Why Texas is One of the Best States to Start an S Corporation

Small business owners make up 99.8% of Texan businesses, employing 45.1% of the state’s employees. Recent data provided by the Office of the Advocacy for the U.S. Small Business Administration shows that the most popular commercial industries in the state fall into the professional, scientific, and technical services, with construction coming in at a close second.

These impressive business figures relate to the state’s economic growth, ensuring it is the world’s 9th largest economy, ahead of countries like Spain and Australia.

A business friendly-climate and low tax rates certainly encourage business growth. Indeed, many businesses in the state prefer to form an LLC with its default pass-through taxation or take it a step further and seek S Corp tax designation, further minimizing their tax burden.

Besides being the second-biggest state in the country, there are several reasons for its impressive business formation statistics. First, Texas is one of the few U.S. states that don’t impose a corporate tax or income tax, which creates an environment that attracts entrepreneurs. Secondly, the state has a favorable business environment.

In a state rich with natural resources like oil and gas and vast infrastructure, exports play a significant role in Texan economic growth. In turn, this encourages substantial employment and income growth. Furthermore, a skilled workforce and ease of doing business promote an excellent business climate.

The state also throws in other incentives, including property tax abatements and sales tax exemptions on equipment, software, and machinery. Furthermore, several local funding efforts and cash grants make the state popular for startups and business relocations from other states. New additions to the state include Apple, Samsung, and

However, businesses other than sole proprietorships and some partnerships must pay a franchise tax of 0.75%. The rate for franchise tax decreased to 0.375% for smaller companies with up to $10 million in annual receipts, and businesses with less than $1.18 million receipts annually pay no franchise tax.

The best way to start an S Corp in Texas is by first forming a corporation or an LLC. Next, choose how you want your enterprise taxed by choosing the S Corp tax designation with the IRS when applying for your business identity - the EIN.

The distinct difference between an S Corp and a corporation is that the S Corporation does not pay separate federal income tax. Furthermore, the same applies to most states; S Corporations are not subject to separate income tax. Instead, they tax each shareholder on the portion of the corporation’s annual net income they receive, making them pass-through entities. For example, in the case of an S Corp in Texas, the federal selection is recognized, but the business pays the state’s franchise tax according to the rates that apply. Additionally, the shareholders pay no state tax on whatever portion of the corporation’s net income they receive.

Before electing the S Corp tax designation, you need to consider if there are any advantages for your business. Some restrictions prevent some companies from seeking this tax status. These include that the business cannot have more than 100 shareholders, and these can only hold one class of stock. Furthermore, S corp owners must be individuals that are U.S. citizens or permanently residing aliens.

Your LLC or corporation must pay you a market-value salary and the FICA and Medipay taxes on the salary. However, you need to have tax savings of over $2,000 a year to make the tax designation worthwhile.

According to the business information company TRUiC, the steps for an S Corporation Texas are simple. They recommended first forming an LLC before registering with the IRS for the tax registration by choosing a business name, selecting a registered agent, and filing the certificate of formation with the Secretary of the State. Next, visit the IRS website to apply for an EIN and request the S Corp status by filling in Form 2553.

Suggested Video: https://www.youtube.com/watch?v=P5O7FoUGkL0&ab_channel=TRUiC

Choosing the best business and tax structure for your startup in Texas will depend on the type of business and its potential income. A legal or tax professional can advise you on your options and which one makes financial sense. Texas is an exciting state for business, offering opportunities for entrepreneurs in several industries, with a favorable corporate tax environment that benefits companies.