Texas is home to a thriving business community, with over 3 million small businesses operating in the state. According to the Texas Secretary of State, more than 150,000 new business entities are formed in Texas each year, with LLCs and Corporations being among the most common choices. If you wish to start a business in Texas, one of the most crucial decisions you will make is choosing the right business structure. 

Choosing the right business structure is essential for protecting your personal assets, minimizing tax liabilities, and establishing credibility with customers and investors. Broadly, two most popular options are Limited Liability Companies (LLCs) and Corporations. Each structure offers unique benefits and requires specific steps for incorporation. They differ in terms of taxation, management structure, and ongoing requirements. To simplify things, this guide will explore everything you must know about LLC vs Corporation and how to form one in Texas through company formation services:  

What is an LLC? 

A Limited Liability Company (LLC) is a business structure that combines the personal liability protection of a corporation with the tax benefits and flexibility of a partnership. LLCs offer limited personal liability protection, pass-through taxation (profits/losses are passed to members' personal tax returns), flexible management structure, and are generally easier to establish and maintain compared to corporations. Key Benefits of an LLC in Texas include: 

• Limited personal liability protection
• Pass-through taxation (avoid double taxation)
• Flexible management structure
• Easier to establish and maintain

What is a Corporation? 

A corporation is a legal entity separate from its owners (shareholders). Like LLCs, corporations offer limited personal liability protection to shareholders. Additionally, corporations can raise capital through the sale of stock, have perpetual existence, and C-corporations may be eligible for certain tax benefits and deductions. However, C-corporations are subject to double taxation. Key Benefits of a Corporation in Texas include: 

• Limited personal liability protection
• Ability to raise capital through stock sales
• Perpetual existence
• Potential tax benefits for C-corporations
• Tax-deductible employee benefits

How to Choose the Right Entity for Your Business in Texas

When deciding between an LLC and a corporation in Texas, it's essential to consider various factors to determine which entity best suits your business needs. These include: 

Business Size and Growth Plans: LLCs are suitable for small businesses with limited growth potential, while corporations are better for businesses with significant growth plans or plans to seek outside investment.

Management Preferences: LLCs offer flexibility in management structure, allowing member-managed or manager-managed options, while corporations have a formal structure with a board of directors and officers.

Tax Implications: LLCs are pass-through entities, avoiding double taxation, while C-corporations face double taxation, but may have more deductions and credits. S-corporations offer a hybrid approach.

Liability Protection: Both LLCs and corporations offer limited personal liability protection, but maintaining proper formalities is crucial.

Ownership Structure: LLCs allow for customizable ownership percentages, while corporations have a more rigid structure with shareholders owning stock.

Regulatory Requirements: Some industries may have specific requirements, such as professional corporations (PCs) or professional limited liability companies (PLLCs).

Long-Term Business Goals: Corporations may be more advantageous for businesses planning to eventually sell or transfer ownership due to their perpetual existence, while LLCs can be more difficult to transfer.

Step-by-Step Guide to Forming an LLC and Corporation in Texas

Step 1: Choose a Unique Business Name and Check Availability 

For a corporation, your business name must include the word "Corporation," "Company," "Incorporated," or an abbreviation thereof. For an LLC, your name must include the words "Limited Liability Company," "Limited Company," or an abbreviation thereof.You can check the availability of your proposed business name on the Texas Secretary of State's website. If the name is available, you can proceed with the formation process.

Step 2: Appoint a Registered Agent 

Corporations and LLCs in Texas must appoint a registered agent to receive legal documents and official correspondence on behalf of the company. The registered agent must have a physical address in Texas and be available during normal business hours.

Step 3: File the Necessary Formation Documents 

To officially create your business entity, you will need to file the appropriate formation document with the Texas Secretary of State.

For a corporation, you will need to file a Certificate of Formation (Form #201), which includes information such as the corporation's name, registered agent, and the number of authorized shares.

For an LLC, you will need to file a Certificate of Formation (Form #205), which includes information such as the LLC's name, registered agent, and the management structure (member-managed or manager-managed).

You can file these documents online, by mail, or in person, along with the required filing fee.

Step 4: Create Governing Documents 

For corporations, you will need to create corporate bylaws, which are a set of rules that govern the internal operations of your corporation. While not legally required in Texas, adopting bylaws is a crucial step in establishing your corporation's management structure, shareholder rights, and board of directors' responsibilities. Consult with an attorney to draft comprehensive corporate bylaws.

For LLCs, you will need to create an operating agreement, which outlines the ownership, management, and operational procedures of the LLC. While not legally required in Texas, an operating agreement is highly recommended to ensure a clear understanding among the LLC members.

Step 5: Appoint Initial Directors/Managers and Hold First Meeting 

After filing your formation documents, you must appoint initial directors (for corporations) or managers (for member-managed LLCs) who will serve until the first annual meeting or member meeting.

For corporations, hold the first board of directors meeting to adopt bylaws, elect officers, and address other organizational matters.

For LLCs, hold the first member meeting (or manager meeting, if manager-managed) to adopt the operating agreement and address other organizational matters.

Step 6: Issue Stock Certificates or Membership Interests 

Corporations must issue stock certificates to their initial shareholders, representing their ownership stake in the company. LLCs must issue membership interests to their members, also representing their ownership stake.

Step 7: Obtain an Employer Identification Number (EIN) from the IRS 

Both corporations and LLCs need an EIN for tax purposes and opening business bank accounts. You can apply for an EIN online through the IRS website.

Step 8: Obtain Necessary Licenses and Permits

Obtain any necessary licenses and permits to operate your business in Texas legally. These may include a general business license, professional licenses, and zoning permits. Check with your local city or county government and the Texas Department of Licensing and Regulation for specific requirements.

Forms Associated with LLC and Corporation 

Entity Type	Form Number	Form Name
Corporation
	201	Certificate of Formation for a For-Profit Corporation
	202	Certificate of Formation for a Nonprofit Corporation
	203	Certificate of Formation for a Professional Corporation
LLC
	205	Certificate of Formation for a Limited Liability Company
	206	Certificate of Formation for a Professional Limited Liability Company
	632	Certificate of Conversion of a Corporation Converting to a Limited Liability Company
	635	Certificate of Conversion of a Limited Liability Company Converting to a General Partnership
	636	Certificate of Conversion of a Limited Liability Company Converting to a Corporation
	637	Certificate of Conversion of a Limited Liability Company Converting to a Limited Partnership
	638	Certificate of Conversion of a Limited Liability Company Converting to a Real Estate Investment Trust
Registered Agent / Registered Office
	401	Change of Registered Agent and/or Registered Office
	401-A	Consent of Registered Agent to Appointment
	402	Statement of Resignation of Registered Agent
	408	Statement of Change of Address by a Registered Agent
	428	Rejection of Appointment
Other Forms such Foreign Entities
	301	For-Profit Corporation Application for Registration - Application by a foreign for-profit corporation to transact business in Texas
	304	Limited Liability Company Application for Registration - Application by a foreign limited liability company to transact business in Texas
	305	Application by a foreign professional limited liability company to transact business in Texas.
	306	Application by a foreign limited partnership to transact business in Texas.
	307	Application by a foreign limited liability partnership or limited liability limited partnership to transact business in Texas
	422	Amendment to Registration To Disclose a Change Resulting from a Conversion or Merger
	427	Certificate of Abandonment
	651	Certificate of Termination of a Domestic Entity

 

Annual Filings for LLC and Corporation 

LLCs and Corporations formed in Texas must fulfill certain annual filing requirements to maintain their good standing with the state. These annual filings include:

Annual Report-  LLCs and Corporations in Texas are required to file an annual report with the Texas Secretary of State. This report provides the state with updated information about the entity, such as its registered agent, principal office, and any changes to the managerial personnel. The annual report filing deadline is typically the anniversary date of the entity's formation. Failure to file the annual report can result in penalties, administrative dissolution, or the entity being placed in a "not in good standing" status with the state.

Annual Franchise Tax Report- In Texas, LLCs and Corporations must file an annual franchise tax report and pay the corresponding tax to the Texas Comptroller's Office. The franchise tax is based on the entity's taxable margin. 

For report years 2024 and 2025:

• The no tax due threshold is $2,470,000. Entities with total revenue below this amount do not owe franchise tax.
• The tax rate is 0.375% for retail or wholesale businesses, and 0.75% for other businesses.
• The compensation deduction limit is $450,000.
• For the EZ computation method (allowed for entities with total revenue under $20 million), the tax rate is 0.331%.

The franchise tax report and payment are due each year on May 15th. If May 15 falls on a weekend or holiday, the due date is the next business day. Failing to file the franchise tax report and pay the required tax can result in penalties, interest, and the entity being placed in a "not in good standing" status with the state. A final franchise tax report must be filed in the year an entity plans to terminate, convert, merge or withdraw registration in Texas. Out-of-state entities must file a final report within 60 days of ceasing nexus in Texas.

Other Filings-  Depending on the entity type and nature of the business, there may be other annual filings required, such as sales tax returns, industry-specific reports, or employee-related forms. It is important for business owners to stay informed about all applicable annual tax filing requirements to ensure compliance and avoid potential penalties.

Filing BOI (Beneficial Ownership Information)

The Corporate Transparency Act (CTA) requires certain entities defined as "reporting companies" to file beneficial ownership information (BOI) directly with the Financial Crimes Enforcement Network (FinCEN). A reporting company is generally a corporation, limited liability company, or similar entity created by filing a document with a U.S. state or tribal secretary of state or similar office. Here are few key factors  to comply with the BOI reporting requirements:

• Reporting companies must file their initial BOI report electronically through FinCEN's secure BOI filing system at https://bssefiling.fincen.gov.
• Existing companies created before January 1, 2024 have until January 1, 2025 to file their initial BOI report.
• Companies formed on or after January 1, 2024 must file within 30-90 calendar days of receiving notice that their creation/registration is effective.
• The BOI report requires disclosure of the reporting company's beneficial owners, which are the individuals who directly or indirectly exercise substantial control or own/control at least 25% of the ownership interests.
• For companies formed after January 1, 2024, the BOI report must also identify the company applicants - the individuals who filed the document creating the entity.
• Reporting companies must file updated reports within 30 days if any reported information changes, such as new beneficial owners.

Failure to comply with the BOI reporting requirements can result in civil and criminal penalties specified in the CTA regulations. FinCEN has published substantial guidance on its website at www.fincen.gov/cta to help reporting companies understand and meet their obligations.

Read more: How to form LLC or Corporation through Company Formation Services 

Filing Options for LLCs and Corporations in Texas

When it comes to forming an LLC or Corporation in Texas, there are several Tax filing options available to business owners. Depending on your needs and preferences, you can choose to file your documents online, by mail, or in person at the Texas Secretary of State's office.

Online Filing - SOSDirect- The most convenient way to file your LLC or Corporation formation documents is through the Texas Secretary of State's online filing system, SOSDirect. This web-based portal allows you to:

- Complete and submit your Certificate of Formation electronically

- Pay the required filing fees securely online

- Receive your approved documents and certificates immediately

The SOSDirect system provides real-time status updates and the ability to print documents on-demand. It's a user-friendly option that saves time and eliminates the need for paper filing.

Filing by Mail- If you prefer to file your formation documents by mail, you can download the necessary forms from the Texas Secretary of State's website and send them in. The mailing address is:

In-Person Filing- You also have the option to file your LLC or Corporation documents in person at the Texas Secretary of State's office located in Austin. The physical address is:

Expedited Filing- Regardless of whether you choose to file online, by mail, or in person, you can also opt for expedited processing for an additional fee. This can reduce the standard processing time from 5-10 business days down to 1-2 business days.

Choosing the right filing option for your LLC or Corporation in Texas depends on your timeline, convenience, and preference. Be sure to review the current filing fees and processing times for each method on the Texas Secretary of State's website.

Final Thoughts 

By incorporating an LLC or corporation in Texas, you are taking a significant step towards protecting your personal assets, establishing credibility, and positioning your business for long-term success. With the right structure, planning, and support, your Texas business can thrive in this Lone Star State.  Remember to seek professional advice from attorneys and professional accountants such as NSKT to ensure that you choose the right entity for your company formation and comply with all legal and tax requirements. With careful planning and execution, your Texas LLC or corporation can provide a strong foundation for your business's success.

Useful Links: 

https://direct.sos.state.tx.us/help/help-corp.asp?pg=fee 

https://comptroller.texas.gov/taxes/franchise/ 

 https://www.sos.state.tx.us/corp/options.shtml 

https://www.sos.state.tx.us/corp/forms_boc.shtml#fbenc 

 

FAQs

• What information do I need to include in the Certificate of Formation? 

The key information required includes the entity name, registered agent and office, the purpose of the business, and the number of authorized shares (for Corporations). You'll also need to designate the management structure (member-managed or manager-managed) for an LLC.

• Can I reserve a business name before forming my LLC or Corporation? 

Yes, you can reserve a business name in Texas for up to 120 days before filing the Certificate of Formation. This ensures that no one else can claim the name while you're in the process of setting up your new entity.

• Can foreign entities register with the Texas Secretary of State? 

Yes, any foreign LLC or Corporation that wants to transact business in Texas must register with the Texas Secretary of State by filing the appropriate registration forms including form 301, 304,305, 306, 307. The filing process remains the same as mentioned above in the blog. 

• Can I file the Certificate of Formation for my LLC or Corporation online? 

Yes, you can file the Certificate of Formation and other business entity forms online through the Texas Secretary of State's SOSDirect portal. This allows you to submit the forms electronically and pay the filing fees.

• Is there a fee to use the SOSDirect online filing system?

There is no additional fee to use the SOSDirect system. You'll still need to pay the standard filing fees for the specific forms you're submitting, but there is no separate charge for using the online portal.