Registering a Business in Texas
Most businesses in Texas that operate as sole proprietorships or partnerships will need to register with the county clerk’s office. If a business runs as a corporation, you will need to register with the Texas Secretary of State.
Additionally, businesses will need to determine if they will be liable for any state level taxes. State tax filings are done through the Texas Comptroller of Public Accounts.
S-Corporation Income Tax
While Texas does recognize the federal “S” election, S corporations are nevertheless subject to the state’s franchise tax. An individual shareholder, however, does not owe state tax on whatever portion of the corporation’s net income he or she ultimately receives.
LLC/Partnership Income Tax
LLCs and partnerships are not required to pay income tax to Texas. Instead, income from the business is distributed to individual LLC members or partners, who then pay Texas income tax on that amount with their personal return. LLCs and other limited liability companies are subject to the franchise tax, explained below.
General partnerships are not subject to the state’s franchise tax.
Corporate Franchise/Privilege Tax
Texas has a franchise tax that applies to most Texas businesses other than sole proprietorships and certain general partnerships.
The Texas franchise tax rate for most businesses is 0.75% of the “taxable margin.” The “taxable margin,” on which the franchise tax is based, is equal to the least of the following four amounts:
- 70% of total revenue
- 100% of total revenue minus cost of goods sold
- 100% of total revenue minus compensation.; or
- 100% of total revenue minus $1 million
There is no minimum franchise tax. Various possible state credits, discounts, and business variations may apply to your particular business, and are not covered here.
Individual Income Tax
Not required to file. Texas does not impose income tax on individuals.
Franchise tax returns are due on May 15th.
Texas does not require estimated payments.
Filing an Extension
A filing extension can be requested through the Texas WebFile system on the Comptroller website or by using form 05-907. This form allows a non-EFT payor a six month extension, or until November 15. An extension payment must total at least 90% of the tax due, or 100% of the tax reported as due on the prior franchise tax report. Extension form 05-907 can be found at the following link.
Returns not filed in a timely manner may be subject to a $50 penalty. If a business fails to pay tax due a 5% penalty will be imposed - if a payment is not filed within 30 days, an additional 5% will be be imposed.
If your business was formed or is located in another state, but generates income in Texas, it may be subject to Texas taxes. The rules for taxation of multistate businesses, including what constitutes nexus with a state for the purpose of various taxes, are complicated. If you run such a business, you should consult with a tax professional.
Texas Comptroller of Public Accounts:
Texas Secretary of State: