How to Incorporate in Texas vs. How to Start a Texas LLC

Here are the basic elements true of all LLCs and corporations that you can base your decision off of:

• Maintenance
  The LLC is known for its simple maintenance and upkeep. LLCs will need only minimal paperwork, have flexibility when a decision is needed, and have low annual upkeep. An LLC is the best choice if you have a small to medium-sized business and can only handle a low amount of maintenance. On the flip side, a corporation will require a high level of maintenance, both on a day-to-day and annual basis. Corporations have more legal formalities than an LLC, like electing a board of directors, holding shareholder meetings, and maintaining internal records such as meeting minutes and stock issuance.
• Tax Structure
  The LLC is not a separate taxable entity apart from its owners, making it a pass-through tax entity. Income and losses pass through the business and onto the members to report on their personal income tax return. LLCs are the simpler and less expensive option in terms of time and paperwork for business owners during tax season. Corporations are more advanced for a business owner to take care of during tax season. A standard corporation defaults to a tax structure called a C corporation, and is known for what’s called double taxation, where a business’s net income is taxed initially by a corporate tax, and then taxed again on personal income, after shareholders receive their profits (dividends) and losses. C corporations are typically taxed at a lower rate on profits, and have opportunities for tax deductions such as health care and travel, and can retain its earnings to be reinvested into the company’s growth. A corporation can potentially elect an S corporation tax status if it’s more beneficial. When you elect an S corporation tax status, your corporation becomes a pass-through entity, and is allowed tax advantages such as dividends not subject to self-employment tax.
• Prospective Investors
  Investors prefer putting their time and funds in a familiar and reputable business structure like a corporation. Entrepreneurs looking to expand their company in the future will most likely need investor funds, making the corporate entity the suitable choice. Investors are more comfortable investing their time and money in a traditional business structure that offers stock, like a corporation. Investors don’t have to worry about complicating their personal taxes when they invest in a corporation, and only get taxed on profits actually distributed to them, unlike an LLC. Investors view corporations as a dependable business structure that will provide them with a return on their investment. Having a corporate structure will profoundly impact the ability to raise investment money. Investors can still invest in an LLC by owning a percentage of that LLC. Owners of LLCs will have to pay taxes on their distributive shares, even if they haven’t received a distribution on those profits, and can’t issue stock, which is a turn-off for many investors. A corporation should be considered if you are serious about gaining investors.
• Business Prestige
  A business starts with its appearance. Having the “LLC” or “Inc” ending on your business name will provide your company with certain a level of prestige. These endings convey permanence and encourage trust from likely investors or clients, and show that you are serious about your business. While both entities provide a level of prestige, incorporating provides a higher level of prestige for your business, since the corporation is the oldest and most traditional entity type. Keep in mind the LLC has surpassed corporations in popularity in most states, and an LLC’s prestige is continually growing.

Note that whether you form an LLC or a corporation, you’ll need to file a Beneficial Ownership Information (BOI) Report with the Financial Crimes Enforcement Network (FinCEN) once your company is officially formed with the state of Texas. This report provides the federal government with identifying information about your company and those with the most control over profits and business operations. However, unlike state filings, the information shared in your report does not go on the public record and there is no filing fee. (Though if you don’t want to file this on your own, we offer BOI filing service for just $25.)

After discussing the basic elements that apply to all LLCs and corporations, next is to explore more specific characteristics of what makes a Texas LLC or Texas corporation unique from other states, which will bring us to the final answer on which entity is best for your business. Each state has its own set of statutes and tax laws that govern the way its businesses operate, and these unique details must be considered when choosing your business entity.

The information in this section will provide these specifics for the Texas LLC and the Texas corporation.

• No Personal Income Tax in Texas
  Texas is one of seven states that does not impose a personal income tax. This is a point of interest if you’re considering starting an LLC, since business income typically passes through LLC’s and onto the members to report on their personal income taxes. In Texas, this income that passes through will not be subject to any kind of taxation, providing a great perk for businesses.
• No Corporate Income Tax in Texas
  Texas is one of six states that does not impose a corporate income tax, saving corporations in Texas a significant amount of money every year.
• Texas Business Franchise Tax
  The Texas business franchise tax is a gross receipts tax on corporations and LLCs in Texas. This tax is at a rate of .575% for businesses with an annual revenue of under $10 million. If your business’s gross receipts are below a certain fluctuating threshold amount (for 2019, this is $1,180,000), you won’t need to pay a franchise tax at all. This franchise tax is surprisingly lower than most state franchise taxes, if it even applies at all, creating a great tax environment for your company.
• Texas LLC Protection From Creditors
  LLCs in Texas have a strong level of protection against creditors (a person who is owed funds or assets by a debtor of an LLC). In other states, creditors can have the courts order a foreclosure on the LLC. In Texas, creditors only have one remedy against the debtor of an LLC, which is a charging order that puts a lien on a debtor’s interest (funds and assets) and creditors then have a right to receive any distributions made to the debtor from the LLC, if the LLC makes a distribution. Often times, this leads to the creditor ending up with nothing, since creditors can’t order the LLC to make distributions (TX §101.112).

Texas LLC or Texas Corporation? Final Answer.
To decide whether an LLC or a corporation is right for your company, consider the size of your business, priority of investors, level of maintenance you’ll need, and the most beneficial tax structure for the future of your business.

The Texas LLC will be your best bet if you have a small to medium-sized business. LLCs in Texas stay true to design in terms of easy formation and maintenance, simple management, strong flexibility in decision-making, and limited liability protection. If growing your company large with investors is not your top priorities, you’re looking for the least expensive and sophisticated taxes and annual maintenance, and you’re just needing limited liability protection for your business, the LLC is your answer.

The Texas corporation will be your best bet if you plan to grow your business big with the funds from investors, and you have the means for the amount of maintenance required. a Texas corporation remains true to character in its substantial amount of paperwork, higher maintenance, and involved yet beneficial tax structure.

If you’re ready to start a Texas corporation, also referred to as incorporating, you must file the Certificate of Formation (Form 201) with the Texas Secretary of State. You can download the Certificate of Formation online at the Texas Secretary of State website. Once your Certificate of Formation is approved, your corporation is officially formed.

You can file the Certificate of Formation in the following ways:

Online at the Texas Secretary of State website

• Online at the Texas Secretary of State website (recommended)
• By postal mail
• In person at the Secretary of State office

We recommend filing your Texas Certificate of Formation on the website since it’s the fastest, most secure, and preferred method by the Secretary of State. The fee for filing your Certificate of Formation costs $300. The state of Texas processes business formation documents in about 5 – 7 days.

To complete your Texas Certificate of Formation, include the following information:

If you’re ready to form a Texas LLC, you must file the Certificate of Formation (Form 205) with the Texas Secretary of State. You can download the Certificate of Formation online at the Secretary of State website. Once your Certificate of Formation is approved, your LLC is officially formed.

You can file the Certificate of Formation in the following ways:

• Online at the Texas Secretary of State website (recommended)
• By postal mail
• In person at the Secretary of State office

We recommend filing your Texas Certificate of Formation on the website since it’s the fastest, most secure, and preferred method by the Secretary of State. The fee for filing your Certificate of Formation costs $300. The state of Texas processes business formation documents in about 5 – 7 days.

To complete the Texas Certificate of Formation, include the following information:

Keeping your business updated and in good standing with the state of Texas every year can be done by taking care of a few annual maintenance tasks.

• File your annual report (referred to as a public information report)
• File your Texas business tax returns

In this section, we’ll explain the basic instructions and resources you’ll need to help you take care of your tax-related upkeep and annual maintenance.

What is a Texas public information report?
A Texas public information report updates or confirms the records for your business, such as officer/member names and addresses. This report lets your business remain in good standing with the state and is submitted on the same document as the business franchise tax. Texas LLCs and Texas corporations that do business in the state are required to file information reports with the Texas Secretary of State.

How do I file my information report in Texas?
This report is filed alongside the Texas business franchise tax return, which can be filed either online at the Secretary of State website (recommended), or by postal mail.

When are Texas information reports due?
Your Texas information report is due on May 15th every year, with the first information report due the year after you’ve formed your business.

The filings can get complicated and you may need the help of a tax service or CPA to complete these requirements, but regardless of your accounting skills, we’re here to help get you started.

Check out our Texas Business Tax FAQ below:

Does Texas have a corporate income tax?
Texas is one of six states that does not impose a corporate income tax, saving corporations in Texas a significant amount of money every year.

Does Texas have a personal income tax?
Texas is one of seven states that does not impose a personal income tax. This is a point of interest if you’re considering starting an LLC, since business income typically passes through LLC’s and onto the members to report on their personal income taxes. In Texas, this income that passes through will not be subject to any kind of taxation.

Does Texas have a business franchise tax?
The Texas business franchise tax is a gross receipts tax on corporations and LLCs in Texas. This tax is at a rate of .575% for businesses with an annual revenue of under $10 million. If your business’s gross receipts are below a certain fluctuating threshold amount (for 2019, this is $1,180,000), you won’t need to pay a franchise tax at all.

What forms do you file for your Texas business taxes?
State Business Taxes:
For the Texas business franchise tax, you will need to submit Form 05-908 to the state.

Federal Business Taxes:
For C corporations, submit Form 1120 federal income tax return.
For S corporations, submit Form 1120S federal income tax return for an S corporation.
For single member LLCs, submit Schedule C as part of your Form 1040 individual income tax return.
For multi-member LLCs, submit Form 1065 partnership income tax return along with Schedule K-1.

When are my Texas business tax returns due?
Your Texas business franchise tax return is due on May 15th every year, with the initial return due the year after you’ve formed your business.