Choosing a Texas business entity

Start with the thing that confuses everyone

Three of the four options people compare are Texas entity types. One of them is not. An S corporation is a federal tax election, not a form of company, and there is no such thing as an S corporation in the Texas Business Organizations Code. You form an LLC or a corporation under state law, then you decide separately how the Internal Revenue Service will treat it.

Which means the real question is two questions wearing one coat. What entity do I form, and how do I want it taxed. A Texas LLC can be taxed as a disregarded entity, a partnership, a C corporation or an S corporation. Most people asking whether to be an LLC or an S corp are asking whether their LLC should make an election, and the answer to that turns on payroll, not on liability.

An LLC files Form 2553 to make the election, and it does not need to file Form 8832 first. The deadline is two months and fifteen days after the start of the tax year the election is meant to cover, or any time in the year before.

What each one costs to start, and what Texas actually requires

The fee difference is the least important line in that table and it is the one people fixate on. Three hundred dollars either way does not decide anything.

What Texas does require is a registered agent with a street address in this state where process can be personally served. A mailbox service does not satisfy it. The agent has to have actually consented, and naming one on the certificate of formation is an affirmation that they did.

What Texas does not require is a written agreement among the owners. Texas calls it a company agreement, not an operating agreement, it is never filed with the Secretary of State, and the statute is permissive about whether you have one at all. That permission is the single most expensive thing in Texas entity law. The agreement binds a member whether or not they signed it, and amending it takes the consent of every member unless the agreement says otherwise. Companies that skip it discover both facts at the worst possible moment.

The franchise tax, with the current numbers

Texas has no individual income tax and cannot get one without a constitutional amendment, since Article VIII, Section 24-a was adopted in 2019. What Texas has instead is the franchise tax, and this is where most published guidance is out of date.

Margin is the lesser of four figures: total revenue times seventy percent, total revenue minus one million dollars, total revenue minus cost of goods sold, or total revenue minus compensation. Then it is apportioned to Texas. The compensation route is capped per person at the figure in the table, which moves every two years under the indexing provision in Tex. Tax Code § 171.006. The statute itself still reads $300,000, so a page quoting the statute is quoting a figure no filer has used in years.

Two things matter more than the rate. The first: being under the threshold does not mean filing nothing. It means owing nothing. A Public Information Report or an Ownership Information Report is still due every May 15, and companies forfeit their charter over exactly this misunderstanding. What forfeiture actually does, and what it exposes officers and directors to, is set out at Texas franchise tax forfeiture.

The second: the No Tax Due Report no longer exists. Form 05-163 was discontinued for report year 2024 and later, and the Comptroller states plainly that it is not available for 2026. Any guidance telling a Texas owner to file one is pointing at a withdrawn form.

Who pays is its own trap. LLCs pay, including single-member LLCs the IRS disregards. S corporations pay. Partnerships pay. Limited liability partnerships pay. The two that do not are a sole proprietorship and a general partnership owned entirely by natural persons that has not registered as an LLP. Registering as an LLP is what pulls a general partnership into the tax.

Self-employment tax, which is what people actually mean

When an owner asks whether to be an S corp, this is almost always the question underneath. Self-employment tax runs 12.4 percent for Social Security up to a wage base of $184,500 in 2026, plus 2.9 percent for Medicare with no ceiling, plus an additional 0.9 percent above $200,000 for a single filer or $250,000 filing jointly. Those last thresholds have not moved since 2013 and are not indexed, so more people cross them every year without anything changing.

The mechanism is narrow and worth stating exactly. Under a ruling that has been on the books since 1959, an S corporation shareholder's share of undistributed taxable income is not self-employment income, because it is not derived from a trade or business the shareholder carries on. Wages are. So an owner who takes part of the return as salary and part as a distribution pays employment tax on the first part only.

The constraint is reasonable compensation, and the Service has litigated it repeatedly and won. Payments to a shareholder-officer must be treated as wages to the extent they are reasonable compensation for services actually rendered. The factors the IRS applies are published: training and experience, duties, time devoted, dividend history, what the company pays non-shareholder employees, and what comparable businesses pay for similar work. An owner paying himself a token salary and calling the rest a distribution is running a position the Eighth Circuit has already rejected.

Set against the saving: payroll registration and quarterly filings, a separate return on Form 1120-S, and a restriction most people never hear about. The election requires one class of stock, which in an LLC means the company agreement's distribution and liquidation provisions have to give every member identical economic rights. A tiered waterfall, the ordinary structure when anyone invests, is incompatible with the election.

Licensed professions, where the rules are different and mostly misreported

If your work requires a Texas license, Title 7 of the Business Organizations Code may control what you are allowed to form. Two points get published wrong constantly.

Not every licensed professional needs a professional entity. Per the Secretary of State's own guide, certified public accountants, architects, engineers, chiropractors and real estate brokers may use an ordinary LLC. Attorneys, physicians, dentists, veterinarians, optometrists and nurses may not. That guide carries a 2017 revision date, so confirm with the relevant licensing board before relying on it for a specific practice. A PLLC does not shield you from your own malpractice. This is the one that surprises people. Section 301.010 makes the entity jointly and severally liable for the negligence of its owners, officers, employees and agents in providing professional service, and it insulates the other owners from that liability. It says nothing that protects the person who committed the act. The professional entity is insulation between partners. It is not a substitute for malpractice coverage.

One structural note worth having: a Texas PLLC is not its own statutory regime. Chapter 304 is a single sentence providing that Title 3, the LLC title, applies to a professional limited liability company unless Title 7 conflicts. A PLLC is a Chapter 101 LLC with overlays.

The series LLC, and the condition nobody quotes

Texas lets a company agreement establish separate series inside one LLC, each with its own assets, members and purposes. Done properly, the debts of one series cannot be enforced against the assets of another. Done improperly, you have one LLC with extra paperwork.

The separation under § 101.602(b) applies only if all three of these are true. The records for the series account for its assets separately from every other series and from the company. The company agreement states the limitation. And the certificate of formation carries notice of it. Miss one and the shield does not exist. Most published summaries mention the recordkeeping and omit the other two.

Since June 1, 2022 Texas has had two kinds. A protected series is created in the company agreement alone. A registered series is additionally filed with the Secretary of State for $300 and gets a name containing the parent's name. Anything written before mid-2022 does not know the distinction exists.

For franchise tax the whole thing is one taxpayer. The Comptroller treats a series LLC as a single legal entity filing one report under one taxpayer number, not as a combined group. That advantage stops at the state line. California treats each series as a separate LLC owing its own annual tax and filing its own return. A structure that is one filing in Texas can become many at $800 apiece for a company with California operations.

When outside money is involved, the decision gets made for you

Three mechanics do most of the work here, and none of them is about liability.

Qualified small business stock requires a C corporation. Section 1202 excludes gain on stock of a C corporation acquired at original issue, and an LLC taxed as a partnership simply cannot issue it. The provision was rewritten on July 4, 2025 and the current terms are better than the ones most guidance still describes. For stock acquired after that date the exclusion is tiered: fifty percent at three years, seventy-five at four, one hundred at five. The per-issuer cap rose from ten million dollars to fifteen, indexed after 2026, and the issuer's gross assets ceiling rose from fifty million to seventy-five. Stock acquired on or before July 4, 2025 stays on the old five-year, ten-million regime.

There is a large exclusion inside it that a Granbury or Fort Worth audience should hear plainly. Section 1202 does not reach businesses whose principal asset is the reputation or skill of employees. Law, health, accounting, engineering, architecture, actuarial science, consulting, financial services, athletics and the performing arts are excluded by statute, as are banking, insurance, farming, extractive industries and restaurants and hotels. A professional practice does not get this benefit no matter how it is organised.

Incentive stock options require a corporation. There is no LLC equivalent. An LLC grants profits interests instead, which under Revenue Procedure 93-27 are generally not a taxable event on receipt, and Revenue Procedure 2001-43 extends that to unvested grants. The consequence founders miss is not the tax. It is that the recipient becomes a partner, which ends their W-2 treatment and changes how they file. Venture terms are drafted for a Delaware C corporation. Stated carefully, because the common version overstates it: nothing requires Delaware. But the model financing documents the industry uses are built around a Delaware corporation, and converting later costs money and time. If institutional capital is genuinely on the horizon, that is a reason to talk it through before forming, not after.

You can change your mind, and it is less dramatic than it sounds

Chapter 10, Subchapter C of the Business Organizations Code lets a Texas entity convert into a different type by adopting a plan of conversion. The effect provision is the part worth reading. The converting entity continues to exist without interruption in the new form. Property vests without reversion, without any further act, and without any transfer or assignment having occurred. Liabilities continue undiminished. Pending lawsuits carry on with no substitution of parties.

So converting an LLC to a corporation is not forming a new company and moving everything across. It is the same company in a different coat, for $300 plus the formation fee for whatever it becomes. One limit: a conversion cannot be effected if it would subject an owner to personal liability without that owner's consent.

The federal side is a separate analysis and not one to guess at. State law continuity does not decide the tax treatment; whether the entity's federal classification changes is what drives that, and it is worth an hour with a tax adviser before rather than a surprise after.

Six things commonly published about this that are now wrong

Not a criticism of anyone. This area moved a great deal in 2024 and 2025 and a page written before the changes reads as confidently as one written after.

1. Beneficial ownership reports. A very large number of Texas formation pages still tell owners they must file a beneficial ownership information report under the Corporate Transparency Act. As of an interim final rule published March 26, 2025, all entities created in the United States and their beneficial owners are exempt. Only foreign entities registered to do business here still report, and they need not report US persons. If you were told you had a filing obligation, check the date on the advice. 2. The No Tax Due Report. Discontinued for report year 2024 and later. It is not a form you can file. 3. The no tax due threshold. $2,650,000 for report years 2026 and 2027. Pages still quote $2,470,000, $1,230,000, $1,180,000 or $1,110,000, all of which were correct once. 4. The compensation deduction cap. $480,000 per person for 2026 and 2027, not the $300,000 printed in the statute and not the $400,000 or $450,000 of earlier years. 5. Qualified small business stock. The ten million dollar cap, the fifty million asset ceiling and the flat five-year holding period all describe the pre-July 2025 rules. 6. Fiduciary duties in an LLC company agreement. Senate Bill 29 amended § 101.401 effective May 14, 2025, and the section heading changed with it. A Texas company agreement may now expand, restrict or eliminate duties, including fiduciary duties. Worth knowing that the state's own statutes site was still serving the pre-amendment text of that section when we checked, so verifying against the official source can itself produce the wrong answer here. The consequences of that change are larger than the entity-choice question that led you here.

So which one

For most Texas businesses with no outside investors, an LLC is the default and the reasons are boring. It is flexible, the governance can be written to fit the actual owners, and the tax treatment stays open. Add the S election when payroll is large enough that the employment tax saving covers the compliance cost, and not before.

Form a C corporation when institutional capital, an option pool or Section 1202 treatment are near-term rather than hoped-for. Form a professional entity when your licensing board requires it, and check whether it actually does. Consider a series LLC when you hold separable assets and will keep separate records for each pool, and think hard about it if you operate in California.

The part that matters more than any of it: whichever you pick, the agreement among the owners decides what happens when someone dies, divorces, quits or wants out, and Texas does not require you to have one. Nearly every ownership dispute I see traces to a document that was never written or was written for a company that no longer exists.

Figures current for report year 2026 and tax year 2026, checked August 15, 2026. Franchise tax numbers change on a two-year cycle and the Social Security wage base changes annually. This is general information about Texas law, not advice about your company.

Common questions

Is an S corp better than an LLC in Texas?

They are not alternatives. An S corporation is a federal tax election and an LLC is a Texas entity, and a Texas LLC can make the election. The real question is whether your payroll is large enough that the self-employment tax saving exceeds the cost of running payroll and filing a separate return.

Does an LLC protect my personal assets in Texas?

Partly, and less than most pages suggest. Section 21.223, which reaches LLCs through Section 101.002, bars owner liability on alter ego theories for the entity's contractual obligations, and for failing to observe formalities. It does not by its terms cover tort or statutory claims. And it gives way entirely where someone shows actual fraud perpetrated primarily for the owner's direct personal benefit.

What does it cost to form an LLC in Texas?

$300 to the Secretary of State for the certificate of formation. A professional association or limited partnership is $750, and an LLP registration is $200 per partner. The filing fee is the smallest cost in the decision.

Do I have to file a beneficial ownership report?

Almost certainly not. Under an interim final rule published March 26, 2025, entities created in the United States and their beneficial owners are exempt from beneficial ownership reporting. Only foreign entities registered to do business in the United States still report. A great deal of guidance written in 2024 says otherwise.

What is the Texas franchise tax threshold for 2026?

$2,650,000 in annualized total revenue for report years 2026 and 2027. Below it you owe no tax, but you still have to file a Public Information Report or Ownership Information Report by May 15. The No Tax Due Report was discontinued for report year 2024 and later.

Does a single-member LLC pay Texas franchise tax?

Yes. The Comptroller treats a single-member LLC as a taxable entity even where the IRS disregards it for federal purposes. A sole proprietorship is not a taxable entity, which is a real difference between the two.

Do I need a PLLC if I am a licensed professional in Texas?

It depends on the profession. Per the Secretary of State's guide, CPAs, architects, engineers, chiropractors and real estate brokers may use an ordinary LLC. Attorneys, physicians, dentists, veterinarians, optometrists and nurses may not. Confirm with your licensing board, since that guide carries a 2017 revision date.

Will a PLLC protect me from a malpractice claim?

No. Section 301.010 makes the professional entity jointly and severally liable for the negligence of its owners and employees in providing professional service, and protects the other owners from that liability. It does nothing for the person who committed the act. That is what insurance is for.

Can I change my entity type later?

Yes. Chapter 10 lets a Texas entity convert into another type, and the statute says the entity continues to exist without interruption, with property vesting without any transfer and liabilities carrying over undiminished. $300 plus the formation fee. The federal tax consequences are a separate question worth asking first.

What is a series LLC and should I use one?

It lets one Texas LLC hold separate pools of assets that are shielded from each other, and for franchise tax it remains a single filer. The shield applies only if the records are kept separately, the company agreement states the limitation, and the certificate of formation gives notice of it. All three. And California treats each series as a separate LLC owing its own annual tax.

The entity matters less than the agreement among the owners. Almost every dispute traces to that document.

The words you'll hear

If this goes further, these are the terms that will come up, from us or from the other side. Each one links to a fuller explanation.

Limited Liability Company

A statutory business entity formed under TBOC Title 3 that combines limited liability for owners (members) with substantial flexibility in management, taxation, and internal governance.

C Corporation

A for-profit corporation taxed as a separate entity under Subchapter C of the Internal Revenue Code;.

Certificate of Formation

The public document filed with the Texas Secretary of State to bring a domestic filing entity into legal existence under Texas law.

Company Agreement

The principal governance document of a Texas LLC, the contract among members (and managers, if applicable) that establishes the LLC's internal rules.

Texas Franchise Tax

A privilege tax imposed by Texas on most taxable entities formed in or doing business in the state.

Qualified Small Business Stock (QSBS)

Stock that qualifies for the capital gains exclusion under Internal Revenue Code § 1202;.

Registered Agent

The person or organization designated by a Texas filing entity to receive service of process and other official communications on the entity's behalf.

Business Judgment Rule

A Texas substantive doctrine protecting corporate officers and directors from liability for decisions made in good faith and within the honest exercise of business judgment.