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As a business owner, you get to make a lot of your own choices. This can be both liberating and daunting. When you’re first starting a business, what kind of business structure do you choose? Is running an S Corporation right for you? It could be, but it depends on your business needs.
S Corporations are IRS-approved tax elections and not separate business entities. They allow income, losses, deductions, and credits to pass through to corporate shareholders so they can be taxed at each shareholder’s personal tax rate.
Below, we can guide you through the basic steps of how to set up an S Corp in Texas. You can also learn more about S Corps on our Information page.
To start an S Corporation, you can usually form a limited liability company (LLC) or a business corporation and then elect to give the entity S Corp status. We can make this initial step quick and simple with our Texas LLC Formation Service and our Texas Corporation Formation Service.
We can also help keep your business running smoothly after getting it going with our large selection of business support products and services.
In general, names of business corporations and LLCs in Texas must identify what kind of state business you started and must be distinguishable from other names on record with the SOS. Your business name also can’t suggest a prohibited or unauthorized business purpose. The rules for naming your business are minimal, so you can get creative with a business name that best reflects what your business does.
A registered agent is required by state law. Your business must have a qualified registered agent to receive legal and official correspondence such as service of process.
Good leadership can be one of the hallmarks of a successful business. If you start a corporation in Texas, your business has to have a Board of Directors. Often, the Board of Directors has the task of managing your business’s affairs. If you start an LLC, your business can be managed by members or managers.
Once you’re ready to make your Texas corporation or LLC a legal reality, you file a Certificate of Formation with the SOS. Along with submitting the Certificate of Formation, you normally have to pay a filing fee.
If your business is a legal reality with the state, you’re ready to file paperwork to make it a Texas S Corp. One of your main Texas S Corp filing requirements is submitting Form 2553 with the IRS. If you started your business in Texas as an LLC, you have to file Form 8832 to elect corporation status before you can file Form 2553.
You have the potential to receive substantial benefits from running an S Corporation, but you have to play by some limiting rules to get S Corp benefits. If you want your business to be an S Corporation, it has to:
Before you determine whether this list of requirements prohibits you from starting an S Corporation, it might be best to speak to legal and financial professionals about your needs.
Sometimes it’s easiest to make an important decision after you’ve written out a list of the significant advantages and disadvantages. Your list of pros and cons might differ based on your unique business needs, but we can get you started with a brief list of potential benefits and drawbacks below.
Among the many potential benefits of an S Corp are:
If your main concern when choosing a business structure is your tax liabilities, an S Corporation might be a great option for you.
Depending on the kind of business you run, electing to become an S Corp can have unique downsides, including:
Starting an S Corp in Texas might cost you more than starting a Texas LLC or business corporation. These cons might not have significant effects on your specific business, but it’s best to speak to a financial professional about your needs and options before making a decision about running an S Corporation.
If you form a corporation in Texas without electing to make it an S Corporation, your business is a C Corporation by default. C Corporations normally miss out on significant tax benefits if they don’t have S Corp status. LLCs that don’t elect S Corporation status can also miss out on certain tax benefits. As noted above, to get certain S Corporation tax benefits, businesses have to comply with strict rules from the IRS.
Although the name “S Corporation” makes this kind of business sound like a stand-alone entity, it isn’t. An S Corporation is a tax status that you choose for a business you’ve already started. This status can often give tax breaks that business owners might not otherwise receive.
In general, S Corporations have more limitations than C Corporations when it comes to issuing stocks. However, S Corporations typically have less tax burdens than C Corporations. Double taxation for a C Corporation means that the business entity itself pays taxes on its income, and then the corporation shareholders pay taxes on their distributions from that income.
Conversely, owners of S Corporations get to enjoy pass-through taxation. With a pass-through taxation structure, the S Corp doesn’t pay income taxes at the entity level, only the shareholders pay income taxes on their share of the corporate income.
After you form your business at the state level, the general requirements to create an S Corporation are staying within the limitations we mentioned above and properly filing Form 2553.
Yes, LLCs can choose to be S Corporations too. Although a standard LLC isn’t subject to double taxation, many LLC owners choose the S Corporation designation because there are other tax benefits, such as more favorable self-employment taxes. You can learn more about LLC tax liabilities on our Tax Information for LLCs page.
Maybe you need time to think about starting a new S Corporation, or maybe you’re ready to get it done now. If you’re ready to start a new venture, we have your back with our S Corporation Formation Service. Our many services can help you with the formation, maintenance, and compliance needs of your business.
Starting a new business can be exhilarating and demanding, but you don’t have to be overwhelmed when you use our business support services.
Disclaimer: The content on this page is for information purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
The benefits of creating an S Corporation can vary from business to business, but the potential of reduced tax liabilities can be a significant boon to your business.
You have a lot of choices when it comes to naming your S Corporation. You can name your S Corporation almost anything, as long as the name doesn’t suggest that your business has an unlawful purpose.
Also is distinguishable from other names on record with the state, and accurately identifies that you started your business as an LLC or corporation (if applicable).
You must identify your LLC as an S Corporation by filing the proper paperwork with the IRS. However, the IRS is the only entity that needs to know of your S Corp status—it doesn’t have to be reflected in your business name.
How you calculate federal taxes for your S Corporation depends on the specific attributes of your business.
Texas doesn’t impose a corporate income tax, so your Texas S Corp tax rate might boil down to what you owe on the state’s franchise tax and other taxable business activities that apply to you.
A tax professional is best equipped to properly calculate the taxes for your S Corporation.
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