owners who are then responsible for reporting and paying taxes on their individual tax returns.
Are there any restrictions on the number of owners an LLC in Texas can have?
No, there are no restrictions on the number of owners an LLC in Texas can have.
Are there any restrictions on the number of owners an S-Corp in Texas can have?
Yes, an S-Corp in Texas must have no more than 100 owners.

Also Read

Why Texas LLC Vs S Corp is So Important

One of the main reasons why the decision between a Texas LLC and S Corp is so important is because of the liability protection that each structure offers. Both an LLC and an S Corp provide limited liability protection, meaning that the owners of the business are not personally liable for the debts and obligations of the business. However, an LLC may offer more flexibility regarding the management structure and distribution of profits, while an S Corp may have more strict requirements for ownership and management.

Another key consideration when choosing between a Texas LLC and S Corp is the tax implications of each structure. An LLC is a pass-through entity, meaning that the profits and losses of the business are passed through to the owners and reported on their individual tax returns. This can result in a lower overall tax burden for the owners, as they only pay taxes on the profits that they actually receive.

On the other hand, an S Corp is a separate tax entity, meaning that the business itself pays taxes on its profits. While this can result in a lower tax rate for the business, the owners may be subject to double taxation if they receive dividends from the business. This can be a significant factor to consider when determining which structure is best for your business and individual tax situation.

Additionally, the choice between a Texas LLC and S Corp can have implications for the growth and scalability of the business. An S Corp may be more attractive to outside investors and shareholders due to the strict ownership requirements and management structure. This can make it easier to attract funding and investment capital, which can be crucial for expanding the business and taking it to the next level.

On the other hand, an LLC may be more suited for businesses that do not require outside investment and prefer to maintain more control over the management and decision-making processes. This can be particularly important for small businesses and family-owned enterprises that value autonomy and flexibility in how they operate.

Ultimately, the decision between a Texas LLC and S Corp is a critical one that should be carefully considered based on the specific needs and goals of the business. While both structures offer unique advantages and disadvantages, it is important to weigh the pros and cons of each before making a final decision. By carefully evaluating the liability protection, tax implications, and growth potential of each structure, business owners can make an informed choice that sets their business up for success in the years to come.

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.

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