Should an Austin business form an LLC or elect S-Corp status? 

For many Austin businesses, forming a Limited Liability Company (LLC) is often the preferred starting point because it offers flexibility and fewer administrative requirements. In some cases, electing S-Corp tax treatment can provide tax advantages as a business grows, depending on profitability, ownership structure, and long-term goals. To be clear, an LLC is a legal entity type, while an S-Corporation is a federal tax election – a distinction that is often misunderstood, even by entrepreneurs.

Starting a business in Austin’s vibrant tech and service economy is exciting. But one of the earliest and most crucial decisions you’ll make as a founder is which business entity to choose. This choice affects your personal liability exposure, tax obligations, operational complexity, and even how investors perceive your company – whether you’re launching a startup, opening a restaurant, forming a construction business, or investing in real estate.

In Texas, two of the most common options for early-stage companies are forming a Limited Liability Company (LLC) and electing S-Corporation (S-Corp) status. As experienced corporate attorneys based in Austin, the BCS Law team is here to walk you through the key differences and real-world implications for tech and service business founders.

 

What Is a “Business Entity,” and Why Does It Matter?

A business entity is a legally recognized organization created under state law that defines how your business operates, how profits are taxed, and what liability protection owners receive. In Texas, many businesses choose the following entity type and tax classification:

• Limited Liability Company (LLC): A flexible business structure that blends features of partnerships and corporations.
• S-Corporation (S-Corp): A tax status elected with the IRS that applies to eligible corporations and LLCs, allowing for pass-through taxation with potential payroll tax savings.

Choosing them requires thoughtful evaluation of your company’s goals, expected profit levels, ownership plans, and tolerance for administrative complexity.

 

Liability Protection: A Fundamental Business Concern

Both LLCs and S-Corps offer limited liability protection—a legal firewall that generally shields your personal assets (like your home and savings) from business debts and lawsuits. This protection is one of the most compelling reasons entrepreneurs avoid operating as sole proprietors or general partnerships.

However, this protection isn’t absolute. To maintain the “corporate veil,” you must:

• Maintain separate business and personal finances.
• Follow basic corporate formalities.
• Avoid commingling assets.

In certain cases, failure to do so may lead courts to pierce the veil and expose personal assets.

 

Taxation: S-Corp vs. LLC in Texas

A key practical distinction between these structures is how they are taxed.

LLC Tax Treatment

LLCs are typically subject to pass-through taxation, meaning the business itself doesn’t pay federal income tax. Instead, profits and losses pass through to members’ personal tax returns. In Texas, there’s no state income tax, but LLCs and S-Corps alike must file the Texas franchise tax report—though many small businesses fall below the current “no tax due” threshold, which is approximately $2.47 million in annual revenue, and owe nothing.¹

For federal tax purposes, LLC owners generally pay self-employment tax (~15.3%) on all net earnings, which covers Social Security and Medicare.

S-Corp Tax Treatment

An S-Corp is not a separate entity type; it is a federal tax election that changes how income is treated. The election is typically made by filing IRS Form 2553.²

Under S-Corp status:

• The business still enjoys pass-through taxation.
• Owners may pay themselves a reasonable salary subject to payroll taxes.
• Remaining profits can be distributed as dividends not subject to self-employment tax.

This structural nuance can reduce overall federal tax liabilities when your business reaches a level of profit where payroll tax savings outweigh the cost of additional compliance and payroll administration. 

 

Formation & Compliance: Costs and Complexity

Forming an LLC in Texas

To form an LLC in Austin or anywhere in Texas, you must file a Certificate of Formation with the Texas Secretary of State. You’ll also need a registered agent and an operating agreement to outline member rights and business procedures.

LLCs have minimal annual compliance requirements compared to corporations – no board, no mandatory meetings, and flexible management structures.

Electing S-Corp Status

If you want S-Corp treatment, you must:

1. First form a legal entity (either an LLC or corporation).
2. File IRS Form 2553 to elect S-Corp tax treatment.

Once that election is effective, your entity must:

• Run payroll for owner-employees.
• File an S-Corp tax return (Form 1120-S).
• Observe corporate record-keeping and employee compliance.

These requirements add complexity and potential ongoing costs – especially for early startups with limited staff.

 

Other Business Entity Types in Texas

This article focuses on LLC formation and S-Corp tax election, which are among the most common choices for Austin-area businesses. However, Texas law also recognizes several other business entity types, including:

• Sole Proprietorship
• General Partnership
• Corporation
• Limited Partnership (LP)
• Limited Liability Partnership (LLP)
• Additional variations used in Texas include Series LLCs and non-profit corporations

Each of these entity types differs in terms of liability exposure, taxation, filing requirements, and governance. As a result, business owners often consult legal and tax professionals to determine which structure best aligns with their specific goals and risk profile.

 

Ownership & Growth Considerations

LLCs: Flexibility and Simplicity

LLCs offer broad flexibility:

• Unlimited members, including non-U.S. citizens and entities.
• Flexible profit distribution as defined by the operating agreement.
• Simple management options (member-managed or manager-managed).

This makes LLCs ideal for many solo founders, small teams, and service-oriented businesses in Austin, including startups, construction companies, restaurants, and real estate ventures still refining their business model.

S-Corps: Growth, Limits & Requirements

An S-Corp imposes some key ownership restrictions:

• Maximum of 100 shareholders.
• Shareholders must generally be U.S. citizens or residents.
• Only one class of stock is permitted.

These rules limit the S-Corp’s appeal for businesses planning broad equity distribution or seeking outside investment from sophisticated firms.

However, if your Austin business plans steady profitability and owner salary optimization, the tax benefits might outweigh these limits.

 

So, Which Is Right for Your Austin Business?

In practice, the appropriate choice often depends on how and when a business expects to grow. Based on our experience advising Austin-area startups and other closely held businesses, the following considerations may be helpful when evaluating common business profiles:

When to Lean Toward an LLC

• You’re launching with modest initial profits.
• You value operational simplicity over tax optimization.
• You plan to keep the ownership structure flexible.
• You prefer fewer formalities.

When to Consider S-Corp Election

• Your business is already generating significant profits (often suggested around or above ~$80,000+).
• You want to reduce self-employment taxes legally.
• You’re ready to handle payroll, reasonable compensation rules (which are fact-specific under IRS guidance, not a fixed formula), and additional compliance requirements.

An LLC that later chooses an S-Corp tax election is a common strategic path: you benefit from the LLC’s flexibility in the early years and switch to S-Corp tax treatment when profit and administrative capacity justify it.

Working With an Austin Business Formation Lawyer

Navigating entity selection, tax elections, compliance rules, and growth planning can be complex. An Austin business formation lawyer with deep experience in corporate law can help you:

• Understand IRS requirements and Texas state regulations
• Evaluate projected profits and tax outcomes
• Draft operating agreements and corporate policies
• Stay compliant with ongoing reporting obligations

 This guidance is especially valuable for business owners forming startups, construction companies, restaurants, real estate entities, and other closely held businesses across Central Texas.

Final Thoughts: Forming an LLC vs. S-Corp in Austin

Choosing between forming an LLC in Austin TX and selecting S-Corp vs LLC Texas involves understanding liability protection, tax implications, and long-term business goals. For many Austin-area businesses, an LLC’s simplicity and flexibility often make it the starting point – especially when paired with thoughtful tax planning. However, S-Corp tax status can offer meaningful payroll tax savings as your business scales.

This guide offers a foundational overview – not legal advice. To fully understand your rights and options, we encourage you to consult experienced legal and tax professionals to tailor these insights to your unique circumstances.

When it comes to business law, Bollier Ciccone Stinson LLP consistently delivers smart and real-time legal solutions to clients throughout Austin and its surrounding areas. Notably, our Business Law practice is led by Tony Ciccone, a veteran business, construction, and real estate attorney who is not only Board Certified in Construction Law by the Texas Board of Legal Specialization, but also Martindale-Hubbell “AV Preeminent” rated.

Contact BCS Law today for a consultation, and let’s build your business the right way.

 

¹ Texas Comptroller of Public Accounts, Franchise Tax – No Tax Due Threshold

² Internal Revenue Service, Form 2553 and S-Corporation Election Guidance

 

About Bollier Ciccone Stinson LLP

Bollier Ciccone Stinson LLP is a boutique law firm in Austin, Texas, providing trusted legal representation in family law, high asset divorce and child custody, construction law, business law, and real estate law. Since 1990, the firm’s experienced attorneys have delivered strategic, personalized legal solutions and strong results for individuals, families, developers, property owners, and businesses.

Known for deep legal expertise, compassion, and a collaborative, team-based approach, Bollier Ciccone Stinson LLP offers comprehensive counsel in high-stakes matters, including contested custody and complex asset division, construction contracts and disputes, commercial and residential real estate transactions, business formation and litigation, and complex civil litigation. The firm’s attorneys are widely recognized for professional excellence, with many holding Board Certifications in their practice areas and receiving respected industry honors, reflecting the firm’s commitment to superior client service and ethical advocacy.

Bollier Ciccone Stinson LLP serves clients throughout Central Texas, including Austin, Round Rock, Georgetown, Taylor, Hutto, Cedar Park, Leander, Pflugerville, Manor, Bee Cave, Sunset Valley, Circle C, Westlake, Lake Travis, Dripping Springs, Driftwood, and across the entire State of Texas.

Learn more at BClawTX.com.