Windward Navigator · Guide
LLC or corporation for a Texas start-up: taxes, investors, QSBS, the Texas Business Court, franchise tax, and when to convert. A plain-English guide from Windward Counsel.
Almost every founder in Texas asks the same first question, and the honest answer is that both entities work — they just fail in different places. This guide walks through the decision the way we walk through it in a scoping call: who will own the company, how it will be taxed, who will fund it, and what it will cost to keep.
Form a Texas LLC if the company will be owned by a few people who work in it, will be funded by its own revenue or by loans, and may distribute profits as it goes. Form a Texas corporation if you intend to raise money from investors who expect stock, options and a board — venture funds, most angel groups, and anyone who will ask about qualified small business stock. If you are not sure, the LLC is the cheaper place to be wrong, because a Texas LLC converts to a Texas corporation by a statutory conversion when the first priced round arrives.
An LLC is governed by its company agreement, and the Texas Business Organizations Code lets that agreement say almost anything: one class of members or ten, management by the members or by managers, distributions that track capital or do not. That flexibility is the LLC's main virtue for a small group, and its main hazard — a thin company agreement leaves questions (who can force a sale, what happens when a member leaves) to default rules nobody chose.
A corporation is governed by its certificate of formation, bylaws and the Code's corporate chapters: shareholders elect directors, directors appoint officers, and ownership is stock. The structure is less flexible and far more familiar to outside investors, which is the point. Option plans, vesting, preferred stock and board seats all assume a corporation.
A single-member LLC is disregarded for federal income tax and a multi-member LLC is a partnership by default; profits and losses pass through to the owners. An LLC can elect to be taxed as an S corporation (often to manage self-employment tax) or as a C corporation. A corporation is a C corporation unless it elects S status, and venture investors generally cannot hold S corporation stock.
Two federal points push growth companies toward the C corporation. First, qualified small business stock under Section 1202 — the exclusion from federal capital-gains tax on the sale of founder and early-investor stock — is available only for stock of a C corporation that meets the asset and active-business tests. The 2025 federal tax legislation expanded the benefit for stock issued after July 4, 2025, with a tiered exclusion that begins at three years and a higher per-issuer cap; the details matter and change, so confirm them with your tax adviser. Second, retained earnings in a C corporation are taxed once at the corporate rate rather than flowing through to founders who have not received cash.
Texas has no personal or corporate income tax. Both entities pay the Texas franchise tax, but no tax is due until annualized revenue passes the no-tax-due threshold (roughly $2.5 million, indexed), and entities under the threshold no longer file a No Tax Due Report — only the Public Information Report. The state filing fee to form either entity is $300.
Angels and friends-and-family rounds will invest in either entity, usually through a SAFE or convertible note. Venture funds, and most organized angel groups, will require a corporation before a priced round — their fund documents, their option-plan expectations and their tax-exempt limited partners all assume stock. If your plan is a venture path, forming the corporation at the start avoids a conversion in the middle of a financing.
For a Texas company, a Texas charter is now the default rather than the exception. The Texas Business Court hears commercial and governance disputes above a dollar threshold and publishes written opinions; the 2025 Legislature's SB 29 codified the business judgment rule for corporations that opt in, set an ownership threshold for derivative suits, and allowed charters to waive jury trials for internal disputes. Delaware still has the deepest body of venture-charter precedent, and a lead investor may insist on it; keeping that option open is a matter of drafting the Texas documents on the forms investors expect. Our Insight on the start-up case for a Texas charter walks through the trade-offs in more detail.
Either entity needs a registered agent, an annual franchise tax filing (even when no tax is due), current consents for anything significant the owners or board approve, and a cap table that matches the executed instruments. Corporations add annual shareholder and director actions and, once there is an option plan, grant paperwork and a periodic valuation. None of this is expensive if it is done on a calendar; all of it is expensive to reconstruct in diligence.
A Texas LLC becomes a Texas corporation by filing a certificate of conversion and a certificate of formation with the Secretary of State, after the members approve a plan of conversion. The entity continues; contracts, bank accounts and the EIN carry over. The real work is the record: making sure every membership interest is documented so it converts cleanly into founder stock, and timing the conversion so QSBS holding periods begin when you want them to.
| If the company will… | Lean toward |
|---|---|
| Be owned by its operators and distribute cash | Texas LLC |
| Raise a priced round from funds or an angel group | Texas corporation |
| Hold real estate or a single project | Texas LLC (or series LLC) |
| Grant options to employees | Texas corporation |
| Aim for a QSBS exit | Texas corporation, formed early |
| Stay small and simple | Texas LLC with an S election if payroll justifies it |
It can raise a SAFE or note round, but most venture funds require a C corporation before a priced round. A Texas LLC converts to a Texas corporation by statutory conversion, so founders often form the LLC first and convert when the round is in sight — provided the ownership record is clean enough to convert without surprises.
No. Texas has no personal or corporate income tax. Both LLCs and corporations are subject to the franchise tax, but nothing is owed until annualized revenue passes the no-tax-due threshold, roughly $2.5 million and indexed.
No. A Texas charter is a credible default for a Texas company, with a specialized Business Court and 2025 statutory changes aimed at predictability. Some lead investors still prefer Delaware; the Texas documents can be drafted so a later conversion is straightforward if one insists.
The Secretary of State filing fee is $300 for either entity. Legal fees depend on how much of the governing document set you need; fixed-fee packages for a Texas LLC or a start-up corporation are published on this site's pricing estimator.
A single LLC whose company agreement creates internal series, each with its own assets, members and liabilities, so one filing can hold several projects or properties. It is common in real estate and in project-based energy work, and it has its own record-keeping requirements.
Windward Navigator guides are general information about Texas and federal law, not legal advice about your company or project. Laws and thresholds change; confirm the current figures and talk to counsel before acting. Attorney advertising.