What are Corporations and How to
Form a Texas Corporation?
Corporations are legal entities in the United States that are separate from their owners. Corporations are given both the legal rights and responsibilities as though they are an individual. Corporations are able to enter legal contracts, as well as loan and borrow money. They can also sue and be sued, hire employees, own assets, and pay taxes.
Although sole-proprietorships and partnerships are given pass-through taxation, corporations typically suffer from double taxation. This is because corporations have shareholders. Shares are either held publicly or privately, and there are rules that must be followed.
How to Create a Corporation in 7 Steps
There are a few required steps when forming a Texas corporation.
Step 1: Choose a Corporate Name
Forming a corporation means you must choose a unique name and include one of the following: "Incorporated," "Corporation," "Company," "Limited," or the abbreviation "Corp.," "Inc.," or "Co.," or "Ltd."
As mentioned, the corporation's name must be distinguishable from any other names of business entities on file with the Texas Secretary of State. The names should be checked for availability at the Texas Secretary of State website.
Step 2: File Certificate of Formation
Corporations are only legal once a certificate of formation is filed with the Texas Secretary of State. The filing fee for the certificate of formation is $300. This certificate must include:
- Corporate name
- Name and address of the registered agent
- Name and address of the initial directors
- Number of shares the corporation is authorized to issue
- Whether the shares have a par value or no par value
- Name and address of the organizer
- Effective date of the certificate
Step 3: Appoint a Registered Agent
Every Texas corporation is required to have a registered agent. This agent can be someone within the company or a corporation who agrees to be available in the state of Texas during business hours. They are required to accept legal papers for the corporation but must have a physical address in Texas.
Step 4: Prepare Corporate Bylaws
Bylaws are the internal documents created for a corporation. It governs the entity and helps it to run properly. Although not filed with the state, and not legally required to have them, they help to establish how a corporation functions. It can also be helpful to show these bylaws to banks, creditors, the IRS, and any other entities that your corporation is legitimate.
Step 5: Appoint Directors and Hold First Meeting
Whoever incorporates (founds) the corporation also signs the articles of incorporation. They must then appoint the directors who will serve on the board. This is only until the first annual meeting of shareholders when the board members will then be elected by the shareholders.
This first meeting to appoint corporate officers and adopt bylaws also includes acts such as selecting a bank and issuing stock. This meeting is essential to incorporation.
Step 6: Issue Stock
Another huge part of incorporation is to issue stock to each shareholder. This is done in return for how much they contribute to the corporation. Capital contributions can be in the form of cash, property, services, or all three.
Texas actually exempts corporations from state registration of unadvertised sales to no more than 35 shareholders. This pertains to those who are either sophisticated investors or individuals with a previous relationship with the company. This also includes anyone who is involved in the company.
Step 7: Obtain an EIN and Pay Taxes
The final step is to obtain an EIN, which is a federal employer identification number. This is done through the IRS. Texas requires corporations to pay franchise taxes, but only those who earn over $1,000,000.
Want to start a corporation but aren’t sure where to start? An experienced business attorney can help.
When you try to start a corporation it is more complicated as compared to an LLC. corporations are more complex because there is a lot of structure involved. You are required to pick directors as well as a registered agent, but also create bylaws, issue stock, and file articles of incorporation. Corporations also pay taxes and in some cases, you might want to utilize the services of an attorney.
What Are the Benefits of Starting a Corporation?
Here are a few benefits of starting a corporation.
Corporations provide a much more professional appearance than any other business structure. Specifically, corporations allow businesses to obtain funding, easily apply for a loan, and corporations are taken more seriously. Corporations can also help businesses establish credibility with potential customers, as well as employees, and vendors more easily.
Corporations are created as separate entities from their owners. This essentially means that a corporation is set up as its own entity that can enter into contracts, own property, and pay taxes.
Rather than doing business under your own name, doing it under the name of a corporation offers liability protection because of being separate entities. If a corporation happens to be sued, creditors cannot come after the personal assets of the owners. Instead, all pursuits of payments owed by the corporation must be done directly through the corporation.
In some states, you can form a corporation anonymously. This is not the case when it comes to Texas, but if you form with a registered agent, then it can afford the owners some privacy. If the corporation happens to be sued, then you can keep the names of the owners hidden while the debts are collected.
Corporations are afforded some tax deductions as compared to sole proprietors. For example, corporations can deduct business expenses, such as the cost of health insurance premiums paid to employees, and saving on self-employment taxes. Corporate income does not require social security payments, or worker’s compensation, as well as Medicare taxes that are paid by LLCs.
Easy Transfer of Ownership
Corporations can be publicly or privately held. When the shares are public, they can easily be transferred without approval from other shareholders.
What are the Different Types of Corporations?
There are 3 main types of corporations that Texas businesses can form: C corp, S corp, or non-profit.
One of the most commonly formed corporations is a C Corp. C corporations are easily formed and without restrictions that harbor an S Corp. C Corporations are taxed twice. Once after the owners are paid out, and again at a corporate level.
In order to avoid double taxation, C Corps often attempt to become S Corps. Because S Corps are given pass-through taxation, profits are only taxed when they are passed down to shareholders. These shareholders must pay taxes on their personal tax returns. Despite this being ideal, to form as an S Corp, a corporation must adhere to the following restrictions:
- No more than 100 shareholders
- All shareholders must be individuals, trusts, or estates
- Shareholders may not be partnerships, other corporations, or non-residents of the United States
- May only have one class of stock
Corporations that act charitably or for educational, or religious reasons, are considered to be non-profit organizations. These corporations are not required to pay taxes. Instead, all profit can be put back into the business. Whether that is for operations, salaries, expansion, or plans in the future.
Should You Start a Corporation?
Starting a corporation can be a great step in growing your business. Whether you wish to go public or want to apply to avoid double taxation as an S corp, a corporate structure can help you to lower your tax liability and gain credibility as a Texas business. Corporations also always afford limited liability and can keep your personal assets safe.