The Corporation is a business structure that provides personal liability protection by separating the owner’s personal assets from the assets of the business. Thus, a corporation is liable for the actions and finances of the business, while the owners (known as shareholders) are not.

Corporation Pros

• Corporations provide liability protection for the shareholders
• A corporation can raise non-debt financing by selling shares of the business
• Taxation may be lower than a sole proprietorship or partnership

Corporation Cons

• Corporations are more complex and expensive to set up than sole proprietorships, general partnerships, and Limited Liability Companies (LLC)
• At a minimum, corporations are required to hold an annual board of directors meeting, shareholders meeting, take minutes at the meetings, issue shares, etc., to maintain the entity’s liability protection.

Related: Guide to starting a business in Texas

Generally, Corporations are chosen over a Limited Liability Company when a significant amount of funding is being raised from investors.  However, due to the cost and complexity of the Corporation, most small businesses are better off forming an LLC.

Related: How to form an LLC in Texas

The following steps are to create a domestic Corporation, which is the most common type for businesses. The other types of Corporations in Texas include a foreign Corporation (an out-of-state Corporation wanting approval to physically operate in the state), a professional Corporation (designated for Corporations offering professional services), or a non-profit Corporation.

Steps to Forming a Corporation in Texas

Step 1: Choose a Name

The first step in forming a Corporation in Texas is selecting a legal name.

The name of the Corporation has to be different from other entity names in the state of Texas.  Check Corporation name availability in Texas.

The name of the Corporation must include one of the following designators at the end of the business name:

• Corporation
• Company
• Incorporated
• Limited
• Or an abbreviation of one of those words – Corp., Co., Inc., or Ltd.

 

A comma may be used after the business name and before the designator.  For example, “Common Grounds Coffee Inc.” and “Common Grounds Coffee, Inc.” are both acceptable.

If there is a name you want but are not ready to register the Corporation, you can file the Application for Reservation of an Entity Name (Form 501) with the Texas Secretary of State. The name reservation will hold a name for up to 120 days at the cost of $40.

Before selecting a name, you may also want to see if the domain name is also available.

While a Corporation has to select a unique name that another Texas Corporation isn’t using, that doesn’t guarantee that the name isn’t currently used by someone else.  Before registering a Corporation name, be sure to do a trademark search to verify it is available for you to use.

Step 2: Choose a Registered Agent

To have a Corporation in Texas, a Texas Registered Agent must be identified to accept service of process for legal documents, tax notices, summons, subpoenas, etc., on behalf of the Corporation.  This can either be a Texas resident or a commercial registered agent service.

You can act as the Corporation’s Registered Agent in Texas, and you are not required to pay for a registered agent. The requirements to be a Registered Agent include generally being present at the registered address during normal business hours and having a physical street address in the state.  A PO Box is not allowed.

Any individual meeting the requirements can be the agent; however, the agent’s name and address will become public record, and with that comes a loss of privacy. This is more important for some entrepreneurs, especially when doing business from home or are still employed.  Hiring a company like Northwest Registered Agent to be the Registered Agent will help protect their privacy.

Related: Do I Need a Registered Agent in Texas?

Step 3: File the Texas Certificate of Formation

The next step in the incorporation process is to file the Certificate of Formation with the Secretary of State. The Certificate of Formation can be filed on the Secretary of State’s SOSDirect website or with Form 201.

The information requested includes:

• The name of the Corporation, which must contain the word “Corporation,” “Company,” “Incorporated,” “Limited,” or an abbreviation.
• Registered Agent information, including whether an organization or individual and the Registered Agent’s name and physical address.
• Name and address of the initial board of directors.
• Information regarding the shares of the Corporation.   This section includes the total number of shares authorized and the par value of those shares.
• The purpose of why the Corporation is being organized. In most cases, a Corporation will use the general business purpose statement, “formed for the transaction of any and all lawful business for which a for-profit corporation may be organized under the Texas Business Organizations Code.”  A specific business purpose can be entered if desired.
• Name and address or the organizer.   This can be one of the owners of the Corporation or someone helping with the formation of the entity.
• Effective date. If you want to finalize the paperwork of the Corporation but not have it start for up to 90 days in the future, enter the future date. Otherwise, choose “this document becomes effective when the document is filed by the Secretary of State.”

The Texas Certificate of Formation can be filed online or submitted by mail.  The mailing address is:

Texas Secretary of State
P.O. Box 13697
Austin, TX 78711-3697

Step 4: Create Corporate Bylaws

Bylaws are the general guiding principles and procedures of the operations of the business. For example, the bylaws may include the name of the officers of the Corporation, responsibilities of the board members, terms of office, procedures for removing or adding a new director or shareholder, policies for authorizing new shares, when shareholder, and director meetings will be held, and more.

Step 5: Hold the Initial Board of Directors Meeting

During the first board meeting, the board of directors will, at a minimum, elect the officers of the Corporation (the President, Vice President, Treasurer, and Secretary). They will also typically review and approve corporate bylaws, choose a bank, issue shares of stock, and decide whether the Corporation will be taxed as a C corporation or S corporation.

It’s critical to remember that taking meeting minutes at all meetings is necessary to protect the shareholders from lawsuits and court actions. The minutes provide a record of all decisions and actions taken during the meeting. Minutes aren’t filed with the state, however, they need to be stored with other Corporate documents.

Step 6: Issue Shares of Stock

In exchange for money or services, the Corporation can exchange shares of stock. The number of shares of stock issued cannot be more than the number of authorized shares listed in the Certificate of Formation.

Alternatively, an inexpensive Corporate Kit can be purchased from Amazon, which has a corporate records book, blank stock certificates, initial meeting minutes template, a corporate seal, and more.

Step 7: Obtain an EIN

The EIN or Employer Identification Number (also called a Federal Employer Identification Number, FEIN, or Tax ID Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies the Corporation for tax purposes. The EIN will be needed to hire employees, open a bank account, register for business licenses and permits, file tax returns, and more.

There is no cost for the EIN when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.

Related: How to Apply for an EIN

Step 8: Elect the Corporation’s Form of Federal Income Taxation

By default, a new corporation will be taxed by the Internal Revenue Service (IRS) like a C-Corporation.  C-Corporations pay corporate taxes on their profits, and the owners pay personal income taxes on their dividends.

A Corporation can elect to be taxed as an S-Corporation. S-Corporations are taxed as “pass-through entities,” which means the Corporation itself does not file corporate taxes. Instead, the profits (or losses) “pass through” to the shareholders, who then report this income on their individual taxes.

For most small businesses, the S-Corporation tax election is the most beneficial because it eliminates the double taxation of the C-Corporation. This tax election can be changed; however, it is highly recommended to talk with an accountant before making this decision.

Step 9: Open a Bank Account

Opening a bank account for your Corporation is important for liability protection as the bank account separates the business’s funds from the member’s personal funds.
Several documents will be needed to open a business bank account, such as:

• A banking resolution is a document that authorizes the members to open a business bank account on behalf of the LLC.
• Copies of the original Certificate of Formation showing the creation of the Corporation in addition to the bylaws.
• Driver’s licenses of the members.
• Depending on the age of the Corporation, a Texas Certificate of Good Standing may be needed to prove the business entity is active and in good standing with the state.

Related: How to Open a Business Bank Account 

Step 10: Apply for Business Licenses and Permits

Depending on what your business does and where it is located, various business licenses and permits will likely be needed before starting your business. Some common registrations include:

Business Licenses – The state of Texas doesn’t have a general business license; however, many cities require a business license in order to operate.

Sales Tax Permit – Businesses selling products and certain services will need to register for a Sales Tax Permit with the Texas Comptroller.

Professional Licensing – Some services such as therapists, tattoo studios, salvage brokers, and food establishments require licensing with the Texas Department of Licensing and Regulation. While this isn’t a license on the business, licensing is required to operate.

Related: What business licenses and permits are needed in Texas?

Step 11: File the Annual Public Information Report

Corporations are required to file a public information report (commonly called an annual report in other states) with the Texas Comptroller each year.

Step 12: File the Annual Franchise Tax Report

Corporations will need to file the Texas Franchise Tax Report by May 15th each year. The franchise tax isn’t a tax on franchises, rather it is a tax on the privilege of doing business in the state. The tax is based on the gross sales of the business and paid to the Texas Comptroller of Public Accounts.

The first report is not due until after the first year of business. For example, a Corporation created on January 1st, 2022, wouldn’t file until May 15th, 2023.

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