Austin Tax Blog


It may sound harsh, but most of the time, small business owners have to spend plenty of their valuable money and time on taxes. However, not all business structures have the same tax benefits and pitfalls. In fact, with the right business entity, you can enjoy certain tax savings..

Despite convoluted similarities and dissimilarities between different business structures, small businesses still have to abide by the tax rules set forth by the IRS. Primarily, S-Corp and LLC’s are perfect options to register a small business and avail numerous tax benefits.

That said, whether you qualify for specific tax benefits depends on your operational activities and capital. It means the last thing you want is to expect generalized expenses from the IRS. You need to make sure that your small business is not in violation of Taxes state law or federal law before and after registration.

Here’s a complete breakdown of basic organizational registrations and some of the tax benefits you can receive in Texas.

Small businesses drive the growth of the US economy. Although the tax laws, incentives, and rewards are often muddled, most business owners understand the opportunities that come with starting a small business. In fact, the majority of US employment businesses consist of small businesses.

Tax Benefits Revolve Around Your Business Structure

Sole Proprietorship

The simplest and most common type of business structure is a sole proprietorship. It just requires one individual who undertakes “sole” ownership of all business-related assets. He or she would also be responsible for all the liabilities of the small business. A sole proprietorship leads to little to no tax benefits.

General Partnership

Although it is the same as a sole proprietorship, the ownership revolves around two or even more persons. It essentially serves as a separate business structure from registered individuals. However, creditors can still hold partners accountable for any debts or liabilities. Like sole proprietorships, Partnerships also do not have much tax benefits..

For-Profit Corporation

The best way to describe Corporations is to think of individuals with limited liability, overlong duration, ownership transferability, and centralized management. Technically, this business structure is not ideal for small businesses. Corporations also have to register with Texas’ secretary of state.

Limited Liability Company (LLC)

LLC is arguably the most flexible business structure you can form as a small business. All you have to do is file a certificate of formation with Texas’ secretary of state.

The registration process mainly entails a few basic steps to get started as a small business in Texas. Once you determine your business structure with a tax professional, you should choose a business name. After that, you can apply for an EIN (Employee Identification Number), which is an ID for business owners. And before you start operational activities, make sure to get relevant business permits and licenses.

Practical Reasons to Select LLC Business Structure

As an LLC business owner, you are not completely liable to pay back liabilities, debts, or face court judgments. Similar ruleapply when the formation of a corporation takes place.

With a Limited Liability Company, you can enjoy levels of flexibility. It means you choose to become a part of unlimited members. The key thing is to remember that a member or owner of an LLC could be a single person, a corporation, or a partnership. Alternatively, business members or owners can take care of the LLC all by themselves or can hire a professional manager.

But the best aspect of LLC is complete freedom to pick how you prefer your small business to be taxed (i.e., as a corporation or a partnership). Remember, LLCs don’t need to issue any stock, which means there’s a division of profits just among the registered members without shareholders’ meetings.

It is relatively Easy to form an LLC

Just like a corporation entity, small businesses can form LLCs that are governed by Texas (state) law. Therefore, your first course of action should be to draft organizational documents in Texas. In short, the draft would state the name and address of your new small business in Texas. Submit the appropriate paperwork to the secretary of state and pay the mandatory filing fee.

Benefits of an LLC in Texas

Legal Tax Protection

Once you register as an LLC in Texas, you form an individual legal entity. And that legal entity will be able to safeguard your personal and business assets. Remember, the LLCs are independently responsible to pay back debts or uphold any obligations, whereas an LLC business owner is not. So, if your creditor ever decided to sue you, he or she can only file the lawsuit against the assets of LLC rather than yours.

Pass-through Taxes

One of the best tax benefits to form an LLC in Texas or any other state is pass-through taxation. It allows LLC owners not to file a corporate-status tax return at the end of the year. Instead, the LLC owner has the freedom to report annual profits and losses on their personal tax return. It is a great way to avoid double taxation for your small business. It is not your LLC that would have to pay taxes, but the owner.

Technically, the IRS maintains that LLCs with more than one owner default to a partnership in terms of taxes. Therefore, your LLC wouldn’t have to pay any taxes. Instead, deductible losses and taxable profits are passed through to the registered LLC owners who function as partners.

Get the ‘Right’ Forms

If you want to be in the good graces with the IRS, report your LLC income and expenses on Form 1065 partnership income return. Form 1065 should also include an attachment of Schedule K-1 for different registered LLC owners. Schedule K-1 simply highlights the share of each member’s income, tax credit, and deduction items. Afterward, these amounts are transferred to each member’s individual tax return.

Furthermore, if the ownership consists of a single member, you will need to use Schedule C to file as a sole proprietorship. Also, there’s a special rule for limited liability company’s business owners who don’t want to assume active roles in business activities. It allows small businesses to avoid self-employment taxes.

S Corp vs. LLC

S-Corp and LLCs have comparatively more similarities than differences:
Both business structures enjoy legal protection.
Both business entities are separate and require state/federal-specific registration guidelines.
Business owners or members are not held personally accountable for any liabilities or debts.
Both entities enjoy pass-through taxation. However, S-corps have to file a standard business tax return.

Final Thoughts

Small businesses are aware that the expensive aspects of their operational activities have always been interest and taxes. Whether you are switching to another business entity or registering for the first time in Texas, you need to avoid common tax pitfalls. Nevertheless, the first step is to register your small business to enjoy tax benefits that you ordinarily wouldn’t as a sole-proprietorship.

Moreover, double-check to ensure you are not violating IRS rules that may result in fines or penalties. Once you register your business structure in Texas, you will be able to save costs for years to come. If you find yourself in a dilemma, seek a tax expert’s professional services who can inform you about state/federal-specific tax benefits in detail.



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