The Benefits that Texas Offers Entrepreneurs
Innovative companies like Tesla, Space X, Samsung, Apple, and General Motors Co. flock to Texas thanks to its abundant resources and excellent infrastructure, ensuring its fame as the manufacturing capital of the U.S.
Global corporations are not the only ones attracted to the state. Texas also boasts 3 million small businesses and healthy population growth, making it the second-most populous state with 29.5 million residents.
Texas Benefits for Entrepreneurs
Known for its business-friendly and sensible regulatory environment and no personal or corporate taxes, Texas also has a skilled and diverse workforce and easy access to world markets, thanks to its varied and robust infrastructure.
These benefits have helped Texas hold the “Best State for Business” title for two decades, ensuring increasing entrepreneur numbers.
Let’s analyze the benefits:
Low Business Taxes
One of the top advantages for entrepreneurs is the lower tax burdens since there is no corporate or income tax. Furthermore, businesses don’t pay sales tax on equipment and machinery for manufacturing, software and equipment, and for research and development-related materials.
Franchise tax replaces the corporate income tax with a franchise tax of 0.75%. However, businesses with less than $1.18 million in annual sales don’t pay the tax, and those making between $1.8 million and $10 million pay 0.375%.
Currently, the combined state and federal corporate tax rates for Texan businesses are at 21%, lower than the average for most states.
Pro Business Environment
Many states like California have strict regulations and don’t offer many incentives for businesses. However, Texas makes it easier for entrepreneurs of new or small companies to get the licensing, and it offers incentives.
Lower Costs of Doing Business
Texas is vast and affordable, making it a natural choice for companies to relocate from other states. Acquiring or renting corporate land is cheaper, and the state also has lower utility and transportation prices.
Infrastructure, Location, and Skilled Workforce
Located quite centrally in the U.S., Texas has the ideal location for employees and product transportation thanks to its plethora of air, road, rail, and sea infrastructures.
Fresh graduates from the state universities and an influx of people migrating to the state mean that entrepreneurs from all industries can find employees with the required skills.
Quick Business Formation
With online filings, the time required to start a business in Texas is minimal. Moreover, most smaller businesses in Texas prefer to start their business as an LLC, opting for the default LLC tax status of pass-through taxation. However, LLC owners in Texas, as elsewhere, also have the option of electing S Corp tax status.
Why Start an S Corp in Texas
Many business owners want to reduce the tax burden of their business and opt for the IRS Subchapter S classification. However, business owners need to ensure this is the best strategy because the S Corp classification must meet specific requirements.
Suggested video: https://www.youtube.com/watch?v=tPcpBnwtWUU&ab_channel=TRUiC
Understanding S Corp Taxes
The owner of an S Corp is treated as a business employee and must earn a reasonable salary that matches the IRS guidelines. Of course, the owner must also pay the FICA and Medicare taxes on the salary. The S Corp owner does not pay self-employment tax. However, this saving must offset the higher accounting fees S Corps pay.
Who Can Elect S Corp Status
Not every LLC can seek S Corp status because it needs to cover the owner’s salary and at least $10,000 in annual distributions. If it doesn’t, then it offers no tax savings. Furthermore, the IRS requires that the business has only up to 100 shareholders that are private individuals and U.S. citizens or permanent residents.
Texas S Corp Filing Requirements
According to TRUiC, the company that provides valuable business information to new and existing business owners, the Texas S Corp filing requirements are straightforward. As a business owner, you follow all the steps required to form an LLC in the state.
These don’t differ from other states; you choose a name for your LLC, then decide on a registered agent and file these with your certificate of formation. Since the S Corp is a tax status, you elect it when requesting an EIN online from the IRS by filling in Form 2553.
Texas has become a trendy state for businesses, thanks to several benefits. Whatever type of business you start in the state, carefully consider and weigh the benefits of a default LLC to those of an S Corp. If your company matches the criteria and the tax savings outweigh the costs, then an S Corp might be the solution; if not, an LLC with its default tax status is the most popular form of pass-through taxation. Of course, you can always change to an S Corp to reap its benefits as your business grows.
This article has been published in accordance with Socialnomics’ disclosure policy.