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WIth its busy cities and enormous landscapes, Texas is a state as beautiful as it is prosperous. If you want to start a successful business, then the Lone Star State could be a great choice — and the lack of a state income tax can be a good incentive! Whether you want to be headquartered in Houston, Austin or Dallas — or you want to build a presence in a smaller city — you have plenty of choices.
Here’s our guide to Texas corporations and deciding if starting one could be the right choice for you.
Most entrepreneurs will have a choice of starting an LLC, an S Corporation or a C Corporation in Texas. It’s important to select the right type of business entity, as each one is treated differently by the TX Secretary of State, the law, the IRS and other official bodies.
Here’s a quick overview of each type of business entity.
These are the simplest type of business and will be the “default” type of TX business you have if you do not choose to form a separate business entity. These types of businesses do not provide you with any special protections or benefits and can leave your personal assets vulnerable. We do not recommend them.
LLCs are a great option for smaller TX businesses. LLCs are quick and easy to create, inexpensive to administer, light on regulations and have simple taxation and rules. You can learn how to create an LLC in Texas here.
You might choose to form a Texas S Corporation because it’s a good compromise between the simplicity of the LLC and the complexity of the C Corporation. Note that TX S Corporations are subject to more rules and regulations than a TX LLC, but they can mean that you pay less tax.
If you plan to start a large business or want to trade your shares on the public stock market, a TX C Corporation is your only choice. Be aware that Texas C Corporations are subject to many rules and regulations, and they have a substantial amount of administrative overhead. Additionally, the tax rules for a Texas C Corporation are not as advantageous as for a TX S Corporation or LLC.
There are some other business entity structures like nonprofits, Limited Liability Partnerships (LLPs) and B Corporations, but they will not be relevant for the majority of entrepreneurs.
Texas corporations have several benefits for business owners.
Texas corporations provide the strongest form of liability protection possible. They insulate your personal assets and finances from those of your business.
This means that any liabilities created by your corporation (debts, obligations, damages, bankruptcy or other liabilities) should not impact your personal money, property or assets — they are considered completely separate from a legal perspective.
Why might you want to choose to incorporate as a TX S Corp or C Corp instead of an LLC? Here are a few reasons.
When you incorporate a business as a corporation, the Texas Secretary of State will treat your business as a C Corporation by default. A C corporation will become an S Corporation when all shareholders wish to change the corporation’s status to an S Corporation with the IRS. You can make this choice when you first form your Texas corporation or at any time after you incorporate.
There are some similarities and some differences between S Corps and C Corps:
Similarities: Texas S Corporations and C Corporations have similar rules and regulations for liability, governance, management and ownership
Differences: Key differences are taxation as well as the ease of buying, selling and transferring stock
A Texas S Corporation will often pay less self-employment tax on owner earnings than an LLC. Note that a TX LLC can choose to be treated as an S Corporation for tax purposes by filing Form 2553 with the IRS, which removes this restriction. Texas C Corporations do not have this advantage over an LLC.
If you want to easily transfer ownership through buying and selling stock, you will need a TX C Corporation or an S Corporation. C Corporations have much more flexibility than S Corporations, and both are better than LLCs for stock and ownership transfers.
C Corporations provide certain benefits when it comes to buying, selling and transferring stock. Here are the rules for both S Corps and C Corps:
If you want up to 100 shareholders who are U.S. citizens or residents and want to issue one type of stock, you can be an S Corporation or a C Corporation.
If you want more than 100 shareholders, want to issue more than one type of stock or have international shareholders, you will need a C Corporation.
If you want to allow the public to buy and sell shares in your company after an Initial Public Offering (IPO), you will need a C Corporation.
Learn more about the differences between business entities.
In addition to the general benefits above, TX S Corporations provide several other advantages:
Texas S Corporations can have up to 100 shareholders.
Running an S Corporation in Texas is simpler than running a C Corporation.
It is easy to transfer ownership in an S Corporation by selling your stock.
In some cases, part of the income from an S Corporation can be paid as a “distribution” rather than “salary,” so it would not be subject to self-employment tax. Find out how this can save you money using our S Corporation Tax Calculator.
LLCs can choose to be taxed as S Corporations to take advantage of this.
In addition to the general benefits above, Texas C Corporations provide several other advantages.
Ownership in a Texas C Corporation is very fluid and determined by who owns stock in the business.
Texas C Corporations can list their shares on a public stock exchange. This stock can be bought and sold by anyone.
Texas C Corporations can sell stock to investors inside and outside the U.S.
Texas C Corporations can issue more than one type of stock.
Texas C Corporations can raise more funds by issuing more stock.
Here are some areas to be aware of when you’re creating a corporation in Texas.
First, TX corporations are formed on the state level by filing a Certificate of Formation with the secretary of state. Incfile specializes in helping entrepreneurs form Texas S Corporations and C Corporations, and we can collect the information and file this form on your behalf.
All TX corporations must issue stock to shareholders.
All TX corporations must hold Annual General Meetings (AGMs).
All TX corporations must have an elected Board of Directors.
All TX corporations must appoint officers.
All Texas corporations must follow stringent compliance rules and regulations. These include financial reports, bylaws, corporate formalities, taxes, fees, business licenses and the like. You can find links to these below.
Are you ready to start your Texas corporation? If so, we can help. We provide comprehensive corporation formation services for both S Corporations and C Corporations in Texas.
You’ll find plenty more insight and guidance on the other pages of this guide, including:
The six steps you need to take to start a Texas S Corporation or C Corporation.
How to search the Texas business registry of the TX Secretary of State and find the right name. Includes information on naming rules, fictitious names, reserving a Texas corporation name and more.
How to appoint a Texas Registered Agent to your new corporation or change to a different Registered Agent. Includes information on Registered Agent rules and searching for Texas Registered Agents.
How to understand the various fees you’ll need to pay and the requirements you’ll need to meet for both federal and Texas rules. Includes details of Employee Identification Numbers (EINs), Texas and federal business licenses, Texas Annual Reports and more.
How to understand the various taxes you will need to pay to the federal and Texas government. Includes details of federal taxes like income and self-employment, and Texas taxes like sales tax and income tax.
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This report is mandatory and must be filed within the specified time frame in order for the entity to remain in good standing with the state. Failure to file this report can lead to the company being revoked or administratively dissolved.
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