When you start your own business, you’re probably worried about simple things, like how to attract customers and turn a profit.
As your business grows and develops, you might find yourself thinking about incorporating your business.
Before you incorporate your business, however, you need to be well-informed about the details of the process.
On top of that, you need to learn about the different incorporation options that are available.
Finally, you need to carefully assess your business goals and evaluate what your priorities are.
Read on to learn about how to form a corporation in Texas and how a qualified business formation lawyer can help you achieve your business objectives today.
What Are the Steps on How to Form a Corporation in Texas?
There are several important steps to forming a corporation in Texas. The first step is understanding the two types of for-profit corporations.
All for-profit corporations have several characteristics in common, namely:
- The issuance of transferable shares of stock to officers and shareholders;
- Management roles;
- Corporate entity longevity; and
- Limited liability.
However, each corporation type offers its own unique advantages and disadvantages.
A C corporation (C corp) is the default form of corporation. Because they are the default form of corporation, C corps are easier to create. This means less paperwork to worry about.
Another advantage of a C corp is that you can have an unlimited number of shareholders. This may allow you to raise funds through stock offerings.
The greatest disadvantage of a C corps is double taxation. Specifically, your company’s revenue is taxed twice—first when your company makes the revenue and again when you file your personal tax return.
Unlike some other business structures, like a sole proprietorship, C corps do not allow tax write-offs for corporate owners on their personal tax returns.
However, not all the taxation consequences of C corps are negative. You can deduct certain employee benefits, like health and dental insurance.
Finally, the 2017 Tax Cut and Jobs Act reduced the corporate tax rate to 21%.
An S corporation (S corp) is a newer kind of corporation type that emerged in the middle of the last century.
Because C corps are the default corporation structure, you can form an S corp only after filing an additional form, Form 2553, with the IRS. S Corps also have to meet additional requirements.
For example, S corporations in Texas cannot have more than 100 shareholders, and none of these shareholders can be corporations or foreign citizens. S Corps can offer only one class of stock.
On the other hand, S corporations avoid double taxation, so corporate revenue is taxed only when it passes to the individual shareholders.
An S corp’s revenue is taxed at the individual income tax rate of each shareholder, which may in some cases be lower than 21%.
In general, you should incorporate as a C corporation in Texas if you want to grow your business into a larger company that can benefit from unlimited numbers of shareholders.
Conversely, you may want to file for S corporation status if you don’t expect to have too many shareholders and wish to benefit from lower taxes.
Figuring out the type of business formation to register can be challenging.
An experienced business lawyer in Austin, Texas can not only speed up the process, but also ensure you pick the right formation for your business, saving you thousands and potentially hundreds of thousands over time.
We can help with articles of formation, and certificate of formation, and advise on your specific situation.
Pros and Cons of a C corp vs. S Corp
|C Corp||S Corp|
|Easier to create, less paperwork||More requirements than C Corp|
|Double taxation||Revenue is only taxed once|
|Does not allow tax write-offs for |
corporate owners on personal tax returns
|Can offer only one class of stock|
|Unlimited number of shareholders||No more than 100 shareholders|
Choose a Name for the Corporation
Once you have chosen the type of corporation that is right for your situation, you need to pick a name for your company.
Under Texas law, your corporation’s name has to comply with certain rules.
These rules include the following:
- Your company name must include the word “corporation,” “company,” “incorporated,” or “limited” (abbreviations are acceptable);
- Your company name cannot include the words “lotto” or “lottery”; and
- Your company cannot imply that it is created for the benefit of war veterans or their families, and use words like “world war,” “veteran,” “legion,” or “disabled.”
Assuming you meet those requirements, your company name must also be unique—that is, there cannot be another company in the state operating under the same or a similar name.
Once you have a name, you can check the Texas Taxable Entity Search Tool to see if that name is available.
Pick a Registered Agent
When you create a corporation in Texas, another critical step is hiring a registered agent.
Registered agents serve to accept official correspondence—including government documents, tax forms, and legal notices—on behalf of your business.
The registered agent then forwards these documents to the corporation.
Texas law requires that each corporation designate a registered agent. However, registered agents can be easily found online and usually range from about $100-$300 per year.
Establish Your Corporation’s Initial Management
To file a certificate of formation in Texas, you must have at least one director. Directors play an important role in the management and administration of the company.
Their goals include establishing the bylaws that define the business’s operating procedures and participating in periodic meetings.
Texas law requires that directors be natural persons (meaning they cannot be a corporation, trust, or non-profit organization).
File a Texas Certificate of Formation
Once you have successfully filed Form 201 (also called a certificate of formation), your corporation will officially come into existence.
The form itself covers a wide range of different matters, including the number of authorized shares, the par value of those shares, and the purpose of the corporation.
At this essential stage, it’s highly recommended to consult an attorney to make sure that you are filing the form in compliance with all state laws.
Once you have completed the form, submit it in duplicate to the Texas Secretary of State along with the $300 filing fee. Alternatively, you can submit it on SOSDirect, Texas’s online business service.
Contact an Austin, Texas Business Law Attorney Today
Knowing how to form a corporation in Texas is easier than actually doing it. The good news is that a qualified business attorney at Massingill can walk you through all the steps of business formation.
They can also assist you with negotiations, document review, litigation, and many other kinds of tasks.