As a resident of Austin, Texas, you may be interested in setting up your own company to protect your personal assets and grow your business. There are many benefits to doing so, as well as a few hurdles that need to be overcome.
This article will provide an overview of all the necessary steps in forming a corporation in Texas along with information on costs and statutory requirements. You’ll also learn about the powers granted by being a corporation and the tax implications for owning one.
Note that corporate statutes can vary slightly from state to state, so be sure to check with your local Secretary of State or Attorney General’s office for the most up-to-date information.
Corporations are legal entities with their own rights and responsibilities separate from their owners. They provide the added benefit of limited liability, which ensures your personal assets are separate from the company’s assets. In most cases, if a business becomes insolvent or bankrupt, the owner is not held liable for financial obligations.
Forming a Corporation in Texas is Easy
Step 1: Create a Name For Your Texas Corporation
The first step to forming a corporation in Texas is choosing a name for your company. This should be unique and easily identifiable by the public. Follow these guidelines when choosing a name:
- The name cannot be the same as (or deceptively similar to) an existing corporation that is already registered within Texas.
- Corporations may also not use “bank,” “insurance,” “incorporated,” or “limited” in their names.
- Corporations may not use certain offensive language, including words with foul or obscene meanings to reasonable people.
Step 2: Choose a Texas Registered Agent
The second step to becoming a corporation is choosing a registered agent. This is the person or entity that will be responsible for handling all legal paperwork associated with the corporation, such as paying bills and filing tax returns. As the registered agent, your business will be listed on your company’s mailing address and will receive all official legal documents.
Texas does not mandate that you use an individual as a registered agent. A business may choose to use an individual as its Texas Registered Agent – but they are not required to do so. However, the names of both parties involved in the transaction must be included on business stationery – either through fax or letter – with your address information included on each document.
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Step 3: Choose Your Texas Corporation’s Initial Directors
The corporate directors are the governing members of your Texas corporation. The number of directors and their duties varies to some degree depending upon the type of business.
The initial directors for a corporation are elected by a majority vote during its first meeting as an official entity. The initial board members must be appointed or elected from the same state in which you choose to incorporate unless you choose another state’s statute that allows corporations to have out-of-state shareholders.
Once you’ve decided on your Texas corporation’s board of directors, be sure they meet these requirements:
- Directors cannot be listed on any other company’s articles with a conflicting purpose or charter.
Step 4: File Form 201 – Texas Certificate of Formation
The final step toward creating a Texas corporation is filing form 201, Texas Certificate of Formation. Form 201 must be filed with the Secretary of State and maintains a permanent file at the state office.
The original or an exact copy of this documentation must be filed with your local Secretary of State or any other state with corporate law, as you may need to obtain a certificate of good standing from them (an out-of-state certificate may satisfy this requirement if you have a registered agent that is current on company records).
The original form can be obtained from the Secretary of State in Austin or online from their website.
Step 5: Get an EIN for Your Texas Corporation
Once you’ve filed form 201, you will receive an EIN (Employer Identification Number) for your Texas corporation. This number is needed by your Texas business and must be included in all federal, state, and local taxes. If you have a small business with few employees, an Individual Tax Identification Number (ITIN) may suffice if it is not required to file returns.
Tip: Filings can be made online by visiting https://www.ssa.gov/individuals/apply_for_itin/index.html .
Set Up a Corporate Records Book in Texas
Once you’ve filed form 201 and received your EIN, you will need to file the corporate records book with the Secretary of State. These are the final formal documents needed to create a corporation in Texas. This is a very important document that contains information about the corporation, including its directors, shareholders, and any initial resolutions adopted by the board of directors.
The corporate records book must be maintained by your corporation. It contains a record of all proceedings and resolutions that were adopted by the board of directors during its first meeting to approve the operation of your company as well as any other key events like amendments to articles of incorporation or a name change.
Establish and Build Your Business Credit Score in Texas
Unlike personal credit scores, business credit scores are not part of the FICO score system. A business credit score is a number that reflects a company’s ability to pay its debts on time. This score is used by lenders and creditors to determine if they are willing to work with you and how much money they are willing to extend based on your company’s financial history.
Building good business credit can go a long way in the beginning stages of establishing your new business. It can also help you establish credit for other purposes such as starting a new line of credit or an additional loan should you need it down the road.
The corporate records book can be obtained from your Secretary of State.
Research Business License Requirements
If you are thinking of starting a business or have already decided to start one, chances are, you probably have a general idea of what type of business license you will need. While some licenses may be state-specific – such as an insurance license or a liquor license – others, like the food permit, may be required in many different states.
Before you decide what kind of state business license you may need to start your new business venture, it is important to research these requirements and other licensing information for your state.
FAQ: Filing the Texas Certificate of Formation
Frequently Asked Questions
Q: What is the Texas Certificate of Formation?
A: The Texas Certificate of Formation is a document issued by the Secretary of State after a corporation or limited liability company has filed its Form 201. The form details information about the corporation including its name, how many shares have been authorized, and how many initial directors have been appointed.
The Secretary of State publishes this form online to provide individuals with access to it in printable file format.
Q: How do I obtain a copy of the Texas Certificate of Formation?
A: You can obtain your copy from your Secretary of State office or online at their website at http://www.sos.state.tx.us/corp/fincorp.shtml.
Q: Is a copy of my Texas Certificate of Formation required for any other reason?
A: Yes. A filer is required to keep their Certificate of Formation on file with the Secretary of State’s office in case new directors are elected during the corporation’s first meeting as an official entity. This form must be filed with the Secretary of State and held as part of the corporation’s permanent records or maintained by its business equivalent (i.e., a bank, an accountant, etc.).
Is a Corporation Right For You?
A corporation is one method of doing business, but there are many others. A regular corporation has shareholders and shares of stock. Those shareholders elect a board of directors who then appoint the officers of the corporation. The directors oversee the day-to-day operations of the company and have complete control over what happens in the company as long as they’re abiding by state and federal law.
If you do decide to incorporate, it’s important to choose your state carefully. Some states offer more benefits that help businesses succeed than others, with Texas being one of them.
In addition, if you are considering starting a new business, you must remember that a corporation must have an EIN (Employer Identification Number) to operate. While this is not required for individuals, it is required for corporations to operate in the United States.
Texas Gov. Greg Abbott recently signed the Tax Code Modernization Act of 2017 into law, which greatly reduces the tax burden on both corporate and personal taxpayers in Texas. This new law also allows businesses to deduct certain expenses from their taxable income as opposed to having taxes assessed against them retroactively later.
There are a lot of great benefits when incorporating in Texas today, so keep this information in mind before making your decision.
Texas State Corporation Tax Requirements
In the state of Texas, you must file Form 1120S for any taxable corporation or LLC. This form is due and payable on April 15 of each year but can be extended to the 17th if necessary. Corporations and LLCs that are taxed as a C-Corp or an S-Corp must file two separate forms – the 1120S and 1120 respectively.
Under certain situations, corporations are required to pay estimated quarterly state taxes. This is due to the fact that corporations are required to make quarterly deposits with their federal income tax returns. Additional information about this can be found here: http://www.window.state.tx.us/taxinfo/taxpubs/tx96-3.pdf.
If you are going to be in business for yourself, you’re probably not looking forward to paying taxes. However, the corporate structure can provide significant benefits over other forms of doing business including:
- Limited Liability – With a corporation, all assets of the company and its owners are protected from any liabilities that the company may incur. This means that your personal assets are not at risk if something goes wrong with your company or if you make an irresponsible decision as a director. This is one of the main reasons why corporations are so widely used today.
- Personal Asset Protection – Corporation owners are protected too by the corporate structure. This means that they are not responsible for any debts incurred by the company, and they do not have to pay them personally.
- Ease of Transferability – While LLCs and other forms of business provide limited liability protection, a corporation has additional flexibility that makes this protection even stronger. For example, if one owner wants to sell their stake in a corporation but still wants that corporation to continue as normal with another owner, it is much easier to do so in a corporation than it is in an LLC or another form of business.
- Tax Advantages – In addition to liability protection, the corporate structure offers other tax advantages including:
- Credits – The business income tax credit allows a corporation to reduce the amount of federal income tax it pays on its personal income. This is available whether or not you have a physical office, are registered with the IRS, or have the required number of employees.
- Deductions – When an S-Corp files for an extension of time to file their quarterly tax returns, they can deduct all their estimated quarterly taxes from their taxable income. They then pay this remaining amount after filing their final return. (If you are running your business as an LLC, this deduction does not apply. However, you can still deduct your estimated quarterly taxes from your taxable income in the year that you file your tax return.)
- Penalties – If you fail to make required payments, penalties can be substantial. Interest and penalties are added directly to a corporation’s total tax liability. This is also true when a corporation is required to make quarterly deposits. If not properly made, these deposits can be subject to substantial penalties as well.
- Overhead Reimbursements – Overhead reimbursements for services performed by employees can be deducted from corporate income before taxes are owed on that income. This greatly reduces the amount of money corporations have to pay in federal taxes when this expense is deducted from an owner’s personal income.
How to Get a Texas Certificate of Good Standing
It is important to apply for your Texas C-Corp Certificate of Good Standing on time. It can take multiple months to complete the process. You can expect to receive the paperwork in the mail during the first week of May.
File your federal tax return as an individual first, and then transfer it through TurboTax or another software program. From there, you need to file Form 80-1029 with your Texas Secretary of State (SOS) office.
Once they receive your federal return, you will be able to obtain a duplicate lien from them that goes along with the photocopy of your federal return. This bank statement will be required to secure the lien.
Once you have obtained the lien, you can then file with your Texas SOS office a New Entity Application Form (Texas Corporation Application Form 1120S). If you are filing as a sole proprietor, LLC, or other entity that is not taxed as a corporation, you must file this application form for your business.
This will require two additional documents: one for your federal return and one for your Texas SOS personal income tax return. You will then be able to obtain an Employer Identification Number (EIN) if you are incorporating your business in Texas. Additionally, the SOS will update your address so that it is accurate in both places.
How to Dissolve a Corporation in Texas
If you are a director of a corporation, you may have to dissolve your business if the corporation is no longer in operation. A business can be considered inactive or dissolved for a variety of reasons. This includes failure to meet the required number of directors, failure to make sufficient payments of taxes, or the complete lack of activity on behalf of a company.
If you are contemplating dissolving your Texas corporation, there is one important thing that you will need to know first: under some circumstances, dissolution can be seen as an admission that you have done something wrong.
The most obvious reason why a business needs to be dissolved is when it has not been operating for more than three consecutive years. This is because Texas laws state that if a company does not hold any meetings or conduct any business in the state, it is considered inactive. Any income tax, franchise tax, or other corporate taxes owed must be paid prior to the company being considered inactive.
If your Texas corporation was inactive for three years and you have not filed your tax returns, this can be seen as an admission of guilt when you decide to dissolve.
However, if you can prove that your company was actually active during this time period but you were unable to file the required documents on time due to extenuating circumstances (such as illness), then there will be no liability attached to dissolution.
File Dissolution Documents
The dissolution process is not as complicated as it might appear. It simply requires that you submit a set of necessary documents to the Secretary of State’s office and wait for your Certificate of Dissolution. You should receive this document either from the county clerk or your Secretary of State in the mail within several weeks.
Dissolution does not have to be costly and time-consuming if you are prepared for every step along the way and if you follow the steps in this guide. Check out our detailed Dissolving a Texas Corporation Guide to learn everything you need to know before, during, and after dissolving your corporation.
Why Form a Corporation?
Forming your own business, or founding a corporation, can be the beginning of a new chapter in your life. Unlike an LLC, a corporation offers some distinct advantages that make it an excellent way to start and grow your business.
Tax Benefits: As the owner of a corporation, you will have far more flexibility than when you are operating as an employee for a company with multiple owners or partners. The federal government considers corporations to be “C-corporations” and will tax them on their income just like individuals do. Corporations also pay taxes at the state level as well.
Whether or not you have employees can even affect how much Texas taxes you owe as an S-Corp shareholder. The Corporation Code provides a taxation system that is entirely separate from the state’s personal income tax laws. This means that there will usually be little to no overlap in taxes for shareholders and employees.
As the owner of a corporation, you will have far more flexibility than when you are operating as an employee for a company with multiple owners or partners. The federal government considers corporations to be “C-corporations” and will tax them on their income just like individuals do.
Corporations also pay taxes at the state level as well. Whether or not you have employees can even affect how much Texas taxes you owe as an S-Corp shareholder. The Corporation Code provides a taxation system that is entirely separate from the state’s personal income tax laws. This means that there will usually be little to no overlap in taxes for shareholders and employees.
Minimal Filing Requirements: There are very few federal and state filings required of a corporation until it grows beyond a certain size. No annual federal tax returns, no Texas personal income tax returns, and very minimal fees and fines for violating local regulations.
In fact, most of the filing requirements come at the state level, which means you won’t have to worry about your small business being penalized by multiple state agencies for minor infractions.
What Type of Corporation Should I Form in Texas?
The type of corporation you form in Texas will vary depending on your needs. There are three basic types of corporations, each with its own benefits and drawbacks:
- small corporations (those who do not intend to create large amounts of wealth)
- family corporations (which are ideal for children over the age of 21)
- general corporations.
Small Texas Corporations
If you’re forming a small corporation in Texas, a Close Corporation (sometimes known as an S or C Corporation) is the right option. Close Corporations are not taxed on the first $1,000 of profit they make.
In addition to this tax-free benefit, Small Close Corporations can qualify for additional tax incentives for reinvesting their earnings back into their business. In order to qualify for these incentives, owners must also hold 100 percent of the shares of stock in their corporation — no outside shareholders can own shares.
For any company looking to limit its liability with an asset protection plan, a Close Corporation is a great option because it does not offer any personal liability to shareholders. However, in order to use this type of corporation, you have to be committed and prepared for corporate-level procedures like record keeping and compliance.
A family corporation is an LLC that is either wholly owned by family members or controlled by a trust owned solely by family members. This type of business structure can be beneficial because it allows your estate to pass down between generations tax-free without having to deal with complex estate planning or statutory merger issues.
It is possible to avoid these issues by forming a family corporation with your spouse, but it is important to understand the final step in your process: the election of a representative to replace you as your business’s manager.
To elect a representative in such an instance, you must fill out Form IE-2 as well as amend the existing articles or document of organization — if you have one — that sets up your Texas LLC. The latter could be an extra step not needed if you’re planning to work mostly out of state or plan on being around for more than three years.
In order to complete this process, one person has to serve as the owner of the record and also serve in an official managerial position. The appointed representative must be the only person who has a right to vote on all matters regarding your Texas LLC and cannot be a party to any legal proceedings involving the company.
The owner of the record is the person who holds 100 percent of the ownership interest in the company and makes all important decisions regarding its business.
A family corporation is primarily beneficial if you are planning to leave your estate or property to your heirs. If you have no heirs, this structure can be used for estate planning purposes or as a means of avoiding probate. There are enough benefits of a family corporation, but it comes with some obligations that require active participation.
The advantage of a general corporation is that it can grow in easily, not having to worry about limitations or aggregation. Unlike a close corporation or family-controlled LLC, a general corporation allows outside investors.
However, if you are looking to open up your company to outside investors, you may want to consider incorporating as an LLC since LLCs allow for different investor participation levels.
General corporations can limit the number of shareholders in the company by requiring them to hold 100 percent of the shares. In other companies with multiple shareholders, there may be certain tax laws that apply if a shareholder owns more than 20 percent of the outstanding stock in the company.
Should I Form a Corporation or an LLC?
You should consider the following when you are considering whether to form an LLC or a corporation:
1) Managing as an independent business entity means that your start-up costs would be cheaper and require less time.
2) A single-member LLC allows you to act much like a sole proprietor but with limited liability protection if someone harms you or your business.
3) Managing as an independent business entity means fast tax filing due to ownership separate from revenue generation which is helpful in large corporations. Large companies often choose this type of organizational structure, especially for bigger businesses in the accounting industry.
4) Owning assets independently can help those businesses become more financially secure since they do not need investors and/or loans
Can a Non-Citizen Start a Corporation in the USA?
Some corporations are limited by who can be an owner. This is especially true of foreign corporations and LLCs. In some states, you may need to be a U.S. citizen to start or own a corporation. Other states do not require this at all or have a different threshold for when citizenship must be verified.
It is not possible to apply for a business license for a foreign corporation in the USA unless the majority of owners are U.S citizens or permanent residents (green cardholders).
A Texas Business Address
In order to set up a corporation in Texas, you must have an address in the state. You do not necessarily need to be physically present in Texas, but you can be incorporated there. Your corporate address can be your own home or office if you don’t have a business location yet.
Free Mail Forwarding
Mail forwarding is a service offered by the USPS and UPS that allows you to have your business correspondence forwarded to you when you are away from your business location. There are several benefits of mail forwarding:
1) You can have all of your company’s correspondence forwarded to one address, regardless of how many employees work for you. This way, each person has access to their own individual mailbox.
2) It is important to note that mail forwarding services generally charge a monthly fee. However, these fees are low compared to the potential costs associated with lost or delayed mail.
Ongoing Maintenance & Compliance
The IRS requires that you have a registered agent in charge of the ongoing maintenance of your corporation. The agent will be responsible for ensuring the proper reporting is completed, as well as other corporate requirements. This ensures that your corporation stays on track with all legal requirements.
Forming an LLC, Corporate or Non-Profit
The first step in forming an LLC, corporation, or nonprofit organization is deciding how many members will run the company and what kind of legal structure you want to use. For most non-profits and corporations formed for the purpose of income generation, a single member is required.
For other corporations, a board of directors is required and will be the governing body. An LLC can have a single member or multiple members, which are called members in common.
Once you have decided on an organizational structure, you need to file the appropriate paperwork with the state and/or county.
There are separate filing procedures that must be followed for citizens of Texas compared to California. For example, in Texas, all documents must be filed by an attorney; in California, only some documents require an attorney’s aid. Additionally, there are different filing fees for single-member LLCs and multi-member LLCs (“members in common”).
After filing, you will need to pay a fee in order to have your corporation (if formed in Texas) registered with the Secretary of State’s office. Corporations in California are automatically registered with the secretary of state. Most business owners form their corporations in Texas because it has one of the lowest corporate filing fees in the nation.
How much is the Texas Franchise Tax and Public Information Report?
There are several options for establishing a corporation in Texas. In most cases, all corporations are formed as “Texas Corporation”. The options available depend on whether your business works in Texas or can be incorporated in Texas.
Some corporations can choose to be registered pursuant to the Texas Associations Code. This is called an “Association” or “Assoc.” Registration requires payment of a franchise tax equivalent to the corporate tax rate (currently 3.25%), plus a fee for processing and publication of notices, plus annual maintenance fees.
An Assoc. is not the same thing as an LLC; they are different types of entities with different rights and responsibilities.
5 important things about forming a corporation in Texas
1. Form a corporation in Texas requires the filing of Articles of Incorporation and an application for a permit to transact business.
2. Meet with the Secretary of state to receive your Certificate of Authority, which allows you to do business in Texas.
3. File annual reports with the secretary of state, who will review your reports and publish a notice about them each year on their website if they are found to be accurate and complete.
4. File a special report each year to file if you wish to qualify for an exemption or credit for taxes, or if you have other major transactions like mergers and acquisitions.
5. Complete the Form W-9 with the Internal Revenue Service (IRS) which allows your corporation to receive payments from a third party for tax purposes.
The Secretary of State’s office provides a number of services related to the registration of agents and limited partnerships. Services included in the scope of the business are as follows:
A contract is a legally enforceable agreement that creates, governs or discharges the obligation between two parties. Contracts are often divided into three types depending on who offers or agrees to perform the contract:
Private-party contracts – under which one person (the offeror) gives another person (the offeree) an offer to perform a contract upon specified terms. Individually negotiated contracts – under which both persons have agreed on the terms of the contract and are not subject to third-party approval.
Collective bargaining agreements – under which board members negotiate with each other so as to sign off on all deals after negotiations with external stakeholders have been completed, such as an Employers’ Association bargaining with its associated employees.
The civil laws of a state regulate the enforceability and legitimacy of a contract. In Texas, there are two forms of contracts under which you can create a legally valid agreement with any third party.
What is a partnership?
A partnership is an association between two or more persons to carry on as co-owners of a business for profit. The following are several important technical aspects of partnerships in Texas:
- Both members and non-members may be classified as partners in Texas. Limited partnerships are required by the Secretary of State to file Articles of Partnership, the information for File No. 441, and annual reports with the Secretary of State’s office.
- One general partner (the lead partner) may be an unlimited personal liability in the partnership.
- Limited partners are required by the Secretary of State to file Articles of Partnership, the information for File No. 441, and annual reports with the Secretary of State’s office.
- Limited partnerships may exist as a general or limited partnership; however, to be classified as a limited partnership, a special license is required.
Texas certificate of Formation
The Texas Certificate of Formation is a legal document that regulates the business and creation of corporations in Texas. If you are starting a corporation in Texas, the Secretary of State’s office must have all three forms completed and submitted to them:
- Articles of Incorporation – this is the document that legally creates your corporation. It contains basic information about your company such as name, legal address, authority to act, period of duration, and place where meetings will be held.
- Application for Permit to Transact Business – this is what allows you to legally operate your business in Texas. There are several different types that can be used depending on the nature of your operations.
Texas business organizations code
California Franchise Tax and Public Information Report
In California, There are several different types of corporation formats (also known as business entities) that are available to start a business. The business entity is important because it is the basic structure of how a business operates and how it reports taxes each year.
To form a corporation in California, there are several steps that must be taken to ensure your Business Entity is lawful. These include:
- Determine which type of corporation you want to create (C-Corporation, S-Corporation, Nonprofit Corporation, Professional Corporation).
- Choose the appropriate name for your business entity.
- Finalize your business formation by filing Articles of Incorporation and either (i) a Statement by Foreign Qualified Subsidiary or (ii) Statement by Domestic Qualified Subsidiary. The articles must contain information about the corporation and its members.
- File Certificate of Qualification and pay $800 in the secretary of state fees.
- File annual franchise tax report ($800) and pay ($800 in taxes).
- File a report with the California Secretary of State every time a business entity is terminated (either by dissolution or change of status).
- Every two years, file a Business Information Report to maintain the validity of your annual franchise tax report. For more information, see the Secretary of State’s Business Information Report FAQs, on their website.
Ownership interests in Texas
Each state regulates the amount of money required to register a business entity. The amount of money required and the steps to register vary depending on the type of business you start. In Texas, there are three types of business entities that require an application to the secretary of state’s office. These three business entities are corporations, limited liability companies (LLC)s and limited partnerships (LPs).
Can I get an employer identification number in Texas?
It is not possible to get an employer identification number in Texas.