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.
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Why Texas S Corporation is So Important
One of the primary reasons why the Texas S Corporation is so important is its tax advantages. By electing S Corporation status, businesses can avoid double taxation on their profits. Unlike traditional C Corporations, S Corporations pass their income and losses through to shareholders, who report them on their individual tax returns. This means that business profits are only taxed at the personal income tax rate, rather than being subject to both corporate income tax and individual income tax. This can result in significant tax savings for business owners and shareholders, allowing them to reinvest more money back into their businesses.
In addition to tax benefits, the Texas S Corporation also offers limited liability protection to its owners. Like traditional corporations, S Corporations shield their shareholders from personal liability for business debts and legal obligations. This means that shareholders’ personal assets are generally protected from creditors, lawsuits, and other liabilities of the corporation. This limited liability protection gives business owners peace of mind and security, knowing that their personal assets are safe from potential risks associated with running a business.
Furthermore, the Texas S Corporation structure provides flexibility in ownership and management. S Corporations can have up to 100 shareholders, compared to traditional C Corporations, which have no limit on the number of shareholders. This makes S Corporations an attractive option for small businesses and family-owned companies looking to raise capital by issuing stocks to investors. Additionally, S Corporations are not limited to one class of stock, allowing for different types of shares with varying rights and preferences. This flexibility in ownership and management enables business owners to structure their company in a way that best suits their needs and goals.
Another reason why the Texas S Corporation is important is its credibility and professionalism. Incorporating as an S Corporation signals to customers, suppliers, and investors that the business is serious and committed to long-term success. S Corporations are subject to stricter regulatory compliance requirements and governance standards compared to other business structures, which can enhance the company’s reputation and credibility in the marketplace. This can lead to increased trust and confidence in the business, which can ultimately attract more opportunities for growth and expansion.
In conclusion, the Texas S Corporation offers a host of benefits that make it a valuable option for entrepreneurs and small business owners. From tax advantages to limited liability protection, flexibility in ownership and management, and increased credibility and professionalism, the S Corporation structure can help businesses thrive and succeed in today’s competitive landscape. Entrepreneurs looking to establish a solid foundation for their business should consider the Texas S Corporation as a strategic choice that can pave the way for future growth and prosperity.
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.