With no personal or corporate income tax, Texas can help you save a significant amount come tax season if you opt to form an S corporation (S corp). With the state’s supportive small business community and the ability to save more of your S corp income, you can reinvest in your business to drive its growth.
This guide will walk you through the process of forming your Texas S corp and everything you need to do to keep it compliant with state laws and regulations.
Want to form an S corp elsewhere? Check out our other How to Start an S Corp guides to learn more.
We recommend using a professional formation service like Tailor Brands to get your S corp up and running in no time.
Factors to Consider Before Starting an S Corp in Texas
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by a limited liability company (LLC) or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a Texas S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
How to Form a Texas S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Texas
Starting a Texas LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Tailor Brands to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Certificate of Formation
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Texas.
Be sure to choose a name that complies with Texas naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a Texas LLC:
- Your name must include the phrase “limited liability company,” or one of its abbreviations or words: “LLC, L.L.C., Limited, Ltd., Company or Co.”
- Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
- Restricted words (e.g., Bank, Attorney, University) may require additional paperwork and a licensed individual, such as a doctor or lawyer, to be part of your LLC.
- For a list of naming rules in Texas, you can read the Texas Secretary of State's guidelines.
You can also read the Texas state statute about LLC naming guidelines for more information.
2. Is the name available in Texas? You can use the taxable entity search on the Texas Comptroller of Public Accounts website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Find a Domain Now
Step 2: Choose Your Texas Registered Agent
You must elect a registered agent for your Texas LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Certificate of Formation.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Texas Registered Agent Consent to Appointment
Registered agents in Texas must consent to their appointment in written or electronic form. The statement of consent should include:
- The name of your LLC
- An express statement that the person designated consents to serve as the LLC’s registered agent
- The name of the person designated as registered agent
- The signature of the registered agent
- The date of execution
The consent statement doesn’t have to be filed with the Secretary of State. For in-depth information on this requirement, as well as a fillable consent form, view the Acceptance of Consent Form 401-A.
Step 3: File the Texas LLC Certificate of Formation
The Texas Certificate of Formation is used to officially register an LLC.
OPTION 1: File Online With Texas SOSDirect
- OR -
OPTION 2: File Form 205 by Mail, by Fax, or in Person
State Filing Cost: $300, payable to the Secretary of State (Nonrefundable)
Secretary of State
P.O. Box 13697
Austin, TX 78711
James Earl Rudder Office Building
Austin, TX 78701
Fax: (512) 463-5709
Step 4: Create an LLC Operating Agreement
An LLC operating agreement, known in Texas as a company agreement, is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Texas LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Texas S corp for you, so you can focus on the things that matter most — growing your business.
Keep Your Texas S Corp Compliant
Unlike most states, Texas has a statewide franchise tax that S corps may need to pay if they earn more than a certain threshold. Even if you don’t owe money in Texas franchise taxes, your Texas S corp must still file an annual franchise tax report to remain in good standing.
Texas S Corp Franchise Tax Report
Your Texas S corp must file an annual franchise tax report with the Texas Comptroller of Public Accounts by May 15 each year.
Even though you elected to have the IRS tax your business as an S corp, it’s still technically structured as a Texas LLC. Therefore, you must file this report with the Texas Comptroller of Public Accounts just like any other LLC.
Texas Franchise Tax Threshold
Your S corp may qualify for “no tax due,” which means you won’t have to pay any money in franchise taxes. To determine this, check if either of the below statements are true:
- Your S corp’s annual revenue falls below the “no tax due” threshold of $1,230,000.
- Your S corp’s calculated franchise tax liability is less than $1,000.
Even if you don’t owe any franchise taxes, you must still file an annual franchise tax report consisting of a Texas Franchise Tax Public Information Report (Form 05-102) and a Texas Franchise Tax No Tax Due Report (Form 05-163).
What if I Have to Pay the Texas Franchise Tax?
If you fail to meet the “no tax due” criteria and owe Texas franchise taxes, you must file an annual franchise tax report. This consists of the Texas Franchise Tax Public Information Report (Form 05-102) and a Long-Form Texas Franchise Tax Report (Forms 05-158-A and 05-158-B) or a Texas Franchise Tax EZ Computation Report (Form 05-169).
Texas Franchise Tax Rate
In order to calculate how much you’ll owe in Texas franchise taxes, use the following criteria:
- 0.375% of taxable margins for businesses that focus on retail or wholesale
- 0.75% of taxable margins for all other companies (not retail or wholesale)
- 0.331% of total revenue for companies using the EZ computation method
Visit our step-by-step Texas Annual Report guide for more help with the filing process.
NOTE: If your Texas S corp is a C corporation (C corp) instead of an LLC, you’ll still need to file an annual franchise tax report with the Texas Comptroller of Public Accounts.
Texas S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Texas S corp owners can expect to pay the following taxes:
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Texas Income Taxes
Texas has no personal income tax. Only seven states have no income tax while some have income tax rates that exceed 10%. The lack of a personal income tax makes Texas a great place to start a business and likely contributes to the state’s booming economy.
Texas Franchise Tax
As mentioned above, your S corp is, technically, structured as an LLC or C corp. As such, it may be responsible for paying Texas franchise taxes.
Texas Sales and Use Tax
If you sell taxable services in Texas — or sell or lease tangible personal property in the state — you must collect sales tax. Texas has a state sales tax rate of 6.25%, but many Texas cities charge an additional sales tax on top of that.
To register for sales tax with the Texas Comptroller of Public Accounts, use the state’s eSystems platform.
Additional State Taxes
The Texas Comptroller of Public Accounts collects more than 60 different state-specific taxes. We recommend you consult with a professional lawyer and/or accountant to ensure you pay all the taxes required for your business.
Some examples of additional taxes and fees Texas small businesses may have to pay include:
- Coastal Protection Fee
- Motor Vehicle Taxes
- Natural Gas Production Tax
- Tobacco, Cigarette, and E-Cigarette Taxes and Fees
Visit the Texas Comptroller of Public Accounts website for more information about state taxes.
Texas Local Taxes
From Austin to Dallas, each city and municipality may have its own local rules that can affect how your business operates. Check with your local government to learn more.
Start a Texas S Corp FAQ
What is an S corp?
An S corporation (S corp) is a tax designation that an LLC or a corporation can elect.
Are taxes for LLCs and S corps the same?
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
What is a reasonable salary for an S corp?
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
What is a distribution?
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
Can I still use my DBA name if I elect to be an S corp?
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.
What types of businesses can elect S corp status in Texas?
Texas has a robust economy that’s home to many industries beyond agriculture, including a growing technology industry, oil and natural gas companies, manufacturing firms, and more. Whether you plan to start a local restaurant, open a boutique retail shop, or offer a specialty service, your business can exist as an S corp if you meet the IRS’s requirements for an S corp.
Is Texas a good state in which to form an S corp?
Given its supportive business landscape, low taxes, and business incentives, Texas is a great state in which to start a business and form an S corp.