Entity Formation & Structuring for High Net Worth Individuals in Austin

A single LLC answers exactly one question, which is who owns this business. A family that runs an operating company, holds four rental houses, carries a quiet stake in a friend’s restaurant, and manages a brokerage account of real size is asking several questions at the same time. That is why entity formation for high net worth clients in Austin begins with a map of every income stream and every asset, drawn before anyone files a certificate of formation with the Texas Secretary of State. We handle the tax half of that map. Your own attorney handles liability, governance, and the documents themselves, and we keep those lanes apart on purpose. We will tell you what a structure costs and saves in federal tax. We will not tell you what your operating agreement should say, and any CPA who does is stepping somewhere they do not belong.

The first fork is federal classification, and it is not the same thing as the state filing. Texas hands you an LLC. The IRS then treats that LLC as a disregarded entity, a partnership, an S corporation, or a C corporation, depending on who owns it and what you elect. The IRS business structures page walks through the default paths in plain terms. A single-member LLC with no election is invisible federally, so an operating business lands on Schedule C and rental activity lands on Schedule E. Add a second member and the default flips to a partnership filing Form 1065. None of the Texas paperwork changes any of that. Owners often assume the LLC by itself produced a tax result. It produced a legal shell and a state filing obligation, nothing more.

Run the arithmetic and the decision tends to make itself. Say the operating consulting company nets 480,000 dollars a year and sits in a single-member LLC with no election. Every one of those 480,000 dollars flows onto Schedule SE. The Social Security piece stops at the annual wage base, but the 2.9 percent Medicare piece never stops, and an additional 0.9 percent rides on earnings above the threshold. Elect S corporation treatment, pay yourself a defensible salary of 180,000 dollars for the work you genuinely perform, and the remaining 300,000 dollars comes out as a distribution carrying no self-employment tax. On the Medicare math alone that is roughly 8,700 dollars a year, and somewhere near 11,000 dollars once the surtax on the higher earnings is counted. Against that saving you weigh real payroll filings on Form 941 and a separate corporate return on Form 1120-S. At 480,000 dollars the election clears its own cost easily. At 90,000 dollars it often does not.

The mistake we see most often is speed. A family forms five LLCs in one afternoon through an online filing service, and six months later four of them have no EIN and no bank account. K-1 amounts stop reconciling, rental depreciation schedules live in three unrelated spreadsheets, and the S election everyone remembers signing was never actually accepted by the IRS. Every entity you create is a permanent chore. It brings a return, a set of books, a franchise tax report to the Texas Comptroller, and a bank relationship that someone has to maintain. Four well-chosen entities beat nine accidental ones in every year of your life.

So we build the structure in the order the tax law actually reads. Ownership first, then federal classification, then the elections and the EIN, then the books that will carry the whole thing. Our bookkeeping team sets up the chart of accounts for each entity before the first transaction posts, rather than reconstructing it under pressure in March. The tax strategy consulting side models two or three candidate structures against your real numbers, so you can see the annual cost and the annual saving of each one before you commit to any of them.

Structures age. The arrangement that fits a 480,000 dollar consulting practice today will not fit the same family after a building sale, a partner buyout, or a child joining the business, so plan to revisit the map every couple of years and well before any liquidity event lands on the calendar.

These two forms confuse more people than any other piece of paper in entity work, and the confusion is understandable, because they overlap. Form 8832 is the entity classification election. It tells the IRS whether an eligible entity should be taxed as a corporation, as a partnership, or as a disregarded entity. Form 2553 is the S corporation election. It tells the IRS that a corporation, or an entity that will be treated as one, should pass its income through to shareholders instead of paying tax at the entity level and again on dividends. The practical shortcut most Austin families need is this. An LLC that wants S corporation treatment can file Form 2553 alone, and that single filing is deemed to carry the classification election with it. You do not need both.

Timing is where money gets lost. The S election is generally due within two months and fifteen days after the start of the tax year it should apply to, or at any point during the preceding year. Miss that window and the election takes effect the following January instead, which means a full year of income you planned to split between salary and distribution runs through Schedule C and gets hit with self-employment tax on the whole amount. There is relief for a late election when you have reasonable cause and have been behaving as an S corporation all along, but relief is a request, not a right, and we would rather file on time than argue later.

A worked example makes the stakes concrete. A software founder moves to Austin in February and forms a single-member LLC that will net 350,000 dollars. She intends an S election but nobody files anything until October. Her election now takes effect the following year. That first year, all 350,000 dollars runs through Schedule SE. Had the election landed on time with a 150,000 dollar salary, the 200,000 dollars of distribution would have escaped the 2.9 percent Medicare tax and the 0.9 percent surtax, worth roughly 7,600 dollars. A form that takes twenty minutes cost her that, plus the interest on it. This is the least glamorous and best-paying part of entity formation for high net worth clients in Austin.

The common mistake is filing Form 8832 to elect corporate treatment and then assuming S status arrived with it. It did not. That combination gives you a C corporation, which pays tax at the entity level and then taxes the dividend again when cash comes out, and it also starts a five year clock that restricts changing classification again. We have unwound this more than once, and unwinding is far more expensive than getting it right. Two other traps worth naming. Every shareholder has to sign the Form 2553 consent, and a nonresident alien shareholder or a second class of stock will disqualify the election outright. Check the cap table before you file, not after.

Our process is dull by design. We confirm eligibility, get the EIN issued first, prepare the election with the exact effective date you want, send it in a way that creates proof of mailing, and then chase the IRS acceptance letter until it physically exists. That letter goes in your permanent file. If it never arrives, we call. Meanwhile our bookkeeping team gets payroll and the shareholder distribution account running from day one, and the tax strategy consulting group sets the reasonable compensation figure with support behind it, because a salary of 24,000 dollars against 400,000 dollars of profit is the fastest way to draw an examination.

Once the election is accepted, calendar the payroll deadlines and the shareholder basis tracking immediately, because the year an S corporation stops being simple is always the year someone forgot to record a distribution against basis.

Yes, and the distinction matters more here than almost anywhere else. Texas does not tax your personal income. There is no state return for your wages, your distributions, your capital gains, or your rental profit, and that is the single largest financial reason wealthy families keep landing in Austin. A family relocating from New York or California carries a state tax layer that simply does not exist here, and on 2,000,000 dollars of income the difference is not a rounding error. But no personal income tax does not mean no state tax. Entities themselves can owe the Texas franchise tax, sometimes called the margin tax, administered by the Texas Comptroller.

The franchise tax works on margin rather than on profit, which trips up people who expect it to behave like an income tax. You start with total revenue and subtract one of a few permitted deductions, then apportion to Texas and apply a low rate. Most family entities fall under the no tax due revenue threshold and owe zero. That word zero does a lot of damage, because owing nothing is not the same as filing nothing. Entities below the threshold still generally have a report obligation, and the penalty for skipping it is not the tax, it is the forfeiture of the entity’s right to transact business in Texas. We have watched a forfeited LLC hold up a closing on a commercial building for three weeks. Nobody budgets for that.

Here is the shape of it with numbers. A family holding company reports 900,000 dollars of total revenue across two operating subsidiaries. After the permitted deduction the taxable margin might be 540,000 dollars, and at the retail rate the franchise tax runs in the low thousands of dollars, call it near 2,000 dollars. Meanwhile the same 900,000 dollars, if the family lived in a high tax state, could carry a five figure state income tax bill on top of federal. The federal side of that structure still runs on the same forms everyone else uses, meaning Form 1065 for the partnership tier and Form 1120-S where an S election is in place, with the classification rules deciding which one applies.

The mistake, and it is a costly one, belongs to people who moved here. They form a Texas entity, keep an apartment and a business presence in the old state, and assume the Texas address ended the question. It did not. States audit residency aggressively and they look at where you sleep, where your family lives, and where the work actually happens. Texas will not tax that income, but the state you left may still try, and a Texas certificate of formation is not a defense by itself. The other frequent error is treating franchise tax as a formality and letting the report lapse while everyone focuses on the federal return.

Because there is no state personal return to prepare, our Austin work concentrates almost entirely on the federal picture and on entity-level compliance. Your individual tax return is a cleaner document than its New York cousin, which frees real attention for structure. Our tax strategy consulting team uses that freed attention on entity design, timing of gains, and retirement plan choices, which is where the real dollars actually sit for a Texas family. Good entity formation for high net worth clients in Austin uses the absence of a state income tax rather than merely enjoying it.

Put the franchise report deadline on the same calendar as the federal filings this year, because the cheapest state tax in the country still becomes expensive the moment an entity forfeits its standing right when you need it.

The instinct to put everything under one roof is understandable and usually wrong. Operating businesses and rental real estate behave differently in the tax code, and mixing them costs you both flexibility and deductions. An operating company generates active income subject to self-employment tax or payroll tax. Rental property generates passive income reported on Schedule E, governed by the passive activity rules in Publication 925, and carrying depreciation that behaves like nothing else you own. Putting a rental house inside your S corporation is one of the few genuinely irreversible mistakes in this field, because getting appreciated real estate back out of a corporation triggers gain as though you sold it at fair market value.

A workable pattern for an Austin family looks like tiers rather than a pile. The operating business sits in its own entity with its S election. Each meaningful real estate holding sits in its own LLC, often owned by a partnership tier that the family controls. Personal investment accounts stay outside the entity structure entirely, because there is no tax benefit to wrapping a brokerage account in an LLC and there is real cost in the extra return. Your attorney will have views on how the tiers should be documented and on what actually achieves the liability separation you want, and those views should drive the legal design while we handle what each tier does to the tax bill.

The numbers show why separation pays. Take a duplex bought for 600,000 dollars with 450,000 dollars allocated to the building. Straight line depreciation under Publication 946 runs roughly 16,400 dollars a year over the 27.5 year recovery period, claimed on Form 4562. If that duplex nets 22,000 dollars in cash rent, the depreciation reduces the taxable figure to about 5,600 dollars while the cash stays in your pocket. Hold it in its own LLC and that depreciation stays clean and traceable through eventual sale. Bury it inside the operating company and the depreciation gets tangled with business results, the basis records blur, and the day you want to sell the building alone you find you cannot without a large tax cost.

The mistake we correct most is the family that formed a single LLC years ago and has been running a consulting practice, two rentals, and a small equipment leasing sideline through one bank account. The bookkeeping is unsalvageable, the passive losses cannot be separated from the active income, and any buyer for one piece has to buy the whole tangle. Untangling that after the fact means appraisals, and sometimes a taxable event that a fresh structure would have avoided for free. Build the tiers before the assets grow into each other, not after.

There is also a quieter benefit that pure structure charts miss. Separate entities give you separate financial statements, and separate financial statements are what a lender, a buyer, or a partner will actually ask for. Our bookkeeping team keeps each tier on its own books so that a request for the rental portfolio’s performance takes an afternoon rather than a month. Our tax strategy consulting group then reads those statements against the passive loss limits and the basis records, so nothing surprises you at filing time.

Review the tier map whenever a property is added or an operating line changes character, because the structure that quietly worked for five years is usually the one that breaks the year you finally want to sell something out of it.

Faster than most people expect, and slower than most people want. The Texas certificate of formation is filed with the Secretary of State and clears in a matter of days when filed electronically. The federal side has its own rhythm. You apply for the employer identification number on Form SS-4, and the IRS EIN page explains who is permitted to apply and how. Online applications for a responsible party with a Social Security number return a number immediately. That number is what opens the bank account, and the bank account is what makes the entity real. Everything before the bank account is paperwork. Everything after it is accounting.

The sequence matters more than the speed. Ownership decided first, because you cannot elect intelligently until you know who owns what. Formation second. EIN third. Elections fourth, filed with a deliberate effective date rather than whatever date the software defaults to. Bank accounts fifth, one per entity, no exceptions and no borrowing between them without a documented note. Books last, opened before the first transaction posts. The IRS starting a business page covers the federal obligations that attach the moment the entity draws breath, and the recordkeeping rules describe what you are expected to keep once it does.

Here is a real timeline with real money attached. A family sells a business interest and expects to close in nine weeks on a new operating company projected to net 750,000 dollars. We file formation in week one, hold the EIN by week two, get the bank account open in week three, and file the S election in week four with an effective date matching the formation date. Payroll starts the first month there is revenue, at a salary of 210,000 dollars supported by comparable market data. First year federal savings against a disregarded LLC run near 15,000 dollars in self-employment tax, and the incremental cost of the corporate return plus payroll administration runs perhaps 6,000 dollars. That is a clean margin, but it only exists because the election landed inside its window. Two months of drift would have erased the entire first year benefit.

The mistake here is the bank account. People form the entity, then run six weeks of revenue and expenses through a personal checking account because the business account is not open yet, and promise themselves they will sort it out later. Later never arrives cleanly. Those commingled transactions weaken the liability separation your attorney built, and they turn the first year books into an archaeology project. If the account is not open, do not start operating. Wait the week. It is cheaper than the reconstruction.

We run this as a checklist with dates and an owner for each line, and we do not consider the job finished until the IRS acceptance letter is in hand and the first month closes cleanly. If you are weighing a formation and want the tax analysis before your attorney drafts anything, you can request a consultation and we will build the structure map against your actual numbers. Our bookkeeping team takes the entity from day one, and your individual tax return gets prepared by the same people who know how the entity was built, which is how entity formation for high net worth clients in Austin should work.

Set a reminder now for the first estimated payment after the entity starts producing income, because the fastest formation in Austin still generates a penalty if nobody funds the quarterly deposits that follow it.