Choosing the Right Type of Texas Corporation

The Lone Star State is a great place to start a business. A combination of natural resources, lots of land area and culturally diverse cities makes Texas a strong center of opportunity.

Texas is a very business-friendly state as there is no personal state income tax. Texas does have a franchise tax fee, but most small business owners fall below the minimum income level required to pay this tax.

What Type of Texas Business Entity Should You Choose?

When it comes to starting a business in Texas, you have a few options for the type of business you want to create. This is known as your “legal business entity,” and it defines how your business will be treated by the state, the law, the IRS and other official bodies.

Most new entrepreneurs have a choice of several business types — sole proprietorship, partnership, Limited Liability Company (LLC), S Corporation or C Corporation.

Here’s a quick overview of each.

• Sole proprietorships and partnerships are the simplest types of business. They do not provide any special protections or benefits to entrepreneurs and can make your personal assets vulnerable. We do not recommend them.
• Limited Liability Companies (LLCs) are a great option for smaller businesses. They are quick and easy to create, inexpensive to administer, light on regulation and have simple taxation and rules. You can learn how to create an LLC in Texas here.
• S Corporations are the simplest type of corporation an entrepreneur can create and are good for many types of businesses. The regulations, taxation, compliance and legalities are more complex than for an LLC, but they do provide tax advantages for their owners. You can find more information on S Corporations here.
• C Corporations are the most complex type of corporation. They are best for large businesses and are a necessity if the business will be traded on public stock markets. C Corporations have much more significant regulation, compliance and legalities; they are not as tax efficient as S Corporations or LLCs. You can find more information on C Corporations here.
• Other business entity structures include nonprofits, Limited Liability Partnerships (LLPs) and B Corporations, but they will not be relevant for the majority of entrepreneurs.

Advantages of a Corporation Over an LLC

There are several reasons an entrepreneur might choose to form a corporation instead of an LLC in Texas.

• If you want to pay lower self-employment taxes than an LLC, you will need an S Corporation.
• If you want to easily transfer ownership through buying and selling stock, you will need a C Corporation or an S Corporation.
• If you want up to 100 shareholders who are U.S. citizens or residents and want to issue one type of stock, you will need an S Corporation.
• If you want more than 100 shareholders, want to issue more than one type of stock or have international shareholders, you will need a C Corporation.
• If you want to allow the public to buy and sell shares in your company after an Initial Public Offering (IPO), you will need a C Corporation.

Here’s a side-by-side comparison between the various business types. This table focuses on the areas apart from company stock and shareholders.

This table shows the differences between Texas business entities when it comes to issuing, buying and selling stock.

A Quick Note on the Differences Between Texas S Corporations and C Corporations

When a corporation is initially created, it is automatically assumed to be a C Corporation and only becomes an S Corporation (and will be taxed as such) if you file the IRS Small Business Tax Election form 2553.

In most cases when we discuss “corporations” in this guide, we’re talking about both C Corporations and S Corporations. If anything is relevant to just one or the other, we’ll declare that.

Advantages of Forming a Corporation in Texas

Texas corporations have several benefits for business owners.

• Corporations provide the strongest form of liability protection possible. They insulate your personal assets and finances from those of your business.
• This means that any liabilities created by your corporation (debts, obligations, damages, bankruptcy or other liabilities) should not impact your personal money, property or assets — they are considered to be completely separate from a legal perspective.
• There is no state income tax in Texas.

Advantages of Forming an S Corporation in Texas

In addition to the general benefits above, Texas S Corporations provide several other advantages.

• S Corporations can have up to 100 shareholders.
• Running an S Corporation in Texas is simpler than running a C Corporation.
• It is easy to transfer ownership in an S Corporation by selling your stock.
• In some cases, part of the income from an S Corporation can be paid as a “distribution” rather than “salary,” so it would not be subject to self-employment tax. Find out how this can save you money using our S Corporation tax calculator.
• LLCs can choose to be taxed as S Corporations to take advantage of this.
• You can find more advantages of forming an S Corporation in Texas.

Advantages of Forming a C Corporation in Texas

In addition to the general benefits above, Texas C Corporations provide several other advantages.

• Ownership in a C Corporation is very fluid and determined by who owns stock in the business.
• C Corporations can list their shares on a public stock exchange. This stock can be bought and sold by anyone.
• C Corporations can sell stock to investors inside and outside the U.S.
• C Corporations can issue more than one type of stock.
• C Corporations can raise more funds by issuing more stock.

Points About Forming a Corporation in Texas

Here are some areas to be aware of when you’re creating a corporation in Texas.

• Corporations are formed on the state level. You will need to form a new corporation for any state where you want to have an office or do business.
• All Texas corporations must issue stock to shareholders.
• All Texas corporations must hold Annual General Meetings (AGMs).
• All Texas corporations must have an elected Board of Directors.
• All Texas corporations must appoint officers.
• Money earned by Texas C Corporations will be subject to “double taxation” through tax paid on both company profits and dividends paid to shareholders.
• Only U.S. citizens and residents can own stock in Texas S Corporations.
• S Corporations are limited to 100 shareholders and one class of stock.
• All Texas corporations must follow stringent compliance, rules and regulations. This includes financial reports, adopting bylaws, corporate formalities and the like.

Are you ready to start your Texas corporation? If so, we can help. We provide comprehensive corporation formation services for both S Corporations and C Corporations in Texas.

Start Your Texas Corporation in Six Steps

Now that you’ve decided a corporation is right for you, here’s how to form one. At Incfile, we make the corporation formation process easy — and with prices starting at just $49 plus the Texas filing fee, you get excellent value too.

• Start your Texas S Corporation now
• Start your Texas C Corporation now

Step One — Name Your Texas Corporation

• Choose a unique, distinct, original name for your Texas corporation
• This name cannot be used by another business in Texas
• This name cannot be confused with the name of another business in Texas
• See if the name is available by searching for it on the Texas Secretary of State website
• The name of your business must end with “Corporation,” “Incorporated,” “Limited” or an abbreviation of one of these
• For example: “Texas Natural Resources Survey Reports Corporation” or “Finister and Sons, Limited”
• If you’re not forming the business right away, you can reserve the name.

Step Two — Establish Street and Mailing Addresses for Your Texas Corporation

A Texas corporation must have a designated address. That could be your home address (if you’re running the company from your residence), where your office is located or any physical address of your preference — even outside of Texas. It can be a P.O. Box.

Step Three — Appoint a Registered Agent for Your Texas Corporation

Every Texas corporation must have a “Registered Agent” who receives official legal and tax correspondence and has responsibility for filing reports with the Texas Secretary of State. Your Registered Agent must have a physical street address in Texas.

A Registered Agent could be you, a director or an officer of the corporation. Here at Incfile we always recommend using a proper Registered Agent service since they provide several benefits:

• Some people establish companies outside of the state they live in and will use a Registered Agent service to provide an address for receiving legal documentation in the state.
• The Registered Agent's address is listed on public records on the Secretary of State's website. If you do not want your own name and address to be registered, you should use a Registered Agent service.
• The Registered Agent must be present or available during normal business hours (9 a.m. to 5 p.m. Monday to Friday) to receive any legal correspondence delivered, since the type of documents delivered to the Registered Agent require a signature on delivery.
• Some people travel or are not always at their business location to receive these documents.

At Incfile, all of our packages include a Registered Agent service that is free for the first year and $99 per year thereafter. We also have a dashboard where you can log in and easily view any document your Registered Agent has received on your behalf.

Step Four — Draft Your Certificate of Formation

The legal document required to create your new corporation is called the Certificate of Formation. You will need to gather various details for your Texas filing including:

• The corporation’s name
• The corporation's Registered Agent and their address
• The corporation’s directors
• The corporation’s capital structure (number of shares to be issued, who owns them, pricing, etc.)
• The corporation’s purpose
• The corporation’s mailing address and street address
• The name and address of the incorporator

Step Five — File Your Certificate of Formation with the Texas Secretary of State

Once your form is completed, you can file it with the Texas Secretary of State. Filing your Certificate of Formation creates your Texas corporation. You can do this online, mail in a form or have Incfile do it on your behalf.

Step Six — Complete the Legal and Compliance Requirements for Your Texas Corporation

Once your corporation has been created, you will need to get certain legal requirements in place. These include:

• File IRS Small Business Tax Election form 2553 if you want to be treated as an S Corporation
  • Any S Corporations that are formed through Incfile will also include a prepared Form 2553 that will be delivered with the state formation documents
• Create and issue stock certificates to your shareholders
• Apply for business licenses and permits. You may require licenses from your state, county, township and various industry or federal bodies
• Get an Employer Identification Number (EIN)
• File for taxes with Texas Comptroller
• Get all formalities in place for employees, including unemployment, disability, payroll, insurance and taxes
• Appoint a board of directors for the corporation
• Appoint officers to the corporation
• Get a corporate records book to capture all your important corporate information

Starting Your Texas Corporation — Useful Resources

• Texas Secretary of State website
• General information from the Texas Secretary of State

Form a Texas Corporation Without Breaking the Bank

Incfile provides a cost-effective service to help you create your corporation. We guide you through the process and handle most of the administrative steps on your behalf, such as filing the Articles of Incorporation or Certificate of Formation. Our basic package also provides a free Registered Agent service for the first year. If you're looking for help creating a corporation, we can help you start an S Corporation or a C Corporation.