Starting a corporation in Texas can benefit entrepreneurs looking to establish a separate legal entity for their business. Incorporating your business provides liability protection for its owners and offers potential tax benefits and a professional image. This comprehensive guide will walk you through the steps in starting a corporation in Texas, from choosing a corporate name to fulfilling ongoing compliance requirements. I will enlighten you on the advantages and disadvantages of having a corporation. Some people consider starting a corporation since it has advantages and benefits from their business.
Webinarcare Editorial Team will help you gain knowledge in starting a corporation with thorough research and market study. You must cross-check all the factors in this article before forming Texas corporation.
What is a Corporation in Texas?
A corporation is a formal organization established by stockholders, shareholders, or others to make a profit. Like individuals, corporations can undertake contracts, own assets, sue and be sued, pay taxes, limit state and federal taxes, and loan funds from banking institutions.
Common Types of Corporations
Before you start with a corporation, you should know what type of corporation you will form. There are several different forms of corporations you can take into consideration, depending on your corporation’s objectives and ownership structure.
C-Corporation is the most known type of incorporation. They have almost all corporate distinguishing characteristics. Profits are distributed to corporate owners who are taxed at an individual level. The corporation is taxed similarly to a business unit.
Texas S-Corporation is set up similarly to a C-corporation but has different tax implications and owner limits. An S-Corporation has no more than 100 stockholders and is not taxed separately. These business units must also file paperwork with the Internal Revenue Service (IRS) to obtain their status.
Religious, educational, and charity institutions frequently use non-profit businesses to run their operations without making a profit. Thus, a nonprofit corporation is exempt from paying taxes. The nonprofit organization’s gifts, contributions, or cash are reinvested in the company to fund its growth, future endeavors, or operations.
How to Start a Corporation in Texas
To start a corporation in Texas, you must follow the below steps that, include choosing a corporate name, hiring a Registered Agent, appointing directors, filing for Certificate of Formation – For Profit Corporation, creating corporate bylaws, holding the initial board of directors, issuing stock, obtaining required licenses and permits, registering with state tax agencies, and annual reporting and ongoing compliance. All these steps are basic ones. It can be changed depending on the type of corporation you form and the nature of your business.
Step 1: Choosing a Corporate Name
The first step in starting Texas corporation is choosing a name that is available and complies with Texas naming rules. Most states require that the name of a corporation be distinguishable from other registered business names and include a corporate designator such as “Corporation,” “Incorporated,” “Company,” or an abbreviation thereof.
Here are some guidelines you must follow while naming your corporation in Texas-
- Your business name must contain entity identifiers, such as “Incorporated,” “Limited,” “Corporation,” or “Company,” or an abbreviation, such as “Inc.,” “Co.,” or “Ltd.”
- Exclude any words in your business name, such as “Trust,” “Bank,” “Credit Union,” or “Trustee,” or words related to a government agency, such as “FBI,” “State Department,” or “Treasury.”
To check the availability of your desired corporate name, you can search the Texas Secretary of State‘s business name database and Texas business name search. If the name is available, you may choose to reserve it for a specific period of 120 days by filing a name reservation application and paying the online name reservation fee of $40 and mail name reservation fee of $40. If your corporation plans to operate under a name other than its legal name, you may also need to register a fictitious or “doing business as” (DBA) name.
The DBA filing can be done by two methods, by mail and in person., which costs around Varies by county. In addition, the DBA’s validity in Texas is ten years which you can file in Texas Secretary of State.
You can check out how to file a DBA in Texas for clearer understanding.
Step 2: Hire a Registered Agent
Hiring a Registered Agent is essential in starting a corporation. A Registered Agent is a person or company responsible for receiving important legal documents, tax notices, and other correspondence on behalf of your corporation. They ensure that your corporation remains compliant with state regulations and requirements. There are Texas Registered Agent Services to check in forming Texas Corporation.
Step 3: Appointing Directors
Corporations in Texas are required to have at least Three directors, though some states may require more. Directors are responsible for overseeing the corporation’s management and making major decisions on behalf of the company. In Texas, directors must be at least 18 years old and do not need to be state residents.
When appointing directors, it is essential to consider individuals who are knowledgeable, trustworthy, and capable of making sound business decisions. Maintaining a record of appointed directors, including their names, addresses, and terms of service, is also a good idea.
Step 4: Preparing and Filing Certificate of Formation – For Profit Corporation
After you appoint the initial board of directors in your Texas corporation, the next step is to write and file a Certificate of Formation – For Profit Corporation. In writing, the Texas Certificate of Formation – For Profit Corporation, the corporation name, principal place of business, the purpose of business, Registered Agent contact information, and the names and addresses of incorporators and initial board members, should be written.
To officially form your Texas corporation, you must prepare and file Certificate of Formation – For Profit Corporation with the Texas Secretary of State. The Certificate of Formation – For Profit Corporation is a legal document that outlines essential information about your corporation, such as its name, address, purpose, and details about its stock.
The specific requirements for Certificate of Formation – For Profit Corporation vary by state, but generally, the document must include the following:
- The corporate name
- The purpose of the corporation
- The name and address of the registered agent
- The names and addresses of the initial directors
- The number of authorized shares and their par value
- The name and address of the incorporator(s)
Once the Certificate of Formation – For Profit Corporation are complete, please submit them to the Texas Secretary of State’s office, along with the required filing fee. Fees vary by state, but in Texas, the Certificate of Formation – For Profit Corporation filing fee costs around $300 for filing online, by mail, in person filing, or by Fax It is crucial to provide accurate and complete information on this document, as errors or omissions may result in delays or rejection of your filing.
- Online Filing: Create an account/Log in to the SOS site, get the e-form, fill it, and submit online. Or get the online PDF, fill it up and upload it back on the site.
- Offline filing: Send the form by mail to or drop it off in person at Secretary of State, P.O. Box 13697, Austin, TX 78711-3697. Or Fax it to (512) 463 – 5709
Step 5: Creating Corporate Bylaws
Now you are done filing Certificate of Formation – For Profit Corporation in Texas, the next step is to draft corporate bylaws. While not always required by law, creating corporate bylaws is essential in establishing Texas corporation. Bylaws are the internal rules and regulations that govern the corporation’s operations and management. They outline the rights and responsibilities of directors, officers, and shareholders and provide guidelines for holding meetings and making decisions.
Key provisions to include in your corporate bylaws may include:
- The corporation’s purpose and principal place of business
- The roles and responsibilities of directors, officers, and shareholders
- The process for appointing and removing directors and officers
- The procedures for holding annual and special meetings
- The methods for amending the bylaws and Articles of Incorporation
- The procedures for issuing stock and maintaining shareholder records
Once the bylaws are drafted, they must be adopted by the corporation’s board of directors. Keeping a copy of the bylaws with your corporate records and updating them to reflect changes in the corporation or applicable laws is essential.
Step 6: Holding the Initial Board of Directors Meeting
The initial board of directors meeting is a crucial milestone for your Texas corporation. During this meeting, the directors will adopt the corporate bylaws, elect officers, and make other key decisions to set the foundation for the corporation’s operations.
The agenda for the initial board meeting may include the following:
- Adopting the corporate bylaws
- Ratifying any pre-incorporation actions taken by the incorporator(s)
- Electing corporate officers (e.g., president, vice president, secretary, treasurer)
- Designating a corporate bank account
- Authorizing the issuance of stock
- Approving necessary licenses, permits, and tax registrations
It is essential to keep detailed minutes of the initial board meeting, documenting the decisions made and actions taken. These minutes should be stored with your corporate records.
Step 7: Issuing Stock
Corporations in Texas are required to issue stock to their owners, also known as shareholders. When preparing to issue stock, you must determine the number of authorized shares and their par value, as outlined in your Certificate of Formation – For Profit Corporation. You may choose to issue different classes of stock, each with its own rights and privileges, such as voting rights and dividend preferences.
The process for issuing stock typically involves the board of directors approving a stock issuance resolution, determining the price per share, and recording the issuance in the corporation’s stock ledger. Maintaining accurate and up-to-date records of all stock transactions, including transfers and cancellations, is crucial to ensure proper ownership tracking and compliance with securities laws.
Step 8: Obtaining Required Licenses and Permits
Depending on the nature of your corporation’s activities and location, you may need to obtain various licenses and permits to operate legally. These may include federal, state, and local requirements, such as:
- A federal Employer Identification Number (EIN) for tax reporting and employee withholding purposes.
- State sales and use tax registration, if your corporation sells taxable goods or services
- Professional or occupational licenses for specific industries (e.g., healthcare, construction, food service)
- Texas business licenses, zoning permits, and health department approvals
Researching and obtaining all required Texas licenses and permits before commencing operations and maintaining compliance with any ongoing renewal or reporting requirements is essential.
Step 10: Registering with State Tax Agencies
In addition to obtaining licenses and permits, your Texas corporation may also need to register with various tax agencies. This may include registering for sales and use tax, obtaining an Employer Identification Number (EIN) for payroll tax purposes, and filing state income tax and franchise tax returns.
An EIN will serve as the tax ID for your Texas corporation. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.
The application of an EIN in Texas can be through the following:
- Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
- Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that Form SS-4 contains all of the required information.
- Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
- Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.
Each state has tax requirements, so consult a tax professional or Texas Comptroller of Public Accounts for guidance on your specific obligations.
Step 11: Annual Reporting and Ongoing Compliance
Once your Texas corporation is up and running, you must fulfill ongoing reporting and compliance requirements to maintain good standing. This may include filing Annual Report with the Texas Secretary of State, updating your corporate records to reflect changes in directors or officers, and staying current on any required licenses or permits.
In addition, it is essential to stay informed about changes in corporate laws and regulations that may impact your business and to seek professional advice when needed.
Paying Your Taxes in Texas
Even if you have established your corporation in Texas, pay your taxes and keep everything up to date so you won’t pay any penalty. Unlike an LLC, there is a corporate tax that every corporation in Texas has to pay. On the other hand, they must pay income taxes based on their business income. Some other types of taxes in Texas are sales tax, franchise tax (not applicable to all the states), and other state taxes.
Cost of Forming a Corporation in Texas
In forming a corporation in Texas, a filing and Annual fee must be paid. Without it, your corporation won’t operate. A corporation’s initial filing fee may vary from state to state. However, in Texas, it costs $300 for filing online, by mail, in person filing, or by Fax The corporation in Texas also has to file an Annual report (though it might not be mandatory, it is recommended to file one). Ensure you comply with all the necessary fees and costs so your Texas corporation will run successfully and smoothly.
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Starting a Texas corporation involves several critical steps, from choosing a corporate name to fulfilling ongoing compliance requirements. Following the steps outlined in this guide and seeking professional advice when needed, you can successfully establish your Texas corporation and enjoy the benefits of limited liability, potential tax savings, and a professional business image.