Setting Up a Texas S Corporation
Texas small business owners typically know that incorporating a business reduces your risks (True.) And usually they also suspect incorporation can save taxes, too. (Also true.)
But people often don't know that the process for setting up a small business corporation, also known as an S corporation, requires only three steps:
Step 1: Set Up an LLC or a Corporation
You should create either a traditional corporation or a limited liability company as the first step in setting up an S corporation.
Here's why I say this: in order to create an S corporation, you need an "eligible entity," which is just an entity allowed to operate as an S corporation. A variety of entities are allowed to operate as S corporations. But for small businesses, almost always, a limited liability company (LLC) or a corporation will be your best "eligible entity" option.
To create a Texas LLC or corporation, you fill out a simple form which you can download from the Texas Secretary of State's website. The form asks for very basic information like the name you want to use for your new business, what the business does, and where the business operates.
When the Texas Secretary of State accepts your completed form (which is known as either the articles of formation or the articles of incorporation), your new entity exists and the state sends you a certificate of formation (for an LLC) or a certificate of incorporation (for a corporation). These documents "certify" that your new LLC or corporation truly exists.
Step 2: Obtain an Employer Identification Number
After the Texas Secretary of State certifies your LLC or corporation, you take the second step... obtaining a federal employer identification number, or EIN. To get an EIN, you fill out the one-page SS-4 form. This form is available at the Internal Revenue Service's website.
Note: The Internal Revenue Service's website also provides an online application for employer identification numbers. Though the online application is not always available, if the online application is available, use it. The online application gets you your EIN in a few minutes.
Step 3: Make the Subchapter S Election
After you receive the EIN number from the IRS, you file a form 2553 with the IRS service center in Ogden, Utah. The 2553 form, which is also available from the IRS website tells the IRS you want to use the Subchapter S rules for reporting and calculating your taxes.
Around eight to ten weeks after you submit your 2553, the IRS will respond to your request. Assuming you've correctly filled out the form, the IRS will approve your election.
Do-it-yourself vs. Professional Assistance
Many people pay an attorney, accountant or paralegal service (like LegalZoom) a few hundred or even a few thousand dollars to set up the entity and file the companion tax paperwork. However, if you feel like tackling this by yourself, by all means do so.
Furthermore, if you would like some coaching, just purchase one of our Texas do-it-yourself kits. As stated earlier, you choose between two options when setting up a Subchapter S corporation: the LLC option and the traditional corporation option.
Option 1: Using an LLC
In almost all cases, a small business should use the LLC option for the Subchapter S corporation. When businesses choose this option, the LLC version of the Texas S corporation kit helps. The Texas kit e-book includes detailed steps and descriptions on how to correctly fill out each form, links on where to find these forms online, and examples of the correctly filled-out forms. The LLC version of the kit also comes with two sample operating agreements, one for single member and one for multiple member LLCs.Purchase and Download
Option 2: Using a Traditional Corporation
In a few instances, forming a traditional corporation may be a better alternative than forming an LLC to base your S Corporation on. If you choose to use a traditional corporation, we sell a slightly longer e-book (35 pages) with detailed instructions on how to set up your S Corporation. The corporation version includes links to the websites where you can find the forms and examples of the completed forms. The kit also includes sample corporate by-laws, which can be used by you or your attorney as a starting point to create your own corporate by-laws.Purchase and Download
Additional Information You May Find Useful
If you want additional information about how to maximize the tax savings related to running a business or investment venture, you may also be interested in one of our downloadable e-books (see descriptions below). Each book covers a category of tax planning topics that easily save a business owner significant amounts of income or self-employment taxes (potentially thousands of dollars a year) and is instantly downloadable.
One of the most powerful tactics for saving small business taxes is maximizing your deductions. You can literally save thousands in taxes each year.Read More
Using an S corporation for your business? To maximize savings, you need to minimize the salary paid to shareholders. But this decision is tricky.Read More
Tax laws provide active real estate investors with giant tax planning loopholes. A little upfront planning on your part could save you thousands a year...Read More