According to the US Small Business Administration there were three million small businesses in Texas in 2021. This accounts for 99.8% of all businesses in Texas. Additionally, small businesses account for 4.9 million employees in the state which makes up 45.1% of the total employed population in Texas. Between March 2019 and March 2020 a total net increase of 8,339 new businesses opened as 63,872 closed and 72,211 new establishments opened. Employment also expanded in the state over the same period. Small businesses accounted for 60,952 closings as well as the majority of openings as well. Establishments in Texas created 1.2 million jobs while 1 million jobs were lost in the same period. This means there was a net increase in the number of jobs by 140,588. Small businesses made up the majority of both the gained and lost employment as they made up 92.4% of the total new jobs which were created.
These statistics highlight the importance of small businesses for both employment and economic development. The two most popular business entities for small business owners are the LLC and the C corporation. Both of these business entities provide limited liability asset protection to their owners. This means that a business’s liabilities cannot become the responsibility of the owner in a personal capacity. Both of these types of business entities can be converted into an S corporation. An S corporation is a tax classification which has been created by the IRS to give small businesses a means of avoiding double taxation. Double taxation is the process of being taxed twice on corporate income. Once at the corporate level and once on the personal level.
Filing Requirements For Texas S Corporations
There are five essential steps to starting an LLC and electing the S corporation status for tax purposes. Step one is to name the LLC which the individual has created and ensure that the name is unique and not similar to any other business name. Step two is to decide on who or which service an individual would like to use for their registered agent. Step three is to file the Certificate of Formation. The fourth step is to create an operating agreement so that the owner or owners understands their obligations for the company. The fifth and final step is the most important and this involves a business obtaining an EIN and filing Form 2553 to elect S corporation tax status.
An Employee Identification Number of EIN is like a social security number for a business. The IRS uses this to track businesses and ensure they are meeting their tax requirements. This is also the part of the process in which LLCs or C corporations can elect to become S corporations. Filling in the additional Form 2553 allows the IRS to accept or reject a business for its S corporation status. There are however a number of restrictions and requirements for a business to become an S corporation.
A business cannot have more than 100 shareholders and it also cannot have more than one type of share. Additionally, all shareholders must reside within the US and no foreign nationals are allowed to be shareholders. On top of this, there are also other regulations restricting what kind of business can become an S corporation. The tax classification was created to help small businesses avoid double taxation on their income and that is why a great deal of the requirements are in place. That is, to ensure that larger businesses are not using S corporation status as a means of tax avoidance. For more information on S corporations in Texas, consider this help resource.
Final Thoughts
The Texas business environment is expanding and it is recovering steadily from the effects of the coronavirus pandemic. This data also revealed how important small businesses are to the economy and to creating new employment opportunities. Creating an S corporation is a desirable goal because it allows a business owner to pass through their corporate income onto their personal tax return and only be required to be taxed once on the income. This can represent a considerable amount of savings for a small business.