There is a lot more to starting up a business than creating a product, drafting a business and marketing plan, and making a lot of revenue. The tax collector still needs to take their cut, and taxes–even outside of a business setting–can be complicated.
At Gonzalez & Arrambide, Inc. we want to help new entrepreneurs like you get up to speed on identifying what taxes may be applicable to their business by highlighting most of the ones that they may be responsible for paying down below.
Business Taxes in Texas
In contrast with other states, the low business taxes and lack of personal income in Texas gives the Lone Star State two advantages over many other states:
- Businesses keep more of the revenue they generate.
- Top talent individuals are attracted to the lack of personal income tax.
This is even better for small businesses. With the business tax rate already being low as is, it shrinks or decreases to zero for businesses whose revenues don’t exceed particular thresholds.
For instance, smaller businesses with less than $1.18 million in receipts pay $0 in business taxes–known as the zero-tax threshold or no-tax-due threshold. Bigger businesses that have over $1.18 million to $10 million in receipts only pay around 0.375 percent, and if you’re a sole proprietor or in a general partnership, you are exempt from the franchise tax.
For startups and entrepreneurs, this can make the few early years a little less stressful.
It is, however, important to keep in mind that Texas refers to its tax on businesses as a franchise tax, but the state doesn’t have a corporate income tax. To clarify, the difference between corporate income taxes and franchise taxes is that corporate income taxes apply to profit while franchise taxes are basically a mandatory fee for companies who have the privilege of doing business in a city or state–usually determined by the capital held by or the net worth of the business organization.
S and C Corporation Taxes
The S Corporation is popular among small businesses. Texas still requires S corporations to pay its franchise tax depending on the business’s annual revenue. This tax can only be as high as 1 percent, and individual shareholders in the company aren’t obligated to cover state taxes on their portions of the company’s income.
This advantage offers benefits to small S corporations whose annual revenues don’t pass the zero-tax threshold. In a sense, they work tax-free since tax isn’t established on the business itself or on the individuals who gain money from the business.
As companies grow from LLCS to S corporations and then ultimately a C corporation, so too will they be responsible to pay franchise taxes where they will follow the same zero-tax threshold rules mentioned above.
Limited Liability Company Taxes
LLC is the other common choice for small businesses. In most states, LLCs are entities that provide protection to business owners from some legal liabilities but give their incomes to those owners, who take care of the personal income tax instead of business income tax on their proceeds.
With S corporations, however, Texas goes against the national trend and charges the franchise tax to LLCs, which applies to every business type.
It is worth emphasizing that the income that goes to the owners as personal income isn’t imposed on state income tax in Texas.
Partnership and Sole Proprietorship Taxes
Most of Texas’ small businesses are partnerships that pay the franchise tax, whereas sole proprietorships don’t.
However, if a partnership is a business that is directly owned by individuals, meaning that the business income is distributed directly to them, partnerships and sole proprietorships are treated the same and aren’t charged the franchise tax.
The business owners are obligated to pay federal income tax on this income but not state tax, given that Texas doesn’t tax personal income.
Most partnerships in Texas, including LPs and LLPs, are assessed with the franchise tax.
The Virtual CFOs at Gonzalez & Arrambide are Available to Assist You
At Gonzalez & Arrambide, we offer our clients Virtual Chief Financial Officer (VCFO) services designed to help businesses manage their financial obligations efficiently without having the need of a full-time CFO, all at a reasonable rate that can save you a lot on startup costs.
Every dollar counts when it comes to running a business, and having an accurate report of your cash flow and how it is affected by taxes is crucial to staying afloat.