Forming a Texas Corporation
The advantages of forming a Texas corporation are numerous and include limiting owner risk, liability, and possible tax savings. A main reason to incorporate in Texas is the liability protection of your personal assets.
When you incorporate it helps separate company and personal assets. A legal corporate entity is setup to separate the owners or shareholders from any debts that the business has. Typically, shareholders are not liable for the debts and obligations of the business. In a partnership or sole proprietorship, the creditors can go after the owners personal assets if the company's assets are not enough to settle a claim. This is a very dangerous concept for a small business owner who has assets to protect.
Forming a corporation can limit personal liability
When you form an Incorporation in Texas, you are essentially forming a new entity that exists separately from the owners. Therefore, when a Texas Corporation is named in a lawsuit, there are legal provisions and UCC Code to protect the owners, directors, shareholders, and employees from personal liability. If you operate your business without the protection of a corporation, you can find yourself personally liable for any and all debts and obligations of the business.
If you are currently employed at a large company, as an employee, you probably don't have any worries about being responsible for paying off the bills personally. But as a business owner you can be held liable if your business was not formed correctly.
If your business has not incorporated or formed an LLC, you may have to sell everything you have to cover your debts. In many cases business owners are faced with liens, and closed bank accounts. So, do the right thing and setup your business correctly.
Texas Corporate advantages:
- A Texas corporation will have an unlimited life. The business can continue to exist forever.
- Limited liability protection for all shareholders.
- Corporations can easily be sold, or additional shareholders/investors can be added to the company.
- A corporation can provide tax benefits to the owners.
How to name your Texas Corporation
Texas Corporations must contain the words Incorporated, Corporation, Limited, or Company, also acceptable would be abbreviations of these words such as Inc, Corp, Ltd or Co. Texas has a “two word” rule that applies to all Limited Liability Company and Corporation names. For example, if there was an entity with the name “Tex Mex Bar & Grill, Inc” anything submitted to the state with the first two words “Tex Mex” would be rejected, regardless of what followed those words.
Name Consent for Conflicts
Sometimes there is an option to obtain consent to use the name, though I it is often not granted since you need consent from the existing business. Common abbreviations in Texas may also conflict with the two word rule such as “SoTex” as an abbreviation of “South Texas”. Texas does not include in its searches for words such as “and”, “a”, “an” and “the” etc.
What does limited liability mean for debts
A Texas Corporation, if operated correctly, is a separate legal entity from the shareholders. Simply stated, your business is liable for the debts, while you are an employee/director of a corporation, however there is a lot that must be done to ensure a separation exists.
You must keep in mind, that you will be held responsible for any debts or obligations that you personally guarantee. So, if you are acting on behalf of your business make sure that this is clear all parties. One way to do this is sign on behalf of your company, and always use a corporate tax id number instead of your personal social security number.
Avoid problems with your corporation
The easiest way to avoid any problems with your Texas corporation, is to make sure that the Secretary of State, always has your most recent address information. We commonly see companies have issues when they move and do not notify the Corporations Division with their new address information.
If the state has your address information, they typically will send notifications by mail that will keep you in good standing.
What is a Texas S corporation?
An S corporation in Texas can be elected once a C corporation has been filed at the Texas Secretary of State. An S corporation status for federal tax purposes is created by filing Form 2553 (PDF), Election by a Small Business Corporation. Several requirements must be met before you can elect S corporation status.
Once you have filed for an S corporation you will receive a letter from the IRS notifying you of approval or rejection. After becoming an S corp, you will file form 1120S for your federal tax return. Taxes are different for S Corps and regular C corporations, so please discuss all tax related issues with your CPA.