Key Takeaways

  • An LLC with S Corp election in Texas offers self-employment tax savings while maintaining liability protection.
  • Electing S corp status can lower your overall tax burden by allowing owner-employees to split income between salary and distributions.
  • Texas does not recognize S corporations at the state level, but the federal election still significantly affects your IRS tax filings.
  • Requirements for S corp election include U.S. residency, a limited number of shareholders, and a single class of stock.
  • Filing deadlines and compliance rules (like reasonable salary and payroll tax filings) are crucial to maintain S corp status.
  • Not all LLCs benefit from S corp election—it's best for businesses with stable profits and owner involvement in daily operations.

LLC with S Corp Election

LLC with S corp election refers to when a limited liability company (LLC) chooses to be considered as an S corporation (S corp), which can offer distinct tax advantages.

The LLC is the newest business form, with a high advantage in flexibility where taxes are concerned. When one is running an LLC, they can be taxed in several ways, which allows them to save money both in their business and as their owner. That said, LLCs tend to remain with the default tax form, and some find electing the S corp status can be more advantageous still.

Why Choose an LLC with S Corp Election in Texas

In Texas, electing S corp tax status for your LLC can yield major tax advantages, especially for businesses with consistent earnings. Texas does not impose a state income tax on individuals or recognize S corporation status at the state level. This means your S corp election only applies to your federal taxes with the IRS, but you still benefit from avoiding federal self-employment tax on profit distributions.

Advantages include:

  • Lower self-employment taxes: S corp election allows you to pay yourself a reasonable salary (subject to payroll taxes), with remaining profits distributed as dividends, which are not subject to self-employment taxes.
  • No additional state complexity: Since Texas doesn’t tax personal income or recognize S corps separately, you avoid extra state filings tied to your tax election.
  • Business-friendly environment: Texas remains a top state for small business growth, and the LLC with S corp election structure is a powerful combo for scalability and savings.

Differences Between LLCs and S Corporations

LLCs and S corps are two of the most common small business legal structures, and many entrepreneurs struggle with which form best suits their needs, as both have their advantages.

For instance, both LLCs and S corps are not taxed for their profits—the taxes are passed on to the owner(s). Also, both forms give the owner(s) liability protection by separating them from their business. However, there are several key differences in advantages that must be highlighted.

LLC taxation advantages include:

  • Fewer state forms and filings, documentation requirements, and formal meetings.
  • Lower start-up costs.
  • More flexibility for profit and loss allocation amongst owners. Percentage of profit distribution can be raised and lowered as you see fit.

S corp taxation advantages include:

  • Greater flexibility in earning distribution to owners. Earnings can be divided into wages and salaries or into distributions, which are considered passive income.
  • FICA tax for Medicare and social security only applies to wages and salaries. (However, you must give yourself a reasonable salary: taking a $20,000 salary and $150,000 distribution is not allowed.)

Also, it should be noted that in an LLC the owner is not considered an employee for tax purposes, while in an S corp the owner is, so long as they perform more than minor duties. For this reason and others, a small business owner has much to consider.

Is S Corp Election Right for Every LLC?

While appealing, S corp election isn’t ideal for every Texas LLC. It’s best suited for businesses that:

  • Generate $40,000+ in net annual profit after expenses.
  • Have owners who actively participate in the business.
  • Are comfortable managing payroll and quarterly tax filings.
  • Don’t plan to take on venture capital or issue multiple stock classes.

Consider avoiding S corp election if:

  • Your business is still in the startup phase with minimal profits.
  • You plan to retain profits instead of distributing them.
  • You have foreign owners or more than 100 shareholders.

Taxation for LLCs and S Corporations

One of the major differences between LLCs and S corps is how they are taxed. When it comes to LLC taxation, the following key qualities must be considered:

  • LLCs can choose to be taxed as C corps or S corps by filing an election document with the IRS. This makes the LLC the same as a corporation in the IRS’s eyes with the same tax requirements.
  • If no election is filed, LLCs are taxed as single-member or multi-member LLCs, in what is called the “default” status by the IRS.
  • Single-member LLCs are taxed as sole proprietorships, with the owner filing a Schedule C form.
  • Multi-member LLCs are taxed as partnerships. They file Form 1065, and individual partners file Schedule K-1 forms.

Meanwhile, for S corps, the following qualities apply:

  • S corps are considered pass-through entities, meaning losses and income pass through them to the owners in their personal tax returns.
  • S corps report income as deductions.
  • S corps file Form 1120S reporting yearly deductions, income, losses, profits, and tax credits.
  • A Schedule K-1 must be filed by shareholders listing their shares of items on Form 1120S.
  • S corp owners/employees are required to report S corp earnings on their Form 1040 and pay their share of Medicare taxes and social security as part of any employee salary they are paid.
  • S corps with larger circulation will not need to pay as high employment taxes.
  • S corps are required to withhold employment tax and federal income from the owner/employee’s pay, as well as pay federal and state unemployment taxes, Medicare taxes, and Social Security on the employee’s behalf.
  • S corps are the only form of business that allow owners to save on Medicare and Social Security taxes.

How Taxes Work for an LLC with S Corp Election in Texas

An LLC in Texas that elects to be taxed as an S corporation files Form 2553 with the IRS. This doesn’t change the LLC’s legal structure—it’s still an LLC with liability protection—but its taxation is treated like an S corp.

Tax breakdown:

  • Owner salary: Subject to federal payroll taxes (Social Security, Medicare).
  • Distributions: Not subject to self-employment tax but still reported on personal income tax returns.
  • No Texas personal income tax: You won’t pay state income tax on either the salary or distributions in Texas.
  • Texas franchise tax: You may still owe this tax if your gross revenue exceeds the exemption threshold, but it’s based on margin—not income structure.

Filing deadlines matter. To take effect for the current tax year, Form 2553 must be submitted within 75 days of forming the LLC or the start of the new tax year.

How to Set Up an S Corporation

If you decide that an S corp election is the best fit for your business, setting up an S corp is relatively simple. All you need to do is file Form 2553 with the IRS within 75 days of the date of your company’s incorporation. However, to elect S corp status, the following is required:

  • That there are no more than 100 shareholders.
  • That all shareholders are U.S. residents.
  • That all shareholders are individuals, not corporations or partnerships.
  • That the stock is of one class only.

If these criteria are met, then you may continue with the process. Then, once done, you will be able to enjoy all the benefits an S corp designation can bring to your business.

Annual Compliance Requirements for LLCs with S Corp Election

Once you've elected S corp status for your Texas LLC, maintaining that status requires consistent compliance:

Key annual tasks:

  • Run payroll and issue W-2s for yourself and any employees.
  • File IRS Form 1120S (U.S. Income Tax Return for an S Corporation).
  • Provide Schedule K-1s to shareholders detailing their income.
  • Maintain accurate corporate records, including minutes of meetings and resolutions (even if not legally required in Texas).
  • File Texas franchise tax reports annually with the Comptroller’s office if required.

Failure to meet these requirements can result in the IRS revoking your S corp election status, reverting you to default LLC taxation.

Texas-Specific Considerations for LLCs Electing S Corp Status

Texas law doesn’t require special state filings for an LLC electing S corp status. However, some practical considerations still apply:

  • Register your LLC with the Texas Secretary of State using Form 205.
  • File Form 2553 with the IRS for S corp tax treatment.
  • Register for a Texas taxpayer number with the Texas Comptroller if you're collecting sales tax or hiring employees.
  • Comply with Texas franchise tax rules—even if you’re federally taxed as an S corp, your entity type (LLC) is what the state uses to determine franchise tax obligations.

If you hire employees (including yourself), be sure to:

  • Set up a payroll system
  • File federal and state payroll tax reports
  • Issue W-2s at year-end

Frequently Asked Questions

  1. Does Texas recognize S corporations for tax purposes?
    No, Texas does not recognize S corporations at the state level. The S corp election is only for federal tax purposes, but you may still owe franchise taxes in Texas.
  2. What are the key tax benefits of an LLC with S corp election in Texas?
    The biggest benefit is savings on self-employment taxes. You can take part of your income as a distribution, which isn't subject to Medicare or Social Security taxes.
  3. Can any LLC in Texas elect S corp status?
    Most can, but they must meet IRS requirements (e.g., under 100 shareholders, only individuals as owners, one class of stock). It’s best for LLCs with steady profits and active owners.
  4. How do I know if S corp status is worth it?
    If your Texas LLC earns at least $40,000 in profit annually, it’s worth considering. You’ll need to run payroll and maintain compliance, so factor in administrative costs.
  5. When should I file Form 2553 for my LLC in Texas?
    You must file within 75 days of forming your LLC or within the first 75 days of the tax year in which you want the S corp election to take effect.

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