How to start an S Corp in Texas

Your small business has choices on how it is taxed, depending on its business structure. If you’re a business owner in Texas, you may be wondering “How do I set up an S Corp in Texas?” This article is for business owners who want to know how to register a Texas S Corporation.

Texas S Corp Formation

Generally, business owners will first form an LLC (Limited Liability Company) by following the process for forming an LLC in Texas. Then they make an S Corp election.  Owners may also choose another entity type with the State of Texas and then make the S election. Forming an LLC generally involves fewer formalities and more flexibility than a corporation.

Starting an S Corp in Texas

The first step in starting an S Corp in Texas is to decide on a business name. The name you choose should be unique. It should not misrepresent your business. For example, your name should not give the impression that it is a government agency. It’s a good idea to confirm the name is available for registration through the Texas Secretary of State’s office. An LLC name can also be reserved online or through the Secretary of State’s office.

The next step in starting a Texas S Corp is to appoint a Texas registered agent. This person or business can accept legal documents for the business. This registered agent must have a physical location in Texas—no P.O. Box is allowed. For example, if a person resides in Oklahoma and conducts most of their business in Texas and has no address in Texas, they cannot be the registered agent because they don’t have a physical address in the State of Texas.

Forming an LLC in the State of Texas

Register an LLC with the State of Texas by filing a Texas Certificate of Formation or Articles of Organization and paying the $300 filing fee.

Next, you will want to consider formalizing an Operating Agreement. This document usually governs how the business is run, ownership percentages, profit and loss division, and federal tax provisions. In the federal tax provisions of the agreement, the owners state that they wish to be taxed as an S Corp for federal tax purposes. You should keep your operating agreement with your other business records – it isn’t filed with the State of Texas.

Texas S Corporation IRS Process

After forming your LLC – or other business entity – you can apply for S Corp status with the Internal Revenue Service.  Before you apply, be sure your business meets the requirements to be an S Corp. Once you confirm you meet the requirements, you may apply for S Corporation status with the IRS by filing Form 2553.

The State of Texas recognizes the federal S Corp election.  Your business will still be subject to franchise taxes with the State of Texas.

Keep in mind that a key benefit of an S Corp is potential tax savings.  If you are able to take advantage of tax savings, be sure to pay yourself a reasonable salary, submit quarterly tax payments, and complete your entity tax return annually (generally by March 15^th).

Texas and Federal Employer Identification Number Requirements

When you register your business in Texas, you should also be aware of the following federal and state tax obligations.

Employer Identification Numbers

A federal tax number called an Employer Identification Number, or EIN, identifies your business. An EIN is required in many circumstances such as when you have employees or form an S corporation.  You can obtain an EIN by phone, mail, fax or online from the IRS.

Texas law dictates that business owners who plan to hire employees, sell goods, or expect to owe excise taxes will need to apply for a Texas ID Number (TIN) as well. This is a similar process to applying for an EIN at the federal level. Obtain the number through the State of Texas online or by phone, mail, or fax.

Federal and Texas Unemployment Tax Obligations

Business owners who hire employees must follow the rules for unemployment at both the state and federal levels. This includes Texas S Corps.

Employers pay federal unemployment tax on the first of $7,000 of wages paid for every employee. The rate is 6% and is figured on Form 940 (generally due January 31).

If you owe federal unemployment tax, you will also owe unemployment tax in Texas. The first $9,000 in wages paid to an employee is subject to tax. You will need to register with Texas to calculate and pay unemployment tax. When you register on the Texas state website, you will receive an ID number. Then you must file and pay quarterly.

Navigating your options

Whatever route you choose, it’s important to consider your personal situation and the needs of your business. Laws vary from state to state. A business attorney can help you understand your specific circumstances and guide your decisions. Likewise, the Secretary of State’s office in most states offers resources for small business owners. This usually includes online information that may help owners assess their options – and be aware of possible requirements – for their specific circumstances.

Block Advisors Can Help

While you can complete all of the steps above yourself, the process can be daunting.  Whether you already have a business entity or are starting from scratch, Block Advisors’ online Business Formation tool can help you prepare your S Corp election. Get started today in just minutes.

This article is for informational purposes only and should not be construed as legal advice. You may want to seek the advice of an attorney to evaluate all relevant considerations.

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Texas S Corp FAQs

How much does it cost to create an S Corp in Texas?

The IRS does not charge a fee to make an S Corp election and change the tax treatment of an existing LLC or corporation. If you need to create a new entity, Texas does charge a fee to form both LLCs and corporations. If you use a third party to help you form an entity and/or make the S Corp election, additional fees may apply.

What is the minimum income for an S Corp?

S Corps do not have a minimum income requirement. In fact, businesses that sustain a loss can still elect S Corporation status, and it may be beneficial to do so.

What form do I need to file an S Corp in Texas?

After you have formed your entity, usually an LLC or corporation, you’ll need to file Form 2553 with the IRS to request S Corp status. Once your business is classified as an S Corp, you will be required to file estimated tax payments quarterly and a corporate tax return annually with the IRS. You will also need to file a Franchise Tax Report with the Texas Comptroller’s office and any other required Texas filings.

What is the difference between LLC and S Corp in Texas?

An LLC is an entity created at the state level, whereas an S Corporation is a federal income tax classification. Basically, an LLC is the type of business, and S Corp is one of the taxation options available to an LLC federally.  Since Texas does not charge income tax on LLCs, an LLC is not taxed differently at the state level, regardless of its federal S Corp status. This is different in some other states.

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