What's the difference between filing as a sole proprietor, LLC, and S-Corp in Texas?
The biggest thing to understand is that these aren’t three equal categories. Sole proprietorship and S-Corp are tax classifications. LLC is a legal structure. You can be an LLC and still file as a sole proprietor or as an S-Corp. That distinction trips up a lot of business owners.
If you operate as a sole proprietor, whether you formed a single-member LLC or not, you file a Schedule C on your personal tax return. All your business profit flows onto your 1040 and gets taxed as ordinary income. You also pay self-employment tax of 15.3% on the entire net profit. That covers Social Security and Medicare. On $100,000 in profit, you’re paying roughly $15,300 in self-employment tax on top of your income tax.
Forming an LLC in Texas gives you liability protection, but it doesn’t change how you file taxes by default. A single-member LLC is treated as a “disregarded entity” for federal purposes, meaning you still file Schedule C exactly like a sole proprietor. A multi-member LLC defaults to partnership filing on Form 1065. The LLC on its own doesn’t create any tax advantage. It’s what you elect to do with it that matters.
That’s where the S-Corp election comes in. You can elect S-Corp status for your LLC by filing Form 2553 with the IRS. As an S-Corp, you pay yourself a reasonable salary and take remaining profits as distributions. Your salary gets hit with payroll taxes at the same 15.3% rate, split between employer and employee portions. But the distributions don’t get that self-employment tax. If your LLC earns $150,000 and you pay yourself a $70,000 salary, you avoid self-employment tax on the remaining $80,000 in distributions. That’s roughly $12,000 in annual savings.
The S-Corp election isn’t free though. You have to run actual payroll, file quarterly payroll tax returns, and prepare a separate business return on Form 1120-S. The “reasonable salary” requirement is real and the IRS scrutinizes S-Corp owners who pay themselves too little to inflate their distributions. You’ll also have higher bookkeeping and business tax return preparation costs. If your business isn’t generating enough profit above a reasonable salary, those added costs eat up whatever you saved on self-employment tax.
Texas has no state income tax, so there’s no state-level income tax difference between these structures. However, Texas does have a franchise tax that applies to LLCs and corporations. The good news is businesses with total revenue under $2.47 million owe nothing, though you still need to file the annual report. Most small businesses in the Pearland and Greater Houston area fall well under that threshold.
As a general guideline, the S-Corp election starts making sense when your business profit consistently exceeds $50,000 to $60,000 after paying yourself a reasonable salary. Below that, the payroll costs, additional tax filing, and more complex bookkeeping offset the self-employment tax savings.
This is one of those decisions that looks straightforward on paper but involves a lot of variables specific to your situation. Your revenue, your reasonable salary in your industry, whether you have employees, and your growth plans all factor in. Working with a bookkeeper in Pearland who understands these structures can help you model the actual numbers so you’re making the decision based on your business, not a general rule of thumb.
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