How to Start an S Corp in Texas: Federal Election, State Franchise Tax

An S corporation is a federal tax designation, not a business structure. In Texas, you form a corporation or LLC first, then elect S corp tax treatment with the IRS using Form 2553. This election lets your business avoid double taxation while keeping liability protection. Texas has no state income tax and no separate state S corp filing requirement, which simplifies the process but introduces specific franchise tax and reporting obligations you need to understand.

What You Need to Know Before You Start

S Corp vs. C Corp vs. LLC in Texas

An S corp is a tax election available to corporations and LLCs. The entity itself is formed as a corporation (using Form 201) or an LLC (using Form 205). The S election is then filed federally with Form 2553. In Texas, both structures cost $300 to file with the Secretary of State.

The S corp election eliminates double taxation. A C corporation pays corporate income tax, and shareholders pay income tax on dividends. An S corp passes income through to owners who report it on personal returns. This avoids federal tax at the entity level. However, Texas has no corporate income tax, so the main benefit is at the federal level.

Owners of S corps must take reasonable W-2 wages for work they perform. This is an IRS requirement, not a Texas rule, but it directly affects your tax burden. You cannot just take all income as a distribution to avoid payroll taxes.

Texas Franchise Tax and S Corporations

S corporations and LLCs are both subject to Texas franchise tax, a state privilege tax administered by the Texas Comptroller. The no-tax-due revenue threshold for 2026 and 2027 is $2,650,000. If your gross revenue is at or below that amount, you owe no tax but must still file a Public Information Report (PIR) each year.

Above that threshold, the franchise tax rate is 0.375 percent for retail and wholesale businesses and 0.75 percent for all other business types. There is also an EZ Computation rate of 0.331 percent available for entities under $20 million in total revenue.

The franchise tax includes a compensation deduction. You can deduct W-2 wages you pay to yourself and other employees, up to $480,000 per individual, from your tax margin. This deduction incentivizes paying reasonable W-2 compensation to owners who work in the business.

Registered Agent Requirement

Every corporation and LLC in Texas must maintain a registered agent and registered office in the state. The agent can be an individual who is a Texas resident or a domestic or foreign entity qualified to do business in Texas. The entity itself cannot be its own registered agent. The registered office must be a physical street address, not a post office box. The agent must consent in writing or electronically. There is no fee to file the initial registered agent information with your formation documents, but changes cost $15.

Timeline and Cost Summary

Forming a Texas S corp involves two filings: the state formation and the federal election. The state filing costs $300 and can be processed in two to three business days with expedited service (additional fees). The federal Form 2553 has no filing fee. You must file Form 2553 no later than 2 months and 15 days after the first day of the tax year in which you want the S election to take effect.

Step-by-Step: How to Form an S Corp in Texas

Step 1: Choose Between a Corporation and an LLC

Decide whether to form a corporation (filing Form 201) or an LLC (filing Form 205). Both can elect S corp status. Corporations have more rigid requirements: they require bylaws, a board of directors, and annual meetings. LLCs are more flexible and require an operating agreement but have fewer formalities. For tax purposes, the S election works identically with either structure. Cost is the same: $300 for either form.

If you already have an LLC and want S corp tax treatment, you can file Form 2553 without forming a new corporation. The LLC will be taxed as an S corp.

Step 2: Check Name Availability

Your business name must be distinguishable in the records of the Texas Secretary of State from any other existing domestic or registered foreign entity. Check availability at the Secretary of State's business search page: https://www.sos.state.tx.us/corp/searches.shtml. You can call (512) 463-5555 for preliminary availability confirmation by phone.

Your name must include an organizational designation. For a corporation, use "Corporation," "Corp.," "Incorporated," "Inc.," "Company," or "Co." For an LLC, use "Limited Liability Company," "Limited Company," "LLC," "L.L.C.," "LC," or "L.C."

Step 3: File the Certificate of Formation

File the Certificate of Formation with the Texas Secretary of State. Use Form 201 for a corporation or Form 205 for an LLC. Filing is done online through SOSDirect at https://direct.sos.state.tx.us/acct/acct-login.asp, by mail, or by hand delivery to the Secretary of State office in Austin.

Online filing through SOSDirect is fastest. The Secretary of State does not publish a guaranteed standard processing time, but electronic filings typically process faster than mailed documents. If you need a faster timeline, Texas Express expedite service is available: Standard Expedite ($50, processed within two to three business days), Next Day Expedite ($500, by close of business the next day for filings received by noon), and Same Day Expedite ($750, by close of business the same day for filings received by noon). These fees are in addition to the $300 filing fee.

The Certificate of Formation must include your entity name with the required designation, the registered agent and registered office, the initial directors or governing persons, the purpose, and the organizer. Check the current form for the full list.

Step 4: Obtain an EIN from the IRS

Apply for an Employer Identification Number (EIN) from the IRS at https://www.irs.gov/ein. You can apply online immediately and receive your EIN instantly. An EIN is required for payroll, opening a business bank account, and filing Form 2553 with the IRS. If you are a sole proprietor or single-member LLC before the S election, you may have used a Social Security Number for tax purposes; the S election requires an EIN.

Step 5: Draft Corporate Bylaws or an LLC Operating Agreement

If you formed a corporation, draft bylaws that outline the structure, duties of the board of directors, shareholder rights, and internal governance. If you formed an LLC, create an operating agreement that specifies member contributions, profit and loss allocation, management structure, and member rights. These are not filed with the state but are essential internal documents. Both should address how you will handle distributions and ensure compliance with S corp requirements.

Step 6: File Form 2553 with the IRS

File Form 2553 (Election by a Small Business Corporation) with the IRS to elect S corp tax treatment. The deadline is critical: you must file no later than 2 months and 15 days after the first day of the tax year in which you want the election to take effect. Missing this deadline means the election is not effective until the following tax year, or you must request late election relief from the IRS (which involves additional paperwork and potential fees).

For a new business, the tax year starts on the date of formation. If you form your corporation on June 1 and want the S election effective immediately, you must file Form 2553 by August 15 of that same year.

File Form 2553 with the IRS by mail to the address listed on the form or electronically through the IRS e-file system if you use a tax professional. Keep a copy for your records.

Step 7: Set Up Payroll and Obtain a Sales Tax Permit

An S corp with owners who work in the business must run payroll and issue W-2 forms. You are required to pay yourself reasonable compensation for work performed. This is not optional. Set up payroll processing through a payroll service or software, and register with the Texas Workforce Commission (TWC) for unemployment insurance. Register with the TWC through its online employer registration.

If your business sells taxable goods or services in Texas, register for a sales and use tax permit from the Texas Comptroller at https://comptroller.texas.gov/taxes/permit/. The permit is issued at no charge and typically takes two to three weeks to process.

Step 8: Open a Business Bank Account

Open a business bank account in the name of your S corp using your EIN. This separates personal and business finances and is essential for accounting and legal liability protection.

Ongoing Compliance Obligations for Texas S Corporations

Annual Franchise Tax Report

Every year by May 15, file a Public Information Report or Ownership Information Report with the Texas Comptroller, even if your revenue is below the $2,650,000 no-tax-due threshold. The report details your gross revenue and other business information. If you owe franchise tax (revenue above $2,650,000), the report is combined with your tax return. The report is due May 15 regardless of your federal tax year.

Federal Form 1120-S

File Form 1120-S (U.S. Income Tax Return for an S Corporation) with the IRS annually. This form reports the business income and losses passed through to shareholders. It is due on the 15th day of the third month following the end of your tax year (typically March 15 for a calendar-year business). Shareholders receive a Schedule K-1 showing their share of income or loss.

W-2 and 1099 Filings

Issue W-2 forms to yourself and any employees reporting W-2 wages. W-2s are due January 31. If you pay independent contractors, issue 1099-NEC forms if payments reach the IRS reporting threshold ($2,000 for payments made in 2026; confirm on IRS.gov).

Reasonable Compensation Requirement

The IRS monitors S corporations to ensure owners pay themselves reasonable W-2 compensation for work performed. There is no fixed threshold, but the IRS expects the W-2 amount to be reasonable given the business type and the owner's role. Underpaying yourself W-2 wages to minimize payroll taxes is a red flag. A safe approach is to pay yourself a salary in line with what similar businesses pay for similar roles, then take any remaining profit as a distribution.

Registered Agent and Office

Maintain a registered agent and registered office in Texas at all times. Notify the Secretary of State if the agent or office address changes; the filing fee is $15.

Tips and Common Mistakes to Avoid

Timing the S Election

The S election deadline is strict: 2 months and 15 days after the start of the tax year. Missing the deadline means your business operates as a C corporation or partnership (depending on entity type) for that year, which creates adverse tax consequences. File Form 2553 well before the deadline to avoid any delays.

Reasonable Compensation

Do not attempt to avoid payroll taxes by paying yourself all income as a distribution. The IRS requires reasonable W-2 wages. If you are audited and the IRS determines your W-2 is unreasonably low, you will owe back payroll taxes, interest, and penalties. Document your reasoning for salary decisions and adjust your strategy with a CPA.

Franchise Tax Compensation Deduction Cap

Remember that the franchise tax compensation deduction is capped at $480,000 per person. If you pay yourself $500,000 in W-2 wages, only $480,000 counts toward the deduction. Plan payroll with this in mind if you anticipate high revenues and multiple owners with significant W-2 compensation.

Distinguishable Name

Check name availability carefully before you file. If your name is not distinguishable from an existing entity, the Secretary of State will reject your application. Search again just before filing to catch any new filings by other businesses.

Registered Agent Consent

Ensure your registered agent has given written or electronic consent to serve before you file your Certificate of Formation. Naming someone without consent can delay your filing or result in rejection.

When to Consult a Professional

This article is informational only and does not constitute legal or tax advice. S corp elections and ongoing compliance involve both state and federal rules. Consult a qualified attorney and a CPA before electing S corp status. A tax professional can help you determine whether an S election is beneficial for your specific business, ensure you meet the reasonable compensation requirement, and file Form 2553 correctly. An attorney can draft your bylaws or operating agreement and ensure your registered agent and entity governance meet Texas requirements.

The S corp election is complex if you have multiple owners, plan significant outside income, or operate in multiple states. Professional guidance upfront saves time and money later and reduces the risk of IRS problems.

Key Takeaways

• An S corp is a federal tax election, not a Texas business structure. Form a corporation (Form 201) or LLC (Form 205) first, then elect S corp status by filing Form 2553 with the IRS.
• The cost to form is $300 for either entity type, filed with the Texas Secretary of State online through SOSDirect or by mail.
• The S election deadline is 2 months and 15 days after the start of the tax year. Missing this deadline is costly and difficult to fix.
• Texas has no corporate or state income tax, so the S corp benefit is at the federal level. Texas franchise tax still applies, with a no-tax-due threshold of $2,650,000 for 2026 and 2027.
• Owners must pay themselves reasonable W-2 wages. The IRS requires this and will challenge underpayment on audit.
• Every year by May 15, file a Public Information Report with the Texas Comptroller, even if you owe no tax.
• Consult a CPA and attorney to ensure the S election is right for your business and to handle the compliance obligations correctly.