Texas LLC Tax Elections — S-Corp, C-Corp & Partnership

One of the most powerful features of an LLC is tax flexibility. Your Texas LLC can be taxed as a disregarded entity, partnership, S-corporation, or C-corporation — without changing its legal structure. Choosing the right election can save thousands in annual taxes. For the full picture, see our Texas LLC tax guide.

Available Tax Elections for Texas LLCs

S-Corporation Election (Most Common)

The S-corp election is the most popular tax strategy for profitable Texas LLCs. Here is how it works:

The concept: Instead of all LLC profit being subject to self-employment tax (15.3%), you split income into two buckets:

1. Reasonable salary — subject to payroll taxes (you pay FICA as employer + employee)
2. Distributions — NOT subject to self-employment tax

Example (Texas LLC earning $150,000 net profit):

Without S-corp election:

• Self-employment tax: ~$21,200 (15.3% on $138,600 + 2.9% on remainder)
• This is on TOP of federal income tax

With S-corp election (salary set at $70,000):

• Payroll taxes on salary: ~$10,710 (15.3% on $70,000)
• Distributions ($80,000): $0 in self-employment/payroll tax
• Savings: ~$10,490/year

How to elect:

• File Form 2553 with the IRS
• Deadline: by March 15 of the tax year you want the election to take effect (or within 75 days of formation for new LLCs)
• Late election relief is available if you have reasonable cause

Ongoing S-corp requirements:

• Pay yourself a "reasonable salary" via W-2 (must be comparable to what you'd pay someone else to do your job)
• Run payroll (quarterly payroll tax deposits, annual W-2, Form 940/941)
• File Form 1120-S annually (due March 15, or September 15 with extension)
• Issue K-1s to all members

Texas-specific note: The S-corp election does not affect your Texas franchise tax obligation. Your LLC still files the franchise tax report based on total revenue. However, since there is no Texas income tax, the S-corp savings are purely federal — you do not get a double benefit at the state level (unlike in states with income taxes where S-corp can reduce both federal and state tax).

When S-Corp Makes Sense for Texas LLCs

Good candidates:

• Net profit consistently above $50,000-$80,000
• Owner actively works in the business
• Simple ownership structure (one owner, or owners with equal participation)
• Business has stabilized (predictable income)

Poor candidates:

• Net profit under $40,000 — payroll costs eat up the savings
• Real estate rental income — passive income is already exempt from SE tax for most LLCs
• Multiple members with very different roles — reasonable salary determinations become complex
• Plan to sell the business soon — S-corp can create complications with asset sales

C-Corporation Election

Less common for small LLCs, but relevant in specific situations:

When it makes sense:

• You want to retain significant earnings in the business for reinvestment
• You need corporate fringe benefits (employer-paid health insurance for >2% shareholders is not deductible in an S-corp but is in a C-corp)
• You are raising venture capital (VCs prefer C-corp structure)
• You plan to issue stock options (not applicable to LLC interests)

Texas consideration: Because there is no Texas corporate income tax, a C-corp elected Texas LLC pays only the 21% federal corporate rate — lower than in states that add 5-10%+ corporate tax on top. However, double taxation on distributions (corporate tax + qualified dividend tax) typically makes this worse for small businesses distributing profits.

How to elect: File Form 8832 (Entity Classification Election) with the IRS.

Partnership Election (Multi-Member Default)

The partnership default is often the best choice for multi-member LLCs with:

• Members contributing different amounts of capital and labor
• Need for "special allocations" (distributing tax items differently than ownership percentages)
• Real estate LLCs benefiting from depreciation allocations
• Entities where self-employment tax is minimal (passive investors)

Texas advantage: With no state income tax, partnership allocations are simpler — you only need to worry about federal allocation rules, not state-level differences.

FAQ

Can I switch between tax elections?

Yes, but with restrictions. You can revoke an S-corp election effective for the following tax year. Switching from C-corp back to partnership has a 60-month waiting period. Consult your CPA before making changes.

How does the S-corp election affect my Texas franchise tax?

It does not change your franchise tax obligation. The LLC still files based on total revenue. The S-corp election only affects federal income and self-employment taxes.

What is "reasonable compensation" for S-corp owners?

The IRS requires S-corp owner-employees to receive a salary comparable to what you would pay someone else for the same work. Factors: industry, geographic area, experience, hours worked. Setting salary too low triggers IRS scrutiny. A good rule of thumb: at least 40-60% of net profit, or the market rate for your role — whichever is higher.

Do I need a CPA to make the S-corp election?

Not legally required to file Form 2553, but strongly recommended to have a CPA (1) confirm S-corp makes sense for your income level, (2) set the right salary amount, (3) handle payroll compliance, and (4) file Form 1120-S. The costs of CPA + payroll service ($2,000-$5,000/year) must be weighed against the tax savings.

When should I make the election — at formation or later?

Most advisors recommend waiting until your LLC is consistently profitable above $50,000-$80,000 before electing S-corp. This avoids the cost and complexity of payroll when you are not yet earning enough for the tax savings to justify it. You can always elect later — the deadline is March 15 of the year you want it to start.