How to Start an 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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Start an S-corporation in Texas

Texas, popularly known as The Lone Star State, offers a bunch of benefits for business owners, especially the state capital Austin has a lot to offer to the rising entrepreneurs in the state. If you want to start a business in Texas, you must choose an appropriate corporate structure. You can have a corporation or a sole proprietorship or set up an LLC in Texas. There are a few guidelines that you should be aware of when it comes to starting an S-Corporation. In Texas, S-Corporation is businesses’ most common corporate structure, especially start-ups. It was developed in order to give companies limited liability protection while preserving the advantages of being a distinct legal organization.

In this article, you will learn about how to start an s-corporation in Texas. You will also learn whether an s-corporate business structure suits your business. Please read all the points carefully before starting your business in Texas.

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 both 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.

If you want an S corp status for your business, you can always form an LLC to protect your personal assets from business debts. It takes some basic steps to have a successful s-corporation in Texas. S-Corps do pay corporate income taxes, but they are still treated as disregarded companies for federal tax purposes.

S-corps pay corporate taxes that LLCs do not have to pay. If you want to have an S-corp status, then we would recommend you have an LLC instead. This will protect your personal assets from your business liabilities and you don’t have to pay any corporate taxes.

LLCBuddy Editorial Team

Limitation and Requirements of S-Corp in Texas

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.

If you are qualified for the limitations and requirements, you can apply for an S-Corp in Texas.

How to Start 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 in Texas, requesting an EIN, 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 LLC, there is a complete guide on Texas LLC name guidelines for a proper LLC 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, for example, doctors, attorneys, etc.
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hiring the Texas Registered Agent

The next step in starting an S-corp in Texas is hiring a Texas 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 in Texas. Forming an LLC and an S-corp will be easier if you have Registered Agent in Texas.

Step 3: File Your Texas 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. In order for the “Certificate of Formation” to be filed, you need to pay a filing fee to the state. In Texas, the filing fee is $300.

In California, along with the Certificate of Formation, you must send the Statement of Information to file your company. The statement of information is a mandatory document in California, but other states do not have this document.

Step 4: Creating an Operating Agreement in Texas

After you have filed your Certificate of Formation in Texas, the next step is to create an LLC operating agreement in Texas. The Texas LLC 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. For more details about how an operating agreement works, please check Operating Agreement.

Step 5: Request for EIN in Texas

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- You can apply for EIN online, the most desirable and fastest method for users.
  • Apply by Fax- Another method of obtaining EIN is to fax Form SS-4 (PDF) after entering all the correct information to (855) 641-6935.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is 4 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.

If you would like to be assisted in getting an EIN in the Internal Revenue Service, we can get your EIN for you. Our EIN service is quick and hassle-free. For more details about EIN for your business, check why you need EIN.

Step 6: File Form 2553 for Your S-Corp Business in Texas

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 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 send your form 2553 to the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520 .

Advantages of Starting an S-Corporation in Texas

Filing an S-Corp in Texas has numerous benefits and advantages.

  • Writing Off Losses: With S-corp, owners can deduct business losses from their individual income statements. If the company loses money in the first few years, it may balance its other sources of revenue. Even so, understand the shareholder loss limitations set by the IRS.
  • Pass-Through Taxation: Starting an S-Corp is the widely known advantage in forming this kind of business structure since an s-corp uses a pass-through taxation structure. The company does not pay twice the tax in this kind of taxation. Because of this structure, most start-ups and entrepreneurs in Texas apply for an S-Corp LLC.
  • Qualified Business Income Deduction: A qualified business income, or QBI, is the total of all qualified items of income, gain, deduction, and loss from any qualified trade or business, including S-Corp. With this, S corp owners may deduct up to 20% of their eligible earnings under the Tax Cuts and Jobs Act.

FAQs

What is an S-Corp in Texas?
An S-Corp in Texas is a type of business organization that is recognized by the Internal Revenue Service (IRS) as a separate legal entity from its owners. It is a type of corporation that has the limited liability benefits of a traditional corporation, but with the flexibilities of a partnership.
What are the benefits of starting an S-Corp in Texas?
The primary benefits of forming an S-Corp in Texas include personal liability protection from business debts, lower taxes due to the ability to split profits between dividends and salary, and the potential for significant cost savings due to the availability of local resources.
What is required to form an S-Corp in Texas?
The process of forming an S-Corp in Texas begins by filing the Articles of Incorporation with the Texas Secretary of State. This document must include the name and address of the business, along with the corporate purpose, names and addresses of the officers, and the number of shares that the corporation is authorized to issue.
What is the cost to start an S-Corp in Texas?
The cost to start an S-Corp in Texas consists of the filing fees for the Articles of Incorporation, an annual franchise tax fee, applicable state registration fees, and other business costs such as licenses, permits, and insurance.
Who can form an S-Corp in Texas?
Any individual, corporation, limited liability company, or other entity can form an S-Corp in Texas.
What are the steps to form an S-Corp in Texas?
The steps to form an S-Corp in Texas include preparing and filing the Articles of Incorporation with the state, obtaining an Employer Identification Number (EIN) from the IRS, drafting the corporate bylaws, registering with the state, obtaining licenses and permits, filing an initial report, and opening a corporate bank account.
How long does it take to form an S-Corp in Texas?
The process of forming an S-Corp in Texas typically takes two to four weeks, depending on the complexity of the business and the availability of the necessary documents.
How much does it cost to register an S-Corp in Texas?
The cost to register an S-Corp in Texas consists of the filing fee for the Articles of Incorporation, an annual franchise tax fee, applicable state registration fees, and other business costs such as licenses, permits, and insurance.
Are there any tax advantages to forming an S-Corp in Texas?
Yes, there are several tax advantages to forming an S-Corp in Texas, including the ability to split profits between salary and dividends, pass-through taxation, and potential cost savings due to the availability of local resources.
What type of paperwork is required to form an S-Corp in Texas?
The paperwork required to form an S-Corp in Texas includes the Articles of Incorporation, a corporate bylaws document, an Employer Identification Number (EIN), a Texas state registration form, and any other necessary licenses, permits, and insurance policies.
Is it difficult to form an S-Corp in Texas?
No, the process of forming an S-Corp in Texas is relatively straightforward. It is important to understand the requirements and to be familiar with the paperwork that must be submitted.
Does an S-Corp in Texas need to be registered with the state?
Yes, an S-Corp in Texas must be registered with the state, typically with the Texas Secretary of State.
Is a business plan required to form an S-Corp in Texas?
No, a business plan is not required to form an S-Corp in Texas, but it is strongly recommended because it helps to define the company’s goals and objectives.
How do I choose a name for my S-Corp in Texas?
The name of an S-Corp in Texas must include the words “corporation,” “incorporated,” or “limited.” It must also be different from all other names registered in the state, and cannot be deemed offensive or otherwise inappropriate.
Do I need a lawyer to form an S-Corp in Texas?
While it is not required to have a lawyer to form an S-Corp in Texas, it is highly recommended. Having an experienced business lawyer can help to ensure that all the necessary documents are filed properly and that the business is compliant with all applicable laws.
What are the ongoing requirements for an S-Corp in Texas?
The ongoing requirements for an S-Corp in Texas include filing an annual franchise tax report, paying the franchise tax fee, maintaining accurate corporate records, and filing any necessary reports with the state.
How do I open a corporate bank account for my S-Corp in Texas?
To open a corporate bank account for an S-Corp in Texas, you will need to provide the bank with the Articles of Incorporation, the corporate bylaws, a copy of the certificate of formation, the Employer Identification Number (EIN), and a copy of the owners’ driver’s licenses or other government-issued identification.
What types of insurance do I need for my S-Corp in Texas?
The types of insurance that are required for an S-Corp in Texas depend on the nature of the business. The most common types of insurance include general liability insurance, professional liability insurance, commercial property insurance, and errors and omissions insurance.
Does an S-Corp in Texas need to hold annual meetings?
Yes, an S-Corp in Texas must hold annual meetings of the shareholders and the board of directors. These meetings must be recorded in the corporate minutes and the results reported to the state.
What is the difference between a corporation and an S-Corp in Texas?
The primary difference between a corporation and an S-Corp in Texas is that an S-Corp allows shareholders to split profits between salary and dividends, while a corporation does not. S-Corps also enjoy pass-through taxation and other cost savings due to the availability of local resources.
What is the franchise tax for an S-Corp in Texas?
The franchise tax for an S-Corp in Texas is 0.75% of the gross receipts of the business, with a minimum of $300 and a maximum of $15,000.
What is the corporate income tax rate for an S-Corp in Texas?
The corporate income tax rate for an S-Corp in Texas is 1%.
Can an S-Corp in Texas have more than one owner?
Yes, an S-Corp in Texas can have multiple owners, or shareholders.
What is the annual report filing fee for an S-Corp in Texas?
The annual report filing fee for an S-Corp in Texas is $25.
Does an S-Corp in Texas have to pay state sales tax?
Yes, most business transactions by an S-Corp in Texas are subject to state sales tax.
Does an S-Corp in Texas have to file a separate tax return?
Yes, an S-Corp in Texas must file a separate tax return with the IRS and the state of Texas.
Is an S-Corp in Texas subject to the Federal Unemployment Tax Act (FUTA)?
Yes, an S-Corp in Texas is subject to the Federal Unemployment Tax Act (FUTA).
Does an S-Corp in Texas need to pay income tax?
Yes, an S-Corp in Texas is required to pay income tax on its profits.
Is an S-Corp in Texas eligible for certain tax deductions?
Yes, an S-Corp in Texas is eligible for certain deductions, such as business expenses, home office expenses, and charitable contributions.
Does an S-Corp in Texas need to withhold payroll taxes?
Yes, an S-Corp in Texas must withhold payroll taxes from employee wages.

Also Read

Why Texas S Corporation is So Important

One of the key reasons why the Texas S Corporation is so important is its pass-through taxation feature. Unlike traditional C Corporations, S Corporations do not pay federal income tax at the corporate level. Instead, income, losses, deductions, and credits are passed through to the shareholders, who report them on their individual tax returns. This avoids the double taxation that can occur with C Corporations, where corporate profits are taxed at the corporate level and then again at the individual level when distributed as dividends. For many small business owners, this can result in significant tax savings and increased cash flow, allowing them to reinvest more of their profits back into the business.

In addition to its tax advantages, the Texas S Corporation provides owners with limited liability protection. Like a traditional corporation, S Corporations shield their owners from personal liability for corporate debts and obligations. This means that creditors cannot go after the personal assets of shareholders to satisfy the debts of the business, protecting their personal wealth from potential business risks and liabilities.

Furthermore, the Texas S Corporation offers a great deal of flexibility when it comes to ownership and management structures. Unlike traditional C Corporations, which can have an unlimited number of shareholders and multiple classes of stock, an S Corporation is limited to 100 shareholders and only one class of stock. This simplifies the ownership structure and allows for greater control over the ownership and management of the business. Additionally, S Corporations can elect to have their profits and losses allocated disproportionately among their shareholders, providing flexibility in distributing income and tax obligations.

Another important aspect of the Texas S Corporation is its ability to attract investors. Many investors prefer to invest in S Corporations due to the pass-through tax treatment, as it allows them to offset their share of corporate losses against other income on their tax returns. This can make investing in S Corporations more attractive than investing in C Corporations, where losses at the corporate level do not necessarily flow through to individual shareholders. As a result, S Corporations may have an easier time raising capital and attracting new investors, which can be crucial for small businesses looking to grow and expand.

Overall, the Texas S Corporation offers a wide range of benefits to small businesses and entrepreneurs, combining the tax advantages of a partnership with the limited liability protection of a corporation. With its pass-through taxation, limited liability protection, flexibility in ownership and management, and attractiveness to investors, the S Corporation has become a popular choice for businesses of all sizes looking to establish themselves in the vibrant Texas economy.

Conclusion

In conclusion, starting an S-corp in Texas is a strategic choice for entrepreneurs seeking the benefits of limited liability and favorable tax treatment. One can successfully establish an S-corp by following the outlined steps, including selecting a unique name, filing the Certificate of Formation – For Profit Corporation, obtaining necessary licenses, and adhering to state-specific regulations. Ultimately, this corporate structure offers a strong foundation for business growth and protection, making it a worthwhile consideration for those looking to launch a venture in Texas.

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