Key Takeaways

  • Texas LLCs don’t pay state income tax but must comply with the state’s franchise tax and other business taxes.
  • The franchise tax applies to most LLCs, but small businesses may qualify for exemptions or lower rates.
  • LLCs must stay compliant with other Texas tax requirements, including sales tax, employment taxes, and local taxes.
  • Single-member and multi-member LLCs are generally taxed as pass-through entities by default.
  • Electing corporate taxation can be an option for certain LLCs seeking specific tax benefits.
  • Deductible business expenses can significantly reduce taxable income.
  • There are specific filing deadlines and reporting obligations, including franchise tax returns due May 15 annually.
  • No personal income tax in Texas offers a favorable environment for LLC owners.
  • You can find an attorney on UpCounsel for help with Texas LLC tax compliance.

LLC taxes in Texas are, like most of the rest of the laws governing business in the state, very favorable to companies that do business there. LLCs, or limited liability companies, are legal entities that are filed at the state level with special protections when it comes to liability. This leads to significant differences between LLCs founded in Texas and in any other state. Depending on the kind of business you are starting, Texas may just be the perfect place.

Texas Advantages

There are many reasons to do business in the Lone Star State. It is one of the most populous states in the union, and its unemployment is typically below the national average. The labor participation rate and total payroll are high. This is mainly due to low-income taxes in the state, which encourages businesses to settle there and is appealing to top talent looking for firms to work for. In Texas, the business tax is called the franchise tax. Businesses that are obligated to pay it are capped at 1% of income, which is much lower than the state income tax in many places.

LLCs

An LLC is a kind of legal protection granted to companies willing to file that way on the state level. It involves changes to how the company is treated in terms of legal liability and taxation. An LLC is treated as a separate person for liability purposes, much like a corporation is, regardless of whether it is federally filed as a sole proprietorship or partnership or corporation. In most states, however, for local tax purposes, the LLC allows income to “pass-through” like a sole proprietorship would, meaning that the company's income is treated as self-employment income made by the owners instead of being subject to any corporate tax. But the LLC status is only applicable at the state level, and actually works a bit differently in Texas.

Texas Taxes

As mentioned above, Texas charges most local businesses the franchise tax, which is usually about 1% of some portion of the income of the company. This tax is leveled against LLCs, C Corporations, and S Corporations. Sole proprietorships and partnerships are immune to the tax. Moreover, many kinds of businesses, especially smaller ones, are eligible for reductions in this already low tax rate. A business making less money can file with the E-Z Computation form and only pay 0.575% as a franchise tax, though it also reduces the number of exemptions and credits the filer can take. The tax is due May 15th of every year.

Who Must File the Texas Franchise Tax?

Most domestic and foreign LLCs doing business in Texas must file an annual franchise tax report—even if they owe nothing. The threshold for franchise tax obligations is determined by total revenue. For 2024, LLCs with revenue below $2.47 million are not required to pay the tax but must still file the “No Tax Due” report.

Entities required to file include:

  • LLCs formed in Texas
  • Out-of-state LLCs registered to do business in Texas
  • Professional LLCs (PLLCs)

Sole proprietorships and general partnerships with individual owners are exempt. Entities must also file a Public Information Report (PIR) alongside the franchise tax return.

Texas Franchise Tax Rates and Calculations

Texas offers two methods for calculating the franchise tax:

  1. Standard Franchise Tax Rate:
    • 0.75% for most entities
    • 0.375% for retail or wholesale businesses
  2. E-Z Computation Method:
    • For businesses with revenue under $20 million
    • Pays a reduced rate of 0.331% (as of 2024)
    • No deductions are allowed under this method

Entities can deduct either cost of goods sold (COGS), compensation, or a standard 30% of revenue (the "EZ Computation" does not allow deductions).

LLCs and Taxes

There are some other considerations for LLCs filing their taxes in Texas. These are:

  • An LLC filing in Texas that will have employees needs a federal tax identification number. Texas, however, does not have a state tax identification number system.
  • Texas does not ask its LLCs to send in annual reports to the Secretary of State, instead of folding the purpose of that report into the yearly franchise tax report system.
  • The franchise tax needs to be payable to the Comptroller of Public Accounts.
  • Businesses based in Texas that will be doing business in other states will need to register as an LLC in those states as well if those states require it. Doing business in this sense can include having offices in the location or trying to solicit business from its residents.

Sales Tax Obligations for Texas LLCs

Texas LLCs that sell taxable goods or services must collect and remit state sales tax. The state base rate is 6.25%, but local jurisdictions can impose additional rates up to 2%, totaling a potential 8.25%.

LLCs must:

  • Apply for a Texas Sales and Use Tax Permit
  • File regular sales tax returns (monthly, quarterly, or annually depending on volume)
  • Keep thorough records of sales and tax collected

Not all services are taxable, but many—including telecommunications, amusement services, and labor for repairs—are. Confirm your business activities with the Texas Comptroller’s office to ensure compliance.

LLCs and Federal Taxes

LLCs are treated federally as one of the other kinds of business entities, depending on how they are filed. An LLC owned by one person treats its income as the personal income of its owner through a process called “pass-through,” leaving the owner to pay the federal self-employment tax themselves. But an incorporated LLC instead pays a corporate tax rate on its profits and then pays taxes again on the income paid out to its shareholders. An S Corporation filing lets the income “pass-through” to the shareholders instead, but puts severe limitations on who is allowed to own stock and what forms that stock can take. This is designed to keep the business small and American.

Choosing Corporate Taxation for Your LLC

While LLCs are pass-through entities by default, some elect to be taxed as a C Corporation or S Corporation. This can offer strategic benefits depending on the owner’s financial goals.

C Corporation Election (Form 8832):

  • Subject to federal corporate tax rate (currently 21%)
  • Potential for reinvested earnings and fringe benefit deductions

S Corporation Election (Form 2553):

  • Pass-through taxation
  • Avoids double taxation
  • Owners must pay themselves a reasonable salary and withhold payroll taxes

This election does not affect your franchise tax obligations in Texas but does change how federal taxes are reported and paid.

Deductible Expenses for Texas LLCs

LLCs in Texas can reduce taxable income by deducting qualified business expenses. These deductions apply primarily for federal taxes but are also important in structuring your tax strategy.

Common deductible expenses include:

  • Business insurance premiums
  • Office rent and utilities
  • Marketing and advertising costs
  • Professional services (e.g., legal, accounting)
  • Travel expenses related to business
  • Equipment depreciation
  • Employee wages and benefits

Keeping accurate records and consulting a tax professional is crucial to ensure all eligible deductions are properly claimed.

Additional Texas Business Tax Requirements

While there’s no personal income tax in Texas, LLCs may still encounter other state and local tax obligations:

  • Employment Taxes: If your LLC has employees, you must withhold federal income tax and pay state unemployment tax (SUTA).
  • Local Business Taxes: Some cities may require local licenses or taxes depending on the industry.
  • Gross Receipts Tax (Franchise Tax): This remains the primary business tax in Texas.

Failure to comply with these obligations can result in penalties or forfeiture of your business’s “active” status with the state.

Frequently Asked Questions

1. Do LLCs in Texas pay state income tax?No, Texas does not impose a state income tax on individuals or LLCs.

2. What is the franchise tax threshold in Texas?As of 2024, LLCs with annual revenue below $2.47 million are not required to pay the franchise tax but must still file a "No Tax Due" report.

3. Do Texas LLCs have to collect sales tax?Yes, if your LLC sells taxable products or services, you must collect and remit sales tax and obtain a Texas Sales and Use Tax Permit.

4. Can an LLC be taxed as an S Corporation in Texas?Yes. Texas LLCs can elect to be taxed as an S Corporation for federal tax purposes by filing IRS Form 2553.

5. When are Texas franchise taxes due?Franchise tax reports and payments are due annually on May 15. Late filing can result in penalties and interest.

If you need help with LLC taxes in Texas, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.