How to start an S Corp in Texas
5 min read
September 20, 2023 • Block Advisors
Your small business has choices on how its are 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.
Generally, business owners will first form an LLC (Limited Liability Company) by following the process for forming an LLC in Texas, and then 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.
The first step in starting an S Corp in Texas is to decide on a business name. The name you choose should be unique and 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 – a person or business who 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.
What entity structure is right for my business?
Answer these six questions to help you find your fit.
Forming an LLC with State of Texas
To register an LLC with the State of Texas, a Texas Certificate of Formation or Articles of Organization must be filed along with a $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 will state that they wish to be taxed as an S Corp for federal tax purposes. The operating agreement isn’t filed with the State of Texas but should be kept with the other business records.
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 15th).
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.
An Employer Identification Number, or EIN, is a federal tax number used to identify your business. There are many circumstances where getting an EIN is required such as when you have employees or forming 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. The number can be obtained through the State of Texas online, by phone, mail or fax.
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 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, including 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.