S Corporation Texas: Everything You Need to Know
When forming an S-corporation, Texas recommends talking to an accountant and attorney to help everything go smoothly. 3 min read
When forming an S-corporation, Texas recommends talking to an accountant and attorney to help everything go smoothly. A company should also take into consideration liability, continuity, the formality of operation, tax, management, and transferability of ownership interests.
Sole Proprietorship in Texas
The simplest and most common form of business is a sole proprietorship. One individual participates in a business activity in a sole proprietorship without needing a formal organization.
If the business is done under an assumed name (which is anything besides the person's surname), an assumed name certificate, known as a DBA, needs to be filed with the office of the county clerk where the company premise is maintained. If there is no maintained business premise, the assumed name certificate needs to be filed in every county where business is done under that name.
General Partnership in Texas
A general partnership happens when two or more people work together to have a business for profit. The partnership normally operates according to the partnership agreement, but there are no requirements saying that the agreement must be in writing. There is also no state filing requirement.
An assumed name certificate needs to be filed with the country clerk's office where the business premise is maintained if the business is done under an assumed name. Otherwise, the assumed name certificate must be filed where business is done under an assumed name.
Corporation in Texas
To create a Texas corporation, a certificate of formation must be filed with the Texas Secretary of State. This office will provide a form that meets all the minimum state law requirements. A corporation is a legal entity that has the following benefits:
- Perpetual duration
- Limited liability
- Ease of transferring ownership interests
- Centralization of management
Owners of a corporation are called shareholders, while those who manage affairs and the business are called directors. Shareholders can go into a shareholder's agreement to get rid of directors and provide management according to state corporate law. Picking the best management structure for the corporation is a task an attorney can help with, as the Secretary of State is unable to assist with that.
An S-corporation is a federal tax election rather than a matter of corporate law. Corporations that are for-profit can choose to be taxed as an S-corporation by taking the steps to file an election with the IRS. A competent tax counsel or the IRS can regard the requirements for filing the election and being taxed as an S-corporation.
Limited Liability Company in Texas
To form a limited liability company (LLC) in Texas, a certificate of formation needs to be filed with the Texas Secretary of State. They will have a form available to meet any minimum state law requirements. The limited liability company isn't a corporation or partnership but instead a certain type of entity that has both the partnership and corporation powers.
The specifics depend on how the LLC is structured, but it might be likened to a limited partnership where every owner can participate in management and have limited liability. It might also be similar to a general partnership that has limited liability.
LLC vs S-Corporation
Companies may want to know if it is better to have an LLC or an S-corporation, but they can actually have both. How to convert a limited liability company in Texas to a corporation will depend on what the situation is. Form 2553 is filed to form an S-corporation. Filing this lets the IRS know that the business wants to be taxed under Subchapter S according to the Internal Revenue Code.
An LLC can choose to be taxed as an S-corporation by filling out the same form. In a multi-member LLC, the company is taxed as a partnership. This means the LLC needs to file a tax return for partnerships and pay/report taxes separately.
An LLC that is taxed as an S-corporation files an annual S-corporation return. The LLC will have several advantages, such as being able to decrease the self-employment tax burden. The owners will get paid a salary by the entity.
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