Tax-Efficient Entity Selection, Formation, and Structuring
Choosing the right business entity is a legal and tax decision with lasting consequences. Our attorneys guide clients through LLCs, corporations, partnerships, and complex holding structures, ensuring compliance with U.S. tax laws and state-specific requirements. Our attorneys design frameworks that balance liability protection, operational efficiency, and tax optimization—building structures that align with your long-term financial and strategic goals
Entity Choice and Tax Exposure in Texas
Choosing a business entity in Texas impacts taxes, liability, and operations. With no state income tax, pass-through entities like LLCs and partnerships let income flow to owners’ federal returns. LLCs and corporations owe franchise tax based on margin, unless revenue is $2.47 million or less—though filing is still required. Here's a breakdown of common options:
Limited Liability Company (LLC)
Offers liability protection and flexible management. Treated as pass-through for federal taxes; subject to Texas franchise tax if revenue exceeds the $2.47M no-tax-due threshold. Even if no tax is due, the entity must still file an information report.
S-Corporation
Passes income to shareholders’ federal returns, avoiding double taxation. Limited to 100 U.S. shareholders and one class of stock. In Texas, taxed like other corporations under franchise tax; owners must take reasonable compensation for payroll tax purposes.
C-Corporation
Allows unlimited shareholders and multiple classes of stock, making it a strong choice for businesses seeking outside investment or venture capital. At the federal level, C-corporations are taxed on their income, and shareholders are taxed again on dividends received, resulting in double taxation. In Texas, C-corporations are subject to franchise tax but are not affected by state income tax.
Partnerships
Income passes through to partners’ federal returns. General partnerships with only individuals as partners are exempt from franchise tax; LPs and LLPs are subject to it. Liability protection depends on partnership type.
Sole Proprietorships
Simplest structure with no formal filing beyond a DBA if using a trade name. Income reported on Schedule C; no franchise tax. Owner is personally liable for all debts and obligations.
Formation and Compliance
Forming a business in Texas involves key steps to establish legal standing and ensure smooth operations. Here's a clear guidance:
File with the Texas Secretary of State
Submit a Certificate of Formation for LLCs or Articles of Incorporation for corporations to register the entity.
Draft Governing Documents
Create operating agreements for LLCs or bylaws for corporations to outline management, ownership, and decision-making rules.
Obtain an Employer Identification Number (EIN)
Apply for an EIN from the IRS for federal tax purposes.
Complete State Registrations
Secure a sales tax permit from the Texas Comptroller if your business sells taxable goods or services.
Ongoing compliance keeps your entity in good standing and avoids penalties. Key requirements include:
File Annual Reportse
Submit reports to the Texas Secretary of State for corporations to maintain active status.
Submit Franchise Tax Reports
Report to the Comptroller by May 15 each year for LLCs and corporations, based on margin.
Make Tax Elections
File forms like IRS Form 2553 for S-corp status if applicable.
Maintain Records
Keep accurate documentation of meetings, financials, and transactions for audits or disputes.
Structuring for Growth and Succession
Structuring for growth and succession in Texas means planning for expansion and ownership changes with tax and legal impacts in mind. Pass-through entities benefit from no state income tax, but proactive planning helps avoid franchise and property tax surprises.
- Plan for Expansion, Mergers, and Acquisitions: Choose an entity type that supports scalability. Converting an LLC to a corporation can simplify mergers through stock issuance under Texas law. Assess franchise tax implications early and conduct due diligence to avoid post-merger surprises.
- Use Restructuring to Manage Tax Exposure:Reclassifying from an S-corp to an LLC may enhance federal deductions like Section 199A and reduce Texas franchise tax risks. Time reclassifications to coincide with loss carryforwards or low-income years to minimize gain recognition.
- Align Entity Structure with Estate Planning: Use buy-sell agreements backed by life insurance to manage ownership transitions. Coordinate with the appraisal district to ensure accurate property valuations and preserve tax basis for heirs or successors.
How The Wilson Firm Helps with Entity Selection, Formation, and Structuring
The Wilson Firm assists clients with selecting the optimal entity based on Texas franchise tax implications and federal pass-through benefits. We handle formation filings with the Texas Secretary of State, draft operating agreements or bylaws, and secure EINs and sales tax permits to ensure compliance from day one. Our attorneys also structure multi-entity setups for asset protection, incorporating holding companies to minimize liability and support succession under Texas Business Organizations Code.
Case Example
In 1984, Michael Dell founded PC's Limited in Austin, Texas, as a sole proprietorship selling custom-built computers from his dorm room at the University of Texas. He quickly restructured it into a corporation, incorporating in Delaware for better investor protection and flexibility, while keeping operations in Texas to leverage no state income tax. This entity selection allowed Dell to attract venture capital, go public in 1988, and expand globally without double taxation burdens. The structuring supported rapid growth, leading to $61 million in revenue by 1988 and eventual privatization in 2013.
Frequently Asked Questions
File a Certificate of Formation with the Texas Secretary of State using Form 205, including details like name and registered agent. Pay the $300 filing fee and draft an operating agreement to outline management and ownership, with no state income tax making LLCs popular for pass-through federal taxation.
An S-corp passes income to shareholders' federal returns to avoid double taxation but limits shareholders to 100 U.S. citizens or residents, while a C-corp allows unlimited shareholders but faces double taxation on profits and dividends. Both pay Texas franchise tax on margin, with S-corps requiring IRS Form 2553 election after incorporation.
Apply for an EIN online through the IRS website after forming your entity, providing details like business name and structure. The EIN is required for federal tax filings and banking, with no state income tax in Texas making it essential for pass-through entities like LLCs.
File an annual report with the Texas Secretary of State to maintain good standing, and submit a franchise tax report to the Comptroller by May 15, even if no tax is due. Failure to file can lead to late fees or entity forfeiture, with corporations needing to keep minutes and records under Texas Business Organizations Code.
Yes, convert by filing IRS Form 2553 for S-corp election after ensuring eligibility like 100 U.S. shareholders, then update your Texas filing with the Secretary of State if needed. The change allows pass-through taxation but requires reasonable compensation for owners to comply with payroll tax rules.
