LLC vs. S Corp in Texas

When you’re starting a new business, there are a lot of decisions to make. One of the biggest decisions you need to make at the outset is what kind of structure you want your new business to have. Limited liability companies (LLCs), corporations, general partnerships, S Corporations, etc.—what’s the best option for a budding entrepreneur? 

The structure for your new venture depends on facts unique to you, but the LLC is popular among many business owners. Sometimes, choosing to run an LLC with an S Corporation status is an even better option.

LLC vs. S Corp: Which is better in Texas?

If you want to compare the benefits of running an LLC vs an S Corp in Texas, we first need to point out that this is like comparing apples to oranges. An LLC is a stand-alone business entity. On the other hand, an S Corporation is a tax status you can elect through the IRS. Different types of business entities can have S Corporation status, including LLCs. 

To better understand an S Corp vs an LLC in Texas, let’s talk about the benefits of running a standard LLC vs. an LLC with S Corporation status. 

What are the tax differences between LLCs and S Corps in Texas?

Tax liabilities for standard LLCs and LLCs with S Corporation status overlap in some areas and have significant differences in others. These similarities and differences depend on what kind of taxes you’re paying. 

Federal Taxes

Whether you’re running an LLC or an S Corp in Texas, you have federal tax obligations.

Pass-Through Taxation

At the federal level, both LLCs and S Corporations are pass-through taxation businesses. This means that your LLC or your entity with S Corporation status doesn’t have to pay federal income taxes at the entity level. The owners of pass-through tax businesses pay federal income taxes on their shares of the business income. 

For many, pass-through taxation is a better option than the double taxation C Corporations experience. A C Corporation is subject to double taxation because a C Corporation has to pay federal income taxes at the entity level, and its shareholders have to pay federal income taxes on their shares of the business income. This is why many avoid running a C Corporation after comparing the tax liabilities of an LLC vs an S Corp vs a C Corp in Texas. 

We’ve reviewed how taxes for LLCs and S Corporations are alike, now let’s talk about how they’re different. 

Self-Employment Taxation

Did you know that you can reduce the amount of self-employment taxes you owe, depending on whether you run a standard LLC or an LLC with S Corporation status? It’s true. In a standard LLC, the owners (also called members) must pay self-employment taxes on their shares of the LLC income and their guaranteed payments. In an S Corporation, members can choose what amount of their business income will be wages subject to self-employment taxes.

When setting their wages, S Corporation members have to set wages that are reasonable for the services they provide to their business. If you can set a low but reasonable wage for yourself as an S Corporation member, you can take home a larger share of business distributions and payments not subject to self-employment taxes. 

Texas Taxes

LLCs and S Corporations alike have to pay Franchise Taxes in Texas. These taxes are due on May 15 of each year (or the following business day if May 15 falls on a weekend or legal holiday), and the amount you owe depends on your business’s margin.

Other taxes you might owe in the State of Texas have to do with the nature of your business. Regardless of whether your business is an LLC or an S Corporation, you’ll likely have to pay state sales and use taxes. And you have to pay unemployment taxes if:

• Your business pays at least $1,500 in gross wages in a quarter
• Your business has at least one employee for 20 weeks or more in a year
• Your business pays at least $1,000 per quarter for domestic services 
• Your ranch or farm business has at least three employees in a year
• Your ranch or farm business pays at least $6,250 in gross wages in a quarter
• Your business is a truck farm, orcharge, or vineyard and uses seasonal workers
• Your business is a farm, ranch operation, or labor agency and your employ migrant workers

Depending on where your business is and what it involves, you might also have to pay taxes to local governments in Texas. 

How do Texas LLC and S Corp ownership requirements compare? 

A significant deciding factor when comparing an LLC vs an S Corp in Texas is the ownership rules.  

Anyone with capacity can be a member of a standard LLC. Your standard LLC can also have as many members as you want. However, an LLC normally can’t transfer ownership without the consent of all existing members. 

If you want your LLC or other business entity to have S Corporation status, you can’t have more than 100 owners, and the following individuals and entities can’t be owners (however, an S corp can own other businesses):

• Partnerships
• Insurance companies
• Corporations
• Certain financial institutions
• Non-resident immigrants
• Domestic international sales corporations

Also, an S Corporation can’t have more than one class of stock. 

Even though LLCs and S Corporations can offer great liability protection and tax benefits, restrictions on who can own your business might hinder your success. It’s important to speak to legal and financial professionals before deciding whether to start an LLC, an S Corporation, or another business type. 

How do Texas LLCs and S Corps handle liability protection?

When comparing an S Corporation vs an LLC in Texas, remember that an S Corporation isn’t a stand-alone business entity, it’s a tax status. The liability protection you receive while running an S Corporation comes from the underlying business entity you elect to give S Corporation status. If you choose to run an LLC with S Corporation status, you can enjoy the same liability protections that any Texas LLC member can enjoy. In Texas, LLC members and managers are not personally liable for the legal and financial obligations of their LLCs. 

Which is easier to file in Texas: LLCs or S Corps?

Electing S Corporation status is the step you take after you form your underlying business entity. Electing the S Corporation status doesn’t take much, but forming the underlying business can be full of formalities. 

To start an LLC, you file a Certificate of Formation with the Secretary of State. This formation document must contain specific information about your business, including its location, management structure, and Registered Agent. 

If you want your business to have S Corporation status, you must file Forms 8832 and 2553 with the IRS. Form 8832 tells the IRS that you want your business taxed as a corporation. And Form 2553 elects S Corporation status. 

Once you’ve fully formed your LLC, you need to submit yearly filings to keep it legally compliant. LLCs have to file yearly Public Information Reports with the Texas Comptroller to remain compliant. 

To keep your LLC legally compliant, you have to keep up with many deadlines. Fortunately, you don’t have to do so alone. Our Worry-Free Compliance Service can help you keep track of your compliance deadlines and file up to two business amendments per year for you. 

Can I convert my Texas LLC into an S Corp? 

You can convert your Texas LLC into an S Corp if your business fulfills the ownership requirements we listed above. 

How do I convert my Texas LLC to an S Corp? 

Converting an LLC to an S Corporation is a two-step process. First, you file Form 8832 with the IRS to have your LLC taxed as a corporation. Then, you file Form 2253 with the IRS to elect S Corporation status. 

Do I need to change my designator if I do?

No. You keep “LLC” or “Limited Liability Company” in your business name even if you elect S Corporation status. 

What is the best time for an LLC to elect S Corporation status? 

The best timing for choosing S Corporation status depends on your specific needs. It’s often easier to choose this status when you first form your LLC. But when you choose, you need to make sure you’re ready to meet the eligibility requirements. You also want to make sure you understand the tax implications of your choices, so it’s good to speak to a tax professional first. If you’re ready to run your LLC as an S Corporation, you need to file the paperwork within the first two months and 15 days of the tax year when you want the status to start.