LLC vs S-Corp in Texas

Texas has no personal state income tax, which changes the LLC vs S-corp math for a trade business. The Texas Secretary of State handles entity formation. The IRS handles tax classification via Form 8832 and Form 2553. The Texas Comptroller administers the state franchise tax, which applies to both LLCs and S corporations regardless of federal tax election. A Texas LLC can elect to be taxed as an S corporation for federal purposes. Texas LLC basics. - Certificate of Formation (Form 205) filed with the Texas Secretary of State under the Texas Business Organizations Code. - Filing fee is $300.00. - Texas LLCs are not required to file an annual report with the Secretary of State. The ongoing Texas state filing is the franchise tax report and Public Information Report with the Texas Comptroller, due May 15 each year. - Single-member LLCs default to disregarded entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with Form 2553. Texas franchise tax: applies to LLCs and S corps alike. - The Texas franchise tax is imposed on most taxable entities doing business in Texas, including LLCs, C corporations, and S corporations. Federal S corp status does not exempt an entity from Texas franchise tax. - The no-tax-due threshold for reports originally due on or after January 1, 2024 is $2,470,000 in total revenue. For the 2026 and 2027 reports the no-tax-due threshold published by the Comptroller is $2,650,000. Entities under the threshold owe no franchise tax but must still file a Public Information Report (for corporations and LLCs) or Ownership Information Report (for other entities). - Rates for entities above the no-tax-due threshold: 0.375% of taxable margin for retail or wholesale businesses, and 0.75% of taxable margin for all other entities. - EZ computation option: available to entities with total revenue of $20 million or less, at 0.331% of total revenue after apportionment. Texas S corp basics. - Federal S corp election flows through to federal income tax only. Texas does not impose a separate state corporate or personal income tax on the S corp or its owners. - The S corp still files the Texas franchise tax report with the Comptroller and pays franchise tax if the entity is above the no-tax-due threshold. - Payroll. An S corp must pay its owner-employee a reasonable W-2 salary. Texas has a state unemployment tax through the Texas Workforce Commission that applies once the employer crosses the wage threshold. Why a Texas trades shop might still elect S corp. The main reason in Texas is federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids self-employment tax. Texas's lack of state income tax does not change this federal calculation, and the Texas franchise tax treats both entity types the same way, so the S corp election is a federal decision with no Texas-side penalty. Rule of thumb. Start as a Texas LLC. When annual profit after a reasonable owner wage is high enough that payroll tax savings clear the payroll, retirement plan, and accounting costs, elect S corp. A CPA with Texas construction clients can run the breakeven for your numbers and confirm the current franchise tax threshold, which the Comptroller adjusts periodically.