LLC vs. S Corp in Texas 2024: A Comprehensive Comparison

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LLC vs. S Corp in Texas: Understanding the Differences

Embarking on the entrepreneurial journey in Texas, also known as The Lone Star State, is an exciting and transformative experience. Texas LLC and S Corporation are two popular options that often top the list of considerations for entrepreneurs. This article serves as your comprehensive guide, comparing LLC vs. S Corp in Texas and ultimately assisting you in determining the best fit for you.

Dive into business formation with confidence and clarity as LLCBase expert analysis simplifies the complexities of LLCs and S Corps, shedding light on their unique advantages and drawbacks. So, let’s explore the fascinating world of LLCs and S Corps and set your business on the path to success in Texas.

Compare LLC and S-Corp

What are an LLC and an S-Corp

A Limited Liability Company (LLC) is a popular legal business structure that offers a combination of benefits from both corporations and partnerships. It is specifically designed to provide personal asset protection to its owners, known as members. This protection ensures that the owner’s personal assets are separate from the business liabilities, such as debts and lawsuits.

In Texas, forming an LLC involves several steps, including paying an initial filing fee. Additionally, LLCs in Texas are required to pay an annual fee of $0 because it is not mandatory to maintain their legal status and stay compliant with the state regulations.

An LLC in Texas offers an attractive option for entrepreneurs seeking a flexible business structure with added liability protection and favorable tax treatment.

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On the other hand, an S-Corporation, or S-Corp, is not a separate legal business entity like an LLC. Rather, it is a tax classification that existing corporations and LLCs can elect. A business can bypass double taxation by opting for this tax status, as the profits and losses are directly passed through to the owner’s personal tax return. Starting an S Corp in Texas  allows business owners to report and pay taxes on their business income as part of their individual income tax filings, eliminating the need for separate corporate taxes.

In Texas, it is crucial for business owners considering this tax classification to fully understand the implications and requirements of being an S-Corp in Texas. This includes adhering to specific rules and regulations related to ownership, shareholder limits, and tax filing deadlines. If you want to start an S-Corp, LegalZoom will help you every step of the way!

LLCs and S-Corporations Comparison

Let’s explore the comparison between LLCs and S-Corporations to help you make an informed decision.

1. Taxation Differences in Texas

One of the main differences between LLCs and S-Corporations in Texas lies in how they are taxed. LLCs are typically subject to pass-through taxation, meaning the business profits and losses are reported on the owner’s personal tax return. In contrast, S-Corporations must adhere to specific tax requirements, including distributing salaries to shareholders and adhering to the state’s income tax rate.

  • Federal Taxes: When choosing between an LLC or S-Corporation in Texas, it’s essential to consider several federal tax factors. These factors include differences in Pass-Through Taxes and Self-Employment Taxes.
  • Pass-Through Taxes: Both LLCs and S-Corporations in Texas benefit from pass-through taxation at the federal level. Due to pass-through taxation, these entities do not pay federal income taxes as separate legal entities. Instead, their owners are required to pay federal income taxes on their share of the business income. This type of taxation prevents the company from being taxed twice. In contrast, C-Corporations in Texas are subject to double taxation, meaning they must pay federal taxes at the entity level and their owners’ taxes.
  • Self-Employment Taxes: Many LLC owners in Texas opt for S-Corporation taxation to reduce their self-employment taxes. An S-Corporation owner is not considered self-employed; they can become an employee of the company and receive regular salary benefits. Conversely, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings when calculating their self-employment tax. Share distributions determine the corporate income of S-Corporation shareholders. For example, suppose you are the sole owner of an LLC in Texas with an annual profit of $150,000 and a fair wage for someone in your location doing the same job as you is $100,000. Under the default LLC taxation, you must pay self-employment taxes on the $150,000 profit. However, if your company is taxed as an S-Corp in Texas, you would be responsible for paying payroll taxes only on the $100,000 standard wage. Income tax would still apply to the remaining $50,000.
  • Texas State Taxes: No major tax differences exist between regular LLCs and S-Corporation LLCs at the state level. For filing an annual report in Texas, it costs $0 because it is not mandatory, which can be paid to the UT Department of Commerce. Additionally, before forming the LLC, you must pay $300.

On the other hand, if you form an S-Corporation in Texas, you will also need to pay taxes. This includes the S-Corp filing fee and an annual report fee after establishing your S-Corp for one year. You must also go to the UT Department of Commerce to make these payments.

2. Liability Protection

LLCs and S-Corporations in Texas provide liability protection for their owners. This means that the owner’s personal assets are protected from business debts and lawsuits. However, S-Corporation status does not offer the same level of protection as an LLC, as it is primarily a tax designation.

The following factors exclude certain individuals and entities from becoming shareholders in an S-Corporation in Texas:

  • Insurance businesses
  • Domestic international sales corporations
  • Partnerships
  • Corporations
  • Unauthorized immigrants
  • Specific financial institutions

While understanding the ownership requirements of LLCs and S-Corporations in Texas is essential, seeking legal counsel when establishing your business is still advisable. For assistance with your Texas LLC or Texas S-Corp, consider consulting with professionals.

3. Ownership Requirements and Restrictions

LLCs and S-Corporations in Texas have specific ownership requirements and restrictions. For instance, an LLC can have unlimited members, while an S-Corporation is limited to 100 shareholders. Additionally, S-Corporations can only have one class of stock and must follow strict rules regarding shareholder eligibility.

Easier to File in Texas: LLCs or S-Corporations

While filing an LLC or S-Corporation in Texas requires time and preparation, proper planning can make the process manageable. Both LLCs and S-Corporations can be filed through the Texas Registered Agent.

To start an LLC in Texas, you must submit the Certificate of Formation to the Texas Secretary of State. This document should contain all the necessary information for your LLC, along with the payment of the associated filing fee.

On the other hand, if you want to elect S-Corporation status for your Texas LLC, you will need to submit additional paperwork. First, file Form 8832 with the Internal Revenue Service (IRS) to indicate your preference to tax your LLC as a corporation rather than a partnership. Next, submit Form 2553 to choose S-Corporation status.

Remember, maintaining legal compliance is crucial for your LLC. This means submitting annual tax returns and reports after establishing your business entity.

With that, we’ve carefully curated a list of the best LLC services in Texas to support and guide you through filing an LLC and S-Corp. Check them out!

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Filing Process for LLCs vs. S-Corporations in Texas

Forming an LLC in Texas involves several crucial steps. To start, you must file Certificate of Formation with the Texas Secretary of State and pay the associated filing fee of $300. Once your LLC is established, you must comply with annual reporting and tax requirements.

On the other hand, if you want to elect an S-Corporation status for your existing LLC or corporation, the process is slightly different. Firstly, you must file Form 8832 with the Internal Revenue Service (IRS) to classify your LLC as a corporation for tax purposes. Then, you must submit Form 2553 to the IRS to choose S-Corporation status. In Texas, the S-Corporation filing fee is $300 for filing online, by mail, in person filing, or by Fax.

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The LLC formation and S-Corporation election processes can be completed through four methods that are online, fax, by mail and in-person. Online incorporation is available at Create an account/Log in to the SOS site, get the e-form, fill it, and submit online. Or get the online PDF, fill it up and upload it back on the site. , while offline incorporation can be done at Send the form by mail to or drop it off in person at Secretary of State, P.O. Box 13697, Austin, TX 78711-3697. Or Fax it to (512) 463 – 5709. It is essential to stay up-to-date with any ongoing reporting and tax requirements for your chosen business structure.

The filing process for LLCs and S-Corporations in Texas varies slightly, with each requiring specific forms and fees. It’s essential to consider the unique requirements of each business structure before making a decision. Consulting with a legal or financial advisor can provide valuable guidance on which structure best suits your business in Texas.

FAQs

What is an LLC in Texas?
LLC stands for Limited Liability Company and is a type of legal entity in Texas that offers personal asset protection to its owners.
What is an S Corp in Texas?
S Corp is a corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code of the United States.
What are the requirements to form an LLC in Texas?
The requirements to form an LLC in Texas include choosing a name, filing a Certificate of Formation with the Texas Secretary of State, and maintaining certain records.
What are the requirements to form an S Corp in Texas?
To form an S Corp in Texas, you must first form a corporation by filing Articles of Incorporation with the Texas Secretary of State.
Which entity is easier to form in Texas, an LLC, or an S Corp?
LLCs are relatively easy to form in Texas and require no more than a few hundred dollars and a couple of logistical steps.
Which is cheaper to form in Texas, an LLC or an S Corp?
LLCs may be less expensive to create and register in Texas than S Corps, whose set-up costs may include more technicalities and legal fees.
Can an LLC become an S Corp in Texas?
Yes, business owners can transform an LLC into an S Corp in Texas by seeking the counsel of a business attorney to file form 2553 with the IRS and choosing an S Corp tax status.
How many owners can an LLC have in Texas?
There is no legal limit established in Texas law for multiple owners in an LLC.
What is the liability protection like for an LLC in Texas?
LLCs are limited liability companies, meaning that personal assets of its members and owners may be protected from creditors seeking debts owed by the company.
Can an S Corp have multiple ownership structures in Texas?
An S Corp can have multiple shareholders and companies in Texas, more so with nonprofits.
What are the restrictions on the number of shareholders an S Corp can have in Texas?
There are restrictions on the number of shareholders an S Corp can have in Texas. It can have no more than 100 shareholders.
Does an S Corp need to be managed formal or structured in Texas?
S corps are structured like regular corporations, with a board of directors which oversees the affairs of the company and managing officers who carry out the directives of the board.
How are both entities taxed in Texas?
LLCs can file to be treated like a Sole Proprietorship, Partnership, S Corp, C Corporation, or Nonprofit depending on their financial status and shareholders; S Corps pass through income and their shareholders pay taxes on that income at their individual tax rates.
Does tax status influence the overall running of the business?
Tax status can influence how the business is operated since both LLCs and S Corps still report to the IRS differently.
Can members/shareholders be publically viewed in Texas?
Companies doing businesses in Texas can maintain a relatively high level of organizational privacy when an LLC is formed compared to that required by an S corporation.
Where do both types of entities put their Articles of Organization in Texas?
LLCs must file a Certificate of Formation, while S Corps must file Articles of Incorporation, both submitted to the Texas Secretary of State.
Which entity model is Considered Flexible in their organizational management structure?
LLC Texas is considered to be incredibly flexible, often using custom-built Management Agreements in place of state-mandated corporate statutes appearing in the Formation Documents required for corporations, S corps included.
Are there residency requirements for owners in either type of Texas entities?
LLCs are owned by members/shareholders. There are no specific Texas residency requirements applicable here for either formation.
How do both entities protect the business name in Texas?
Both the Business and Corporation entities file required paperwork with Texas State Agents protecting their legal business name.
Is maintenance required for different business documents in Texas?
As with most legal entities, both the LLC and S Corp need to keep and retain records such as Minutes and Operating Agreements required to resolve any regulatory or business evaluation processes relevant.
Can shareholders be from different states under either entity in Texas?
There are no specific shareholding eligibility or location requirements only at eligibility under LLCs remains in question.
Can both entity types be formed for charitable organizations in Texas?
Yes, forming a non-profit can benefit under either classification of business.
Are there perpetual lifespans for businesses in Texas?
Many times, this formation document will include a non-expiration requirement, flexible across business entities.
Does the USA’s two types of entities laws change across states?
Potential differences for legal agency documentation factors between states across an entity range inclusive to insurance regulations, security laws, and employment requirements that include business write-offs inclusive to start-up cost regulations in different state locations.
Can an individual entity transition into dual or plural forms?
Many States even expedite the paperwork and documentation changes needed to re-incorporate as a new company/shift organizational statuses.
How do standalone entities form their tax statuses?
Calendar year entities must make decisions regarding their selected business formations before the first of the year and file an election form with the IRS within the first two months falling across the new fiscal year.
Which type of structure holds more formal government supervision requirements in Texas?
S Corps are monitored more strictly by the Secretary of State, the Department of Housing and Local Government, and the Comptroller of Public Accounting costing it more on the state level than a limited liability company (LLC).
Do your state’s LLC or S Corp laws align with Central government laws?
Core legislation governing business empressments for S corps originates with the United States Internal Revenue Service (IRS) agency rather than state and terrritorial-level governments.
Are both types eligible for simplified tax or legal agency laws under payroll considerations if they have one owner?
Texas State Assembly provides informational support laws for its individual proprietors to ensure they keep accurate and complete accounting, align with commonly recognized payroll and tax laws/under authority acting alongside IRS level legislation.
What is the difference between an LLC and an S Corp in Texas?
Both LLCs and S Corps in Texas offer limited liability protection for their owners, but an LLC is formed under Texas state law, while S Corps are formed under federal tax law.
Is formation of an LLC in Texas more expensive than forming an S Corp?
In general, forming an LLC in Texas is less expensive than forming an S Corp, as there are fewer requirements for formation of an LLC.
What are the tax implications of forming an LLC in Texas?
LLCs in Texas are not taxed at the corporate level; instead, the profits and losses of the business “pass-through” to the owners’ personal tax returns, which can result in significant tax savings.
What is required to form an S Corp in Texas?
To form an S Corp in Texas, a company must first be set up as a corporation and then apply for S Corp status with the IRS.
How do the rules for corporate ownership differ for Texas LLCs and S Corps?
LLCs in Texas have no restrictions on the number or type of owners, while S Corps are limited to no more than 100 shareholders who must all be U.S. citizens or permanent residents.
Can LLCs in Texas be managed by their owners or do they require a board of directors?
LLCs in Texas can be member-managed, with day-to-day operations and management being handled by the owners themselves.
What kind of liabilities are LLC owners exposed to in Texas?
LLC owners in Texas enjoy limited liability protection, meaning that their personal assets are protected from the obligations and debts of the business.
Can Texas LLCs elect to be taxed as S Corps?
LLCs in Texas can choose to be taxed as an S Corp for federal tax purposes by filing Form 2553 with the IRS.
Do Texas S Corps have to pay state franchise taxes?
Texas S Corps are required to pay annual franchise taxes to the state.
Are the rules for taxation of income and deductions different for Texas LLCs and S Corps?
LLCs in Texas have significantly more flexibility in how they allocate income and deductions, while S Corps are subject to detailed rules related to shareholder distributions and stock ownership.
Are Texas LLCs required to hold shareholder meetings and issue stock certificates?
LLCs in Texas are not required to hold formal shareholder meetings or issue stock certificates.
How does liability protection compare for Texas LLCs and Texas corporations?
Both LLCs and corporations in Texas offer limited liability protection for their owners, meaning that personal assets are generally protected from business debts and obligations.
Can Texas S Corps have more than one class of stock?
No, S Corps in Texas are prohibited from issuing more than one class of stock.
What happens to income and taxes when an LLC in Texas expands into another state?
When a Texas LLC expands into another state, they are required to register as a foreign entity in that state and may be subject to additional taxes.
Do Texas S Corps have any limits on equity financing?
S Corps in Texas cannot have more than 100 shareholders, which can make raising equity financing more difficult.
Are S Corps in Texas subject to federal income tax at the corporate level?
S Corps in Texas are not subject to federal income tax at the corporate level, as profits and losses are passed through to shareholders.
What kind of management structure do Texas S Corps require?
S Corps in Texas are required to have a board of directors, with a president, secretary, and treasurer all appointed by the board.
Are LLCs in Texas required to have an operating agreement?
LLCs in Texas are not technically required to have an operating agreement, but having one can provide additional protection for owners and clearly define the operating rules of the business.
What is the minimum ownership requirement for Texas S Corps?
Texas S Corps require at least one shareholder, though generally they are not adopted for single-owner businesses.
What is the filing fee for forming an LLC in Texas?
The filing fee for forming an LLC in Texas is $300.
Can Texas LLCs issue securities and raise capital through the sale of stock?
LLCs in Texas generally cannot issue or sell securities, as they are not corporations and do not have shareholders in the traditional sense.
Can Texas S Corps be owned by other corporations or partnerships?
S Corps in Texas can be owned by other corporations or partnerships, provided that no more than 100 shareholders are involved.
How do distributions of profits and losses work for Texas LLCs and S Corps?
LLCs in Texas have more flexibility in how profits and losses are allocated, while S Corps are subject to detailed rules related to shareholder distributions and equity ownership.
How does the Texas franchise tax work for LLCs?
Texas LLCs are required to pay franchise taxes based on their net revenue, which is calculated differently than for S Corps.
Can Texas LLCs have part-time owners who do not participate in daily operations?
Yes, LLCs in Texas can have part-time owners who do not participate in daily operations.
Do Texas LLCs have to pay state franchise taxes?
Texas LLCs are required to pay annual state franchise taxes based on their net revenue.
How are transferable ownership interests handled for Texas LLCs and S Corps?
LLCs in Texas can have transferable ownership interests, while S Corps generally require shareholder approval before ownership interests can be transferred.
Are Texas S Corps required to file annual reports with the Secretary of State?
No, Texas S Corps are not required to file annual reports with the Secretary of State.

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Conclusion

Navigating the world of business structures and filings may seem daunting, but with the right information and guidance, you can confidently make the best decision for your unique entrepreneurial journey. Remember, the path to success is paved with well-informed choices and a clear understanding of your business goals. So, take the time to research, consult with professionals, and weigh the pros and cons of LLCs and S-Corporations in Texas.

As you embark on this exciting adventure, remember that a strong foundation built on sound legal and financial principles will be the backbone of your thriving enterprise. Embrace the challenge, stay curious, and always remember your passion and vision. Visit LLCBase today to access valuable resources, expert guidance, and personalized support tailored to your needs. Don’t wait any longer – let us help you realize your entrepreneurial dreams. 

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