How to Form an S-Corp in Texas in 10 Easy Steps

Thinking about starting a business in Texas? Smart move! The Lone Star State is known for its business-friendly environment, and forming an S-Corp can be a great way to save on taxes.

This guide will walk you through the process step by step so you can stop wondering how to form an S-Corp in Texas once and for all. Grab your favorite beverage (I'll be sipping on my coffee!) and let's dive in.

So, What Is an S-Corp?

Before you do anything, it's important to be clear on what an S-Corp is (and isn't).

An S-Corp is not actually a business entity. It's a tax classification. Corporations and LLCs can apply for the S-Corp tax status with the IRS.

This status allows the company to pass corporate income, losses, deductions, and credits to shareholders (AKA, you). 

To qualify for the S-Corp election, your business must:

• Be a domestic corporation

• Have only allowable shareholders (U.S. citizens or residents, certain trusts, and estates)

• Have no more than 100 shareholders

• Have only one class of stock

• Not be an ineligible corporation

Learn more about the pros and cons of an S-Corporation.

S Corp Tax Benefits

Many entrepreneurs decide to apply for the S-Corp status because of its tax benefits. Here's how it works:

• Pass-through taxation: Your business itself won't pay taxes. Instead, its profits and losses will "pass through" to shareholders' personal tax returns. AKA, to your personal income tax return.

• Savings on self-employment taxes: S-Corp owners are treated as the employees of the business. They pay themselves a reasonable salary. They only pay self-employment taxes on their salary, not on their share of the company's profits.

As a result, a Texas S-Corp can help you save quite a bit during tax season. Learn more about how S-Corp taxes work.

How to Form an S-Corp in Texas: 10 Steps for Success

Figuring out how to form an s-Corp in Texas can be confusing if you don't know where to start.

Forming an S-Corp is similar to registering a new corporation with one notable difference - you'll have to apply for the S-Corporation status. More on that later. 

1. Choose Your Business Name

Your business name is one of the most important pieces of your brand identity. Make sure that it's unique and catchy, but it should also comply with the Texas business name requirements.

In Texas, your corporation name must:

• Be distinguishable from other business names on record

• Include "Corporation," "Company," "Incorporated," "Limited," or an abbreviation

• Not include words that could confuse it with a government agency

You can do a name search on the Texas Secretary of State website to check if your chosen name is available. If so, you can reserve it for 120 days by filling out an Application for Reservation or Renewal of Reservation of an Entity Name Form and paying a $40 fee.

2. Appoint Directors and a Registered Agent

Next, appoint your initial board of directors.

For many entrepreneurs just starting out, this might be just you. Texas doesn't specify a minimum number of directors, so it's perfectly fine to have a single-member board.

You'll also need a Texas registered agent. This person or entity receives legal documents for your business.

Your registered agent must have a physical address in Texas. You can be your own registered agent, but many businesses hire a professional service instead. 

Why? Well, there are a few reasons, but the most important one is that a registered agent must be available at their registered address during all business hours. As in, you won’t be able to step out to grab a coffee or lunch (not to mention take a vacation). 

This limits your freedom, and freedom is probably one of the reasons why you want to start a business in the first place!

3. File the Certificate of Formation

This is one of the most important steps of the process.

The Certificate of Formation, sometimes called Articles of Incorporation in other states, is the document that formally creates your corporation in Texas.

It's basically the birth certificate of your business entity, so to speak!

You need to file your Certificate of Formation with the Texas Secretary of State and pay a $300 filing fee. You can do this online or by mail.

Here's what you'll need to file your Certificate of Formation:

• Corporation name: The official name you chose in step 1.

• Registered agent name and address: The person or entity who will accept legal documents for your business.

• Number of shares the corporation is authorized to issue: This defines your company's ownership structure.

• Names and addresses of the directors: For new entrepreneurs, this will probably just be you.

• Name and address of the incorporator: This is typically you or whoever is handling the formation process.

Once this document is filed and approved, your corporation legally exists in the eyes of Texas! Make sure to double-check all of the information to avoid any tax or S-Corporation election problems in the future.

4. Create Corporate Bylaws

Bylaws are your corporation's internal rules. As a Texas corporation, you're legally required to adopt corporate bylaws, so don't skip this step.

Typical bylaws include:

• Roles and responsibilities of directors and officers

• How shareholders meetings are conducted

• How stock is issued and transferred

• How you can amend your bylaws

You can work with a lawyer to draft your corporate bylaws, but a less expensive alternative is to get a template online.

5. Hold Your First Board Meeting

Once your corporation is officially formed, it's time for your first board meeting. If you're just starting out, this might feel a bit over the top - especially if you're the only board member.

This meeting is important for setting up your business properly. Here's what should typically happen:

• Adopt the bylaws: Officially approve the rules you created for running your corporation.

• Appoint corporate officers: If you're running your business solo, you can appoint yourself as the President, Secretary, and Treasurer.

• Authorize issuance of stock: Decide how many shares of stock to issue and to whom. You can issue all shares to yourself.

• Adopt an official stock certificate form: You'll use it for all your stock certificates.

Remember to keep detailed notes (called "minutes") of everything that happens. These minutes don't need to be complex – just a clear record of what you decided.

This might feel silly to do if you're the only person at this meeting, but it's key to establish your corporation as a separate entity from yourself.

6. Get Your Employer Identification Number (EIN)

An EIN is like a social security number for your business. You'll need it to:

• Open a business bank account

• File taxes

• Hire employees

You can apply for an EIN online on the Internal Revenue Service (IRS) website. It's completely free to do. 

7. File Form 2553 to Elect S-Corp Status

You've registered your Texas corporation, but filing Form 2553 is your way of telling the IRS, "Hey, I want my corporation to be treated as an S-Corp for tax purposes."

When you elect the S-Corp status, you get the following benefits:

• Pass-through taxation: Instead of the corporation paying taxes on its income, the profits (and losses) "pass through" to the shareholders' personal tax returns. This means you avoid the "double taxation" that regular C Corporations face.

• Salary and distributions: As an S Corp owner, you can pay yourself a reasonable salary (which is subject to employment taxes) and then take additional profits as distributions (which aren't subject to employment taxes). This can potentially help you pay less in taxes.

To make this election, you need to file Form 2553 with the IRS.

The timing of this filing is very important:

• If you're a new corporation: File no more than two months and 15 days after the beginning of the tax year you want the election to take effect. For example, if you incorporated on January 1, you'd need to file by March 15.

• For an existing corporation: You can file at any time during the tax year preceding the tax year you want the S-Corp status to take effect.

Filing Form 2553 can be confusing, but we can help you do this when you use our Business Formation Service!

8. Register for Texas Taxes

S-Corps don't pay federal income tax, but you may need to register for state taxes. Common Texas taxes for businesses include:

• Texas franchise tax

• Sales and use tax

• Employment taxes

You can register on the Texas Comptroller of Public Accounts website.

9. Open a Business Bank Account

It's very important to keep your personal and business finances separate - unless you want to deal with a giant headache come tax season (and potential legal consequences). 

You'll need the following to open a business bank account for your S-Corp:

• Your EIN

• Certificate of Formation

• Corporate bylaws

Different banks may have additional requirements. Learn about good bookkeeping habits for small business owners.

10. Comply with Ongoing Requirements

There are a few things that you'll need to do on a regular basis to maintain your S-Corp tax status, such as:

• Hold annual shareholder meetings

• Keep detailed corporate records

• File annual reports with the Texas Secretary of State

• Maintain a registered agent

• File federal and state tax returns on time

Make sure to add all important dates to your calendar and set reminders! As a business owner, it's your responsibility to stay on top of these requirements.

FAQs

How Much Does It Cost to Start an S-Corp in Texas?

You can expect to spend at least $300 to start an S-Corp in Texas. You'll have to pay this fee when you file your Certificate of Formation. You may also have to cover additional costs if you hire a registered agent service or an attorney to draft your bylaws. The good news is that getting an EIN and filing Form 2553 for the S-Corp election is free!

What Is the Difference Between an S-Corp and an LLC in Texas?

LLCs are easier to form and maintain and there are fewer formalities. S-Corps are more rigid - for example, you'll have to hold annual meetings and do more extensive record-keeping. But the good thing about S-Corps is that they can help you save money on self employment taxes. Learn more about the differences between an LLC vs. S-Corp.

Does an S-Corp Pay Taxes in Texas?

S-Corps don't pay federal income tax at the corporate level (because the income passes through to your personal income tax return), but you may have to pay the Texas franchise tax and other state taxes. Taxes are confusing, so learn more about our tax and bookkeeping services!

Can One Person Be in an S-Corp?

Yes! If you're a solopreneur, you can still form and operate an S-Corp. Keep in mind that you'll still need to maintain the corporate formalities, such as appointing a board of directors (which can be just you), holding annual meetings (even if you're the only attendee), and maintaining detailed corporate records.

Form an S-Corp in Texas with Desi Tax®

Properly set up Texas S-Corp = smooth tax season. We can help you find clarity and form your business with confidence.

Learn more about our business formation services or get in touch!