How to Start an S Corp in Texas

You can start an S corporation (S corp) in Texas by forming a limited liability company (LLC) or a corporation by filing the Certificate of Formation or Articles of Incorporation, respectively, and then electing S corp status from the IRS Form 2553 when you apply for your EIN.

An S corp is an IRS tax classification (Subchapter S), not a business structure. The S corp status is used to reduce a business’s tax burden.

We’ll give you the steps to start an S corp in our How to Start an S Corp in Texas guide below.

Recommended: If you’re a solopreneur making at least $60,000 in net earnings with $20,000 in annual distributions looking for tax savings, let Collective start your S corp, handle your monthly accounting, and more.

Factors to Consider Before Starting an S Corp

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
Why an LLC is the best structure for the S corp tax status
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.

Why an LLC Is the Best Structure for the S Corp Tax Status

As entrepreneurs, we believe that starting an LLC is the best way for forming an S corporation because any advantages of forming a corporation are negated by S corp restrictions. LLCs are also easier to maintain than corporations.

Are S Corp Tax Advantages Right for You?

You need to know if the S corp tax status versus a default LLC tax status will be better for your business. To fully understand the tax advantages of an S corp, read our LLC vs. S corp guide.

Businesses that elect S corp status will need to hire payroll and accounting services.

Payroll Services Review | Accounting Services Review

How to Form an 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 not starting a corporation with the S corp tax status because the S corp negates all of the benefits of a corporation.

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 Collective to do it for you.

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.

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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.

Recommended:

Hire a professional service provider like Collective for all your S corporation needs, including:

S corp formation or to convert an existing business
Registered agent services and obtaining an EIN
Managing your monthly accounting (payroll, bookkeeping)
Personalized service with a back office team
Keeping your business compliant with regulatory obligations
Helping you find potential business tax savings, and more.

Connect with Collective to learn more!

Step 3: File the Texas LLC Certificate of Formation

The Texas Certificate of Formation is used to officially register an LLC.

File Your Texas Certificate of Formation

OPTION 1: File Online With Texas SOSDirect

File Online

- OR -

OPTION 2: File Form 205 by Mail, by Fax, or in Person

Download Form

State Filing Cost: $300, payable to the Secretary of State (Nonrefundable)

Mailing Address:
Secretary of State
P.O. Box 13697
Austin, TX 78711

Office Address:
James Earl Rudder Office Building
1019 Brazos
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:

Looking to start your Texas S corp or convert an existing business and start saving on taxes? Find your all-in-one S Corp business solution with Collective.

Consider the Following After You Start Your Texas S Corp

Once you formalize your S corp, consider adding a business phone line to protect your personal information with phone.com.

If you need to build your S corp credit, read our guide on how to build business credit and get a business credit card through Divvy.

For business banking check out our guide on the best banks for small businesses.

Quick Guide to Business Structures and Taxes Simplified

Sole Proprietorship

Owner and business are the same for tax purposes

Pass-through taxation (profits will pass through to its members to be reported on their personal tax returns)
Single-member (owner) company
Informal business structure
No liability protection (if the business is sued, you could lose your personal assets)

Partnership

More than one owner, business and owners are the same for tax purposes

Pass-through taxation (profits will pass through to its members to be reported on their personal tax returns)
Informal business structure
No liability protection (if the business is sued, you could lose your personal assets)

Limited Liability Partnership (LLP)

Business is not a separate entity

Pass-through taxation (profits will pass through to partners to be reported on their personal tax returns)
Corporation and partnership hybrid business
Spreads business risk between partners by having a different set of skills and expertise.
Limited liability (individual partners are protected when one partner is sued)
In some states, may elect S corporation tax status

Limited Liability Company (LLC)

The business is a separate entity from its owners

Pass-through taxation
Formal business structure
Liability protection (if sued, personal assets are protected as long as you don’t pierce the corporate veil)

Corporation (C Corp is the default IRS tax status)

The business is a separate entity from its owners

Double taxation

1. The business is taxed at a flat tax rate (currently 21%)
2. The shareholders are then taxed on the distributions they receive from the business on their personal tax return at their income tax bracket

Formal business structure

Includes protection of personal assets
Can elect S corp tax status instead of the default C corp status

S Corporation (S Corp)

Not a business structure, it’s an IRS tax classification

Tax classification for LLCs and corporations only (in some states LLPs)
Asset protection since it’s formal business structure is an LLC or a corporation
The business itself is not taxed
There is pass-through taxation (as in a default LLC)
Owner(s) and shareholders receive distributions - profits, deductions, credits, and losses are passed down to the owner(s)/shareholders
Preferred by shareholders due to no double taxation
Offers tax savings
- Owner(s) become employees and have a reasonable salary that pays employment taxes and income tax
- Distributions pay only income tax at shareholder’s individual tax bracket - leads to tax savings!

Start an S Corp FAQ

What is an S corp?

An S corporation (S corp) is a tax designation for which an LLC or a corporation can apply.

Is an S corp an LLC?

No. An S corp is a tax designation for which an LLC or a corporation can elect.

How do you form an S corp?

You can form an S corp by filing Form 2553 with the Internal Revenue Service (IRS).

What are the requirements for an S corp?

S corps must meet four requirements:

They can have no more than 100 shareholders.
All shareholders must be private individuals (not other business entities).
Shareholders cannot be nonresident aliens.
The business may only issue one class of stock-this means all members must have the same distribution amount.

What are the benefits of an S corp?

Owners of S corps are considered employees of their company and can save thousands of dollars on self-employment taxes as a result.

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.

Both LLCs and S corps benefit from a provision in the Tax Cuts and Jobs Act of 2017 that allows qualifying owners of pass-through entities to deduct 20% of qualified business income (QBI) from their tax returns. However, for S corps, the deduction doesn’t apply to profits paid out as wages.

What is a reasonable salary for an S corp?

Unlike the default LLC business structure, in which owners must pay self-employment tax on all of the company’s profits, owners of S corps are considered employees of the business and only have to pay self-employment tax on a salary they receive. Any other money they take from the company’s profits in the form of disbursements isn’t subject to self-employment tax.

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.

What is pass-through taxation?

Pass-through taxation is a system of taxation that generally applies to sole proprietorships, partnerships, LLCs, and S corps. In this system, the profits or losses of the business are not taxed at the business level. Instead, they pass through to the owners’ personal tax returns and are taxed at each owners’ personal income tax rate.

What is the S corp tax rate?

There’s no corporate tax rate for S corps. Instead, owners of S corps pay personal income tax on the company’s profits. This rate depends on each owner’s personal income tax bracket.