If you’re thinking of starting a business, one of the decisions you’ll have to make is how to structure your business. If you’re just starting out, it may make sense for the moment to create a sole proprietorship or partnership. As your business grows, though, there are some advantages in changing the structure of your company and incorporating it in Texas.
To Form a Corporation in Texas is Easy
It is easy to form a Texas corporation. If you choose this business structure, you’ll need to incorporate your business with the secretary of state. Depending on the size and complexity of your business, the process can take as little as one day. You can do it yourself, or you can hire an attorney to help you with the incorporation paperwork.
What’s a Corporation?
A corporation is a separate legal entity from its owners, called shareholders. This means that the corporation itself is liable for all its debts. This is an important protection for creditors. If you’re a shareholder in a corporation, you are not personally liable for any of the business’s debts or lawsuits.
To create a corporation in Texas, do the following:
Step 1: Name Your Texas Corporation
If you create a corporation in Texas, the name you choose for it determines much of what your business will be able to do. The name must be “either the name of the commonwealth or the name of a county, but not both and shall not be obscene.”
- The name must be distinguishable from all other business names.
- Contain the words “Texas Corporation,” “Texas Inc.,” or the abbreviation “Corp.”
- Not contain a public figure’s name.
- Not contain a bank, insurance company, or trust company name that is authorized to do business in Texas.
- Not use the words banking and finance or insurance unless your corporation actually engages in those businesses.
- Not use the word “association,” “club,” “foundation,” “fund,” or other words that suggest a not-for-profit organization.
- Not contain a word that would appear to be the name of an individual (John Jones Inc.). That name belongs to a person, thus making it an assumed or fictitious name.
Is my corporation name available in Texas?
One of the first things you want to do before forming your corporation in Texas is checking whether or not the name you’ve chosen is available. You’ll need to check with both the secretary of state and county clerk’s office to make sure it isn’t already in use.
Is the URL available?
It is also a good idea to check the URL available on the internet. You may want to include the term “corporation” or “incorporated” in your company name. These words are often associated with corporations and you want to avoid any confusion for potential customers.
Step 2: Choose a Texas Registered Agent
Once you’ve determined what name you want for your corporation, you’ll need to appoint a Registered Agent in Texas. The registered agent must be a person, not a business entity like a corporation or limited liability company (LLC), and he or she must reside in Texas. There is no fee for serving as the registered agent for a Texas corporation.
- All corporations must appoint a registered agent.
- A registered agent must be 18 years old and a resident of Texas.
- A corporation may not act as its own registered agent.
- The person appointed as the registered agent may never be removed or replaced as the registered agent for any reason other than death, resignation, or revocation of his or her Registered Agent certificate of appointment by the Secretary of State.
- A corporation may not appoint itself or its officers, members, managers, or partners as the registered agent.
- The Secretary of State will not accept a Registered Agent certificate of appointment for any individual who is incarcerated for a felony conviction.
Consent to Appointment
In order for a corporation to act as its own registered agent, it must obtain consent to appointment from each shareholder, manager, partner, or director of the corporation. The consent should be acknowledged by a notary public.
Step 3: Hold an Organizational Meeting
Once you’ve selected a name for your corporation, it’s time to hold the first organizational meeting. This is the meeting where you’ll create an organization chart that will help determine executive officers and directors of your company, elect board members, and set a board meeting date. The meeting documents are usually simple forms issued by the secretary of state that you can fill out online and include in the body of your letter to the secretary of state.
Create and Approve Corporate Bylaws
You’ll need to file a Corporate Bylaws document with the Texas secretary of state and obtain a certificate of filing from the secretary of state. You will also need to designate an agent who will act on your behalf if you are unable to do so. If you have multiple locations, you’ll also have to designate an agent for each location.
Appoint Initial Directors
The initial directors of your corporation will be designated in the corporate bylaws. This is where you will list who your initial board of directors will be and when their terms expire. The board of directors is the governing body of your company and is responsible for making decisions regarding its management, policies, and practices.
The corporate bylaws may specify a certain number or percentage of required directors that must be present at every organizational meeting. Below is some additional information about selecting your corporate directors:
- There must be at least one director on the board.
- The number of directors must be set by the corporation’s charter or bylaws.
- A director may not be an officer, an employee, or a consultant of the company.
- A director may not also serve as a registered agent unless he or she is also a resident of Texas.
- The initial officers are selected in the same meeting where you choose your board members.
Choose a Share Structure and Strategy
Once you’ve created your company, you’ll need to issue shares. You can issue one or more classes of stock. Shares are divided into common and preferred shares and are further subdivided into whole and fractional shares. A corporation may issue as many classes of stock as necessary and all shareholders are treated equally except for the unique rights granted to them by the class of stock they own.
Create and Execute an Incorporator’s Statement
The incorporators are the first directors of a corporation and they are responsible for creating the corporate charter. The corporate charter must be filed with the secretary of state within 90 days after incorporation.
The incorporator’s statement is a simple form you can fill out online and is issued by the secretary of state. It includes all of your company information, including name, business address, registered agent, the authorized number of shares, number, and class(es) of shares authorized, etc.
Step 4: File the Texas Certificate of Formation
You must file your corporate paperwork with the Texas Secretary of State to form your corporation. You can either do this electronically or you can mail a paper copy to the secretary of state. Once you’ve filed your documents, you will receive an access number that must be used when applying for a Texas Business License online at the secretary of state website.
After you’ve filed your Texas Certificate of Formation, the Texas Secretary of State will send you a verification letter. It’s a good idea to keep this letter in a safe place to prove that you did indeed file your corporation.
Step 5: Get an EIN for Your Texas Corporation
You can apply for an employer identification number (EIN) from the IRS once you’ve filed your certificate of formation with the Texas secretary of state. The EIN is your company’s Federal Tax ID Number or Social Security number that must be used in all federal tax forms, such as a W-2.
To apply for an EIN, you will need to provide some information about your corporation such as its name, address, and Tax ID Number.
Advantages & Disadvantages of the Four Basic Organization Structures
I. The Texas Simple Organization Structure has these advantages:
- Minimal filing and minimal staff time required
- Simple structure that is easily understood by all members of the organization
- Direct management and control by officers and directors who are paid employees of the corporation
II. The Texas Corporation is a more complex structure that requires more administrative time but provides some benefits:
- A greater number of directors, management, and corporate officers than the simple form
- More complex provided there are at least two classes of stock or if additional classes are desired as part of a business.
- Greater control of the corporation and its finances by the board of directors as opposed to the shareholders.
III. The Texas Limited Partnership is a very complex structure that offers many opportunities for foreign entities to take advantage of and many disadvantages:
- May be more expensive than other options
- Requires more administrative time and documentation
- May not be available for certain business types such as corporations that want to conduct international trade or buy, sell, or hold real estate.
IV. The Texas Limited Liability Company is a very flexible business entity that provides a good balance of simplicity and complexity:
- May be cheaper than some other options
- Provides a more complicated structure that can be used for several different purposes
- Can be structured to avoid tax implications for all members
An LLC has more benefits than the other business entities because it has the benefits of partnerships while still being able to issue shares. It also provides flexibility because the relationship and tax status between members can be varied depending on how the company is structured. As a result of these features, LLCs are very popular among small business owners.
The major disadvantages of the LLC include:
- Must file a statement with the secretary of state under the name that you’ve chosen for your LLC.
- May require more administrative time and lead to additional costs if not using accounting software.
- Can be more difficult to form than other options.
- May not be available for certain business types such as corporations that want to conduct international trade or buy, sell, or hold real estate.
The LLC is best suited for these business types:
- Professionals who want to protect their personal assets
- Businesses may have difficulty finding a bank willing to lend money directly to the company.
- Businesses with members who do not want to be personally liable for the company’s debt.
- Businesses that will need to issue shares to raise money, but don’t want to be subject to the more complex taxes and regulations that come with corporations
- Businesses that do not plan on issuing stock to investors or raising large amounts of capital.
How Much Does It Cost to Incorporate?
It’s possible to incorporate for free online. The website provides information on incorporating a limited liability company or an S-Corp. There are other options if you decide to use an attorney or pay an online incorporation service like LegalZoom that will set you back $400-$800.
The legal filing fee charges by the state vary according to the structure of your company but typically range between $125 and $250 per entity. You can find more details about the filing fees and registered agent service fees on the Secretary of State website.
The filing fee can be applied to the cost of filing your articles of organization to form your Texas organization.
There are three ways to pay your legal fees:
- Pay using a credit card
- Pay online with a credit card, debit card, or PayPal account.
- Pay by check or money order payable to the Secretary of State.
Texas business owners that incorporate their companies online will have their filings processed faster and save on fees.
Open a Business Bank Account
Business owners who incorporate may open a bank account in their business’ name. This account will allow the company to pay bills and take money out of the business as needed.
If you decide that you would like to have a business bank account, then you will need a U.S. bank account number, and Texas will require your company name to be entered into our banking system by the person who will be opening the business account. The SS-4 form is used to open the account when filing for a federal tax ID number (EIN).
The bank account will allow money to be deposited into the account from the business owner’s personal bank account.
The Treasurer of Texas recommends that you have a bank account for your company. The Treasurer’s office reviews all forms, letters, and notices that your business receives and may question the legitimacy of the information on these documents if it is not in writing. The form allows you to have a local agent who is responsible for managing company accounts.
Set up a Corporate Records Book
A corporate records book is a must for all businesses that incorporate. The corporate records book will have the most up-to-date information about your business. Some of the information in this book includes:
- The company’s name and address
- Names, titles, and addresses of the company officers, directors, and shareholders
If you have questions or issues concerning your business bank account or need to update your contact information then you can contact the treasurer’s office.
The Texas Business Record form is used to open a corporate records book.
Find a Business Broker
If you decide to have your business bank account opened in your company’s name then you will need a corporate records book. A Texas attorney can provide legal advice concerning incorporation, requirements for having a corporate records book, and other important questions.
A Texas-based broker can help facilitate the process of incorporating and maintaining financial records such as:
- Setting up an accounts payable system
- Establishing shipping information for your business
- Providing tax advice about deducting expenses and booking sales taxes.
- Explaining to the IRS how the company will pay its taxes
A business broker can also provide expertise in what types of insurance are recommended for your business and if any form of life insurance is required.
Business brokers provide valuable services that may not be available from general practitioners. Consider your insurance needs before seeing a general practitioner or other health care providers. Each person’s insurance needs vary, so one person’s experience with a health provider may not be relevant to your situation.
Open a Business Credit Card
Incorporating your business in Texas will not have an impact on your credit rating. If you plan on applying for a business credit card after incorporating then it is highly recommended that you apply for a business credit card before incorporating.
The application process should be applied for before Texas sends the tax filing documents to the IRS since there may be questions about the EIN number and taxes when accepting the credit card application.
There are credit cards for business owners that allow your personal credit card information to be linked to the company and its finances. This allows you access to the new bank account that is maintained for your company. All money taken out of the business’ bank account will be treated like a personal expense, which any amount over $20,000 will report on your personal tax return each year.
Establish and Build Your Business Credit Score
The credit score is used to determine if your business qualifies for financing, a new line of credit, or extending credit to customers.
The credit score is determined by the Experian network which gives a letter grade based on the information that is reported to them.
The higher the grade then the more likely your business will qualify for financing or new lines of credit.
After incorporating your Texas business it may be possible to start building a good business credit score. You can build your business credit score by acquiring new lines of credit as a business.
Some business owners have established their business credit score by:
- Paying off their personal credit cards and other debt obligations.
- Allowing your personal bank accounts to be linked to the company bank account.
- Using a corporate credit card for the company’s expenses and payments on time.
- Paying off high balances on another line of credit from different sources (such as loans and mortgages).
Utilizing your business credit card to make business purchases may help establish a positive credit history since the credit card is in the business’ name. However, each company is different and it is best to research and understand the risks of using a corporate credit card.
Hiring a business accountant
The perfect time to hire a business accountant is before incorporating your business. Business accountants are qualified to help in the process of creating financial statements and keeping your company’s tax returns up-to-date.
After incorporating a Texas company, the IRS requires that you have an accountant review your personal tax returns and the corporate tax return if you are filing as a C corporation. Your business accountant will be responsible for making sure that all taxes for the C corporation are reported properly on personal tax returns.
Investing in a business accountant can save you time and money since he or she can keep all tax information up-to-date.
You may incur some expenses while incorporating your business, however, if you do not have the proper insurance then you may be unable to continue operating your business.
Business owners fail to get the proper insurance policies because they are not aware of what kind of insurance is available. You can insure your company, its finances, and physical property with a Texas surety bond or a Texas liability policy.
A Texas surety bond is required for companies that are incorporated in Texas and can be purchased from local bonding companies as well as online.
If your business will be contracting work out then the customers may require a Texas performance bond.
Types of insurance:
1. Business Insurance
Business insurance will protect your company from financial liability. Your business may be more susceptible to financial liabilities than others. A list of typical coverages includes:
- Payment of bonds
- Payment of claims
- Workers compensation claims
- Property damage and liability loss
- Insurance for inventory purchased or owned by the business
- Dental and medical insurance for employees
2. Liability Insurance
Liability insurance will protect the company from lawsuits and financial losses. A list of typical coverages include:
- Bodily injury
- Property damage
- Third party losses
- Damage to real estate (with or without builder’s risk)
- Commercial auto
- Professional liability (e.g. malpractice, errors & omissions)
Liability Insurance can be obtained directly from an insurance company or through brokerage services.
You should look at your state’s insurance laws when obtaining liability insurance. These laws regulate how much money must be paid out to settle a claim in each state.
Certain insurance companies may require the use of their policy when determining your rates. You can save money by having several providers in case one company has unfavorable terms.
3. Business Property & Equipment Insurance
Business property and equipment (BP&E) insurance will protect your company’s tangible assets from loss or damage from fire, explosion, and theft.
You can usually purchase this insurance directly from the provider, however, you may be able to obtain a cheaper rate by purchasing through a broker.
A Texas surety bond or a Texas liability policy will protect your company from financial liabilities such as bodily injury and property damage if you do not have BP&E insurance.
4. Worker’s Compensation Insurance
You may be required to purchase worker’s compensation insurance if your company employs one or more people, has contracted work, or is required to by state law.
Workers’ compensation insurance protects you from being sued by a customer in the event that a worker is injured while working on the company’s premises.
You should look into your state laws when purchasing this type of insurance since requirements vary from state to state.
Texas State Corporation Tax Requirements
The Texas state corporation tax is a franchise tax, which means that you only pay this tax once. The Texas State Corporation Tax is both an annual tax and a franchise fee for the privilege of doing business in the state of Texas. This obligation is owed by businesses with $300,000 or more in shareholders’ equity and businesses with at least $200,000 in assets.
The amount owed as a state corporation tax payment depends upon your net worth and income. You may also be required to file an annual report to remain active.
Your business will be required to pay a franchise tax yearly until it relinquishes its corporate status.
Your Form 1120S will state the exact amount that is owed as a state corporation tax payment on your annual report.
The following information can help you understand the state corporation tax requirements:
1. Annual Franchise Tax Report
The Texas Tax Code requires businesses that file Form 1120S and have total assets of $300,000 or more to file an annual franchise tax report with H&R Block, Inc.
The franchise tax report is due on April 15th of each year, or the next business day if April 15th falls on a weekend or holiday.
2. Use Tax Form
The Texas Department of Revenue requires you to file a use tax return based on the total purchases made from out-of-state vendors. You will need to know how much money was spent on goods and services during the year.
The use tax form is due by the last day of the month that you file your federal return.
The Form 1040 must be filed electronically with the Texas Department of Revenue unless you qualify for an exception.
You may qualify for a deadline extension to timely file a corporate tax return for at least one year if you are considered an “excepted person”.
3. Corporate Income Tax Return
The corporate income tax return will show how much in-state corporation tax was owed to the Texas state government based upon your net worth and income.
- The corporate income tax return is filed as part of Form the 1120S
- You should be aware that there may be another state, local, or federal taxes that you will need to pay if your business meets the respective qualifications for each tax. You should also find out whether these taxes are based upon net worth and/or income when looking at other states’ tax codes.
- The state of Texas has a Pure Bill of Equity Law. The Pure Bill of Equity Law states that in a lawsuit against the owner of the business, the business assets are not liable for any award or judgment if the business assets belong solely to the owner
- The state of Texas has a Co-debtor Law. The Co-debtor Law states that a creditor may choose either to sue the individual or chase after a business if both an individual and business have debts. This law applies when an individual and/or corporation is jointly liable with another entity (person or business)
- The Texas court system has established the following precedence in determining the rightful owner of assets if they are missing from a business
- A person who claims an interest in a lost item must file a complaint within 90 days of the loss with the nearest law enforcement agency
- The owner/principal of the business will be charged with reporting any missing assets to law enforcement within 45 days of filing a written claim to them.
The attorney general will be charged with searching for the lost assets, however, no one is required to file a complaint with the attorney general if they have filed a complaint with law enforcement.
Texas Sales Tax
As a business, you will need to understand the Texas sales tax laws and the rates required in order to collect this tax.
Sales tax is collected at a rate of 6.25% on most retail sales throughout the state of Texas.
You may find it necessary to account for these exemptions when filing your TPS report.
A business owner should also work with a tax professional when filing their TPS report to ensure that all sales and property tax exemptions are properly reflected in their final filing.
The following is an overview of the Texas sales tax exemptions:
1. Food for Home Consumption
Food for home consumption is not taxable. This can include items such as meals, snacks, and drinks. It cannot include alcohol or food that is considered prepared food if it is consumed on the premises or off the premises if it is intended to be consumed off the premises.
A customer should receive a receipt for their purchase of food that was purchased from your retail store or restaurant, even if there was no tax due on the sale.
If the food is not sold to the customer and is consumed at a later date, it is considered a “naked” sale. In this case, the tax will be calculated at the rate of 8% on total sales for that business.
2. Food for Home Consumption for Churches, Schools, and Nonprofit Organizations
Foods related to religious worship are not taxable if they are used in the preparation of a meal or consumed at a later date. This also applies to schools and nonprofit organizations.
3. Maintenance, Repair, or Alteration
Maintenance, repair, and alteration (MRA) of machinery and equipment used for the sale of industrial machinery and equipment are not taxable. This can also include appliances. The MRA exemption includes anything that is necessary for a business to remain in operation.
4. Mark-up on Software and Professional Services
Businesses selling software or professional services can enjoy a 40% mark-up on the transaction after the first $100,000.00 of sales in your business. This exemption includes computer hardware, software, and professional services.
The Texas sales tax laws do not include taxable items such as alcoholic beverages, tobacco products, jewelry, firearms, ammunition for firearms, and bows and arrows for hunting.
Texas Employer Taxes
As a business owner, you should be familiar with the Texas Employer Tax laws, and the know-how they apply to your business.
When you finish reading this section, you should be knowledgeable about all the tax forms that are required during tax season and will be able to explain them to your employees in plain English.
The Texas Employer Tax laws can be broken down into three categories:
1. Payroll Taxes
The payroll tax laws are for employers and employees. A business owner can choose whether to pay the employer and employee taxes directly or have a payroll service provider handle the employer taxes.
The Texas Employment Commission will have lists of licensed payroll service providers on its website at www.taxes.state.tx.us. Many of these entities offer free W-2 forms, which can help your business avoid paying self-employment tax, or SE Tax, on wages to their employees.
2. Corporate Income Tax
The corporate income tax laws are for corporations and partnerships that are required to file a corporate tax return. The annual corporate income tax deduction is $25,000.00. Married couples who file as married filing jointly will receive the maximum $25,000.00 deduction on both their individual and their combined business income from sources within or outside of Texas.
3. Self-Employment Tax
The SE tax laws are for individuals that are self-employed in their own business, as well as professional service providers who pay their own W-2’s. This tax applies to those who earn income from self-employment or professional service employment and is collected by the Texas Comptroller of Public Accounts. The maximum amount of income tax on a sole proprietorship is $1,250.00; an individual business is subject to the maximum tax of $6,250 per calendar year.
Texas Corporation Licenses and Permits
Texas is the largest state in the United States, therefore you should make sure that your LLC has the proper Texas state licenses and permits.
For example, a company that sells products or services within Texas and has customers located in other states will want to apply for an additional Texas license before distributing their products or services to those out-of-state customers.
Below are the licenses and permits required by your business type:
1. Federal Seller’s Permit
The seller’s permit is required by any company that wants to sell products or services in Texas. The seller’s permit is issued by the Texas Department of State Health Services. A business owner can apply online at www.dshs.state.tx.us and follow the online application procedure.
2. Texas State Corporate Charters and Permits
A Texas LLC will need a state charter if its owners want to take advantage of the online filing process. The application process for a Texas LLC charter can be found online at https://www.sos.state.tx.us/corp/bcs/prospectus/default.shtml.
The Texas Secretary of State will provide the required forms for the state charter and permits.
3. Application for Permit to Operate as a Retail Food (Restaurant) Establishment
A food (restaurant) establishment is required to apply for a state permit to operate as a restaurant in Texas. The form can be found at https://www.sos.state.tx.us/ce/forms/index.shtml.
4. Texas Alcoholic Beverage License
A Texas alcoholic beverage license is required if your company wants to sell or manufacture any type of alcoholic beverage in the state. A business owner can apply for an alcohol dealer’s permit online at https://www.sos.state.tx.us/ce/forms/index2.shtml. The application for a statewide permit can be found at http://www3.sos.state.tx.us/Business/Forms/SmallerBizLevel1.pdf.
5. Application for Permit to Operate as a Museum
A Texas museum is required to apply for a permit that allows them to sell or display alcoholic beverages in their museum. A business owner can apply online at https://www.sos.state.tx.us/ce/forms/museumapplicationdefaultformprograms.shtml. The application for a statewide permit can be found at http://www3.sos.state.tx.us/Business/Forms/SmallerBizLevel1.pdf.
6. Application and License for a Vapor Product Vendor
If you are selling or producing a vapor product, you will need to apply for an alcohol dealer’s permit and state license in order to do so. A business owner can do this online at https://www.sos.state.tx.us/ce/forms/vaporproductapplicationdefaultformprograms.shtml. The application for a statewide permit can be found at http://www3.sos.state.tx.us/Business/Forms/SmallerBizLevel1.pdf.
7. Form for a Hereford Farm or Ranch
If you want to own a farm or ranch in the state of Texas, you will need an application for this type of business, which can be found at https://www.sos.state.tx.us/ce/forms/biofarmdefaultformprograms.shtml. The application for a statewide permit can be found at http://www3.
If you are thinking to form your Texas corporation, I hope that the information from this e-book gives you the confidence that, with a little preparation, you can start up and operate your new business successfully.
You should be aware of all the legal requirements so that you do not put your new business in jeopardy by not creating or maintaining proper legal structures.
Good luck with your business!