Texas S Corporation
Advantages and Disadvantages

Texas S Corporation

Texas S Corporation and Advantages and Disadvantages

Advantages of the S Corporation:

  • The independent life of the corporation makes possible its continuation, and the relatively undisturbed continued operation of the business regardless of incapacity or death of one or more stockholders.

  • Fractional ownership shares are easily accommodated in the initial offering of stock.

  • The purchase, sale, and gifting of stock make it possible to have changes in ownership without disturbing the corporation's ability to conduct business.

  • The requirement that the corporation's finances and records be separate from the finances and records of stockholders reduces the risk of unrecognized equity liquidations.

  • With only a few exceptions, under the Subchapter S election for taxation as a partnership the S corporation pays no income taxes and corporation income or loss is passed through direct to the stockholders.

  • To the extent the corporate shield is maintained and other investments and savings of the stockholders are not at risk, the personal life of stockholders is simplified.

  • The annual meetings of stockholders and consultations with legal counsel can provide stimulus for improved communication within the stockholder group (often a family group) and can provide more comprehensive guidance for management.

  • Depending on the corporation's business record and the policies and practices of prospective lenders, access to credit and the ability to secure needed resources may be improved.

  • Earnings representing "return on investment" (interest, rental payments, etc.) are not subject to self-employment tax as long as stockholder-employees receive adequate compensation for labor and management of the business.

Disadvantages of the S Corporation:

  • Lenders may require personal guarantees from corporate officers as a condition of supplying credit, thus negating the limitation of liability.

  • Conflicts or disagreements among the stockholders may immobilize decision making.

  • Restrictions on the sale of stock and/or buy-back agreements included in the bylaws may prevent minority stockholders from being able to recover the value of their investment in the corporation.

  • Through the processes of gifting and inheritance, stock ownership can become divided among many persons who are not active in the business and they may become a voting block that does not support needs and decisions believed desirable by managing stockholders.

  • Over time, corporation paid benefits for stockholder-employees may become costly and exceed the ability of the business to pay.

  • Employment benefits such as life insurance, health insurance, and housing costs are taxable income to stockholder employees with 2 percent or more stock ownership and to employees who are directly related to persons owning 2 percent or more of the corporation stock.

  • If appreciated assets are owned by the corporation and the corporation is dissolved, significant income taxes on the appreciation amount will be generated.

Texas' 2009 Business Tax Climate Ranks 7th

Texas ranks 7th nationally in the nations State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property. Neighboring states ranked as follows: New Mexico (26th), Oklahoma (18th), Arkansas (35th) and Louisiana (33rd).

Texas' 2012 Business Tax Climate Ranks 9th

Texas ranks 9th nationally in the Tax State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property.

Tax Freedom Day Arrives on April 7 in Texas

Tax Freedom Day is the day when Americans finally have earned enough money to pay off their total tax bill for the year. In 2011, Texas taxpayers work until April 7 to pay their total tax bill, ranking it 25th highest in the nation. That's 5 days before national Tax Freedom Day (April 12).

Texas' State and Local Tax Burden Among Nation's Lowest

Texas' state and local tax burden is currently estimated at 7.9% of income (45th nationally), below the national average of 9.8%. Compared to the 1977 data, Texas had a tax burden of 7.9% (48th nationally), remaining relatively constant. Currently Texas taxpayers pay $3,197 per capita in state and local taxes.

Texas Levies No Personal Income Taxes

Texas levies no individual income taxes, joining six other states with the same policy.

Texas Levies a Gross Receipts Tax

Texas, in addition to collecting no personal income taxes, collects no corporate income taxes. However, the state recently instituted a gross receipts tax called the Texas Margins tax. It went into effect January 1, 2007. Texas joins Washington, Delaware, Michigan and Ohio as the only states that levy an economy-wide gross receipts tax.

Texas Sales and Excise Taxes

Texas levies a 6.25% general sales or use tax on consumers, slightly above the national median of 5.85%. In 2007 combined state and local general and selective sales tax collections were $1,624 per person, which ranks 14th highest nationally. Texas' gasoline tax stands at 20 cents per gallon, ranking 36th highest nationally. Texas' cigarette tax stands at $1.41 per pack of twenty and ranks 21st highest nationally. The sales tax was adopted in 1961, the gasoline tax in 1923 and the cigarette tax in 1931. 50-state table of sales, cigarette, gas, beer, wine, and spirits tax rates 50-State Table of State and Local General and Selective Sales Tax Collections Per Capita

Texas Property Taxes Comparatively High

Texas's local governments collected $1,404.76 per capita in property taxes during fiscal year 2006, which is the latest year the Census Bureau published state-by-state property tax collections. Texas is one of the 13 states that collect no state-level property taxes. Its per capita property tax collections in FY2006 rank 13th highest nationally. State property tax collections per capita by state

Federal Tax Burdens and Expenditures: Texas is a Donor State

Texas taxpayers receive less federal funding per dollar of federal taxes paid compared to the average state. Per dollar of Federal tax collected in 2005, Texas citizens received approximately $0.94 in the way of federal spending. This ranks the state 35th nationally and represents a slight decrease from 1995, when Texas received $0.95 per dollar of federal taxes paid (ranking them 37th nationally).

Reference - Tax Foundation

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