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If you are starting a small business in Texas or thinking about changing your structure, two of the most common options are LLC and S-Corp. Both are pass-through entities, but they have key differences when it comes to taxes.
Let’s look at it simply.
An LLC is flexible and simple to run. The profit flows directly to you, and you report it on your personal tax return. The drawback is that all profit is subject to self-employment tax.
An S-Corp is not a separate type of business entity but a tax election. With an S-Corp, you must pay yourself a salary through payroll, but only that salary is subject to payroll taxes. Profit left over can be taken as distributions, which are not subject to self-employment tax.
If your LLC makes $120,000 in profit, all of it is subject to self-employment tax. If you elect S-Corp status and pay yourself a reasonable salary of $60,000, only that portion is subject to payroll tax. The other $60,000 comes out as distributions, which avoids the extra tax.
Since Texas has no state income tax, the difference between LLC and S-Corp is all about federal rules. This makes the potential savings from an S-Corp even more appealing for profitable businesses.
If your business is just starting out or your profit is modest, an LLC often makes more sense. It is cheaper and simpler. If your profit is higher and you want to reduce self-employment taxes, an S-Corp may give you a clear advantage.
An LLC is a legal entity. An S-Corp is a tax election. You can have an LLC that is taxed as an S-Corp, which is the most common setup for Texas owner-operators clearing $80K+ in net profit. The LLC gives you the legal liability protection (your personal assets are shielded from business debts). The S-Corp election changes how the IRS taxes the LLC's profits, splitting them between a W-2 salary (subject to payroll tax) and distributions (not subject to payroll tax). You file Form 2553 to make the election.
The breakeven point is usually $60,000 to $80,000 in net profit. Below that, the cost of payroll, the separate 1120-S return, and quarterly federal payroll filings eats the self-employment tax savings. Above $80,000, the savings clearly outweigh the cost. The other factor is how stable your income is. If you have wildly variable years (a great year followed by a bad year), the S-Corp election can be a headache because you have to keep paying yourself a reasonable W-2 salary even in slow months.
Yes, both filing types are subject to the Texas franchise tax. Texas does not have a state income tax on individuals or on pass-through entity profits, but it does have a gross receipts based franchise tax (sometimes called the margin tax). Most small businesses fall under the no-tax-due threshold (around $2.47M in revenue for 2026), which means you file a No Tax Due Report but owe nothing. Above that threshold, the franchise tax rate runs about 0.375% for retail/wholesale and 0.75% for everyone else.
Adam Traywick, CPA is the President and founding CPA of Adam Traywick, LLC, a Fort Worth CPA firm working with small business owners across home-services trades, hair salons, real estate, and insurance. He has over 20 years of experience helping owners optimize taxes, run cleaner books, and avoid the surprises that come from once-a-year accountants.
