LLC, Business License, Incorporation
Texas remains one of our most popular states for incorporation and LLC formation. With the second largest population in the United States, Texas has a thriving business community. Some of the largest U.S. companies, including Exxon Mobil and Dell, maintain their headquarters in Texas. This state also services many small businesses, particularly in major industries like agriculture and information technology.
Incorporating in Texas
Many entrepreneurs choose to start a business and incorporate in Texas because it gives them access to natural resources, land, and a large population. Like other states, incorporating in Texas requires several steps. Failing to follow these steps can result in lengthy delays. When you incorporate in Texas, it often helps to hire service companies who understand the details of this process.
The Company Corporation can help you incorporate in Texas online.
Forming a Corporation in Texas
Texas corporations are overseen by a state government agency called the Corporations Section of the Office of the Secretary of State. The Company Corporation will submit your paperwork and payments to this agency, which is frequently referred to as the Section. If you need to obtain additional licenses, then you should contact the Texas Department of Licensing and Regulation.
Cost to Incorporate in Texas
The overall cost to incorporate a business in Texas depends on several factors. A certificate of formation for a Texas for-profit corporation, for instance, has a $300 filing fee. Texas nonprofit corporations, however, only have to pay a $25 fee. The Company Corporation includes these Texas incorporation fees within the package price that you select.
Filing for Your Certificate of Formation in Texas
A Texas corporation is created by filing a Certificate of Formation. The Company Corporation will file this form on your behalf with the information that you provide to us. Before you can form your corporation, you need to file for a certificate of incorporation in Texas. To complete this certificate, you will need to provide several pieces of information, including the name of your organization, its mission, and the names of at least two directors.
Texas Corporation FAQ
How to incorporate in Texas?
There are several steps to incorporating in Texas. The most basic steps are as follows:
Choose a name that meets Texas regulations and is not registered to any other organization.
File Texas articles of incorporation.
Have a meeting to establish your organization's bylaws.
Obtain a Federal Employer Identification Number.
Get all of the business licenses and permits that you need.
Submit your corporation's first report.
What are the benefits of incorporating as a nonprofit?
Nonprofits have several benefits when they incorporate in Texas. Texas nonprofit articles of incorporation can establish an organization that pays fewer taxes than for-profit companies. Nonprofits also benefit from a lower filing fee. People and organizations that donate to nonprofits approved by the IRS may also benefit from paying lower taxes.
Forming an LLC in Texas
If you plan to form a Texas LLC, then you will need to know how to prepare for the application process. The Company Corporation will use the information that you provide to us and submit the Texas LLC application online to the Texas Office of the Secretary of State.
A Texas LLC combines features commonly associated with corporations and partnerships. This type of organization, however, exists as a unique entity that can generally limit the liability of members to the amount of money they have invested in the company. Learn about Texas LLC registration below.
Texas LLC Forms and Filing
In order to form a Texas LLC, you will need to file a Form 205 Certificate of Formation for a Limited Liability Company. You should also have a federal tax ID number. The Company Corporation can submit both of these Texas LLC filings on your behalf.
Texas LLC Taxes, Fees, and Other Costs
The basic cost of filing for a Texas LLC certificate of formation is $300. This is a flat fee applied to everyone submitting the form. This is a one-time fee and The Company Corporation will include that as part of the price for the LLC formation package that you select. Other services provided by the Texas Office of the Secretary of State may cost extra. For instance, if you wish to withdraw from a foreign organization, then you will need to pay a $15 fee to process the Certificate of Withdrawal of Registration. Contact The Company Corporation if you need assistance with these Texas LLC filing requirements.
You might also have to pay state, city, and county agencies for licenses and permits specific to your industry. These documents can differ significantly depending on the industry and the size of your organization.
The Company Corporation will help you with these steps so that you can avoid the headache of LLC formation and instead focus on running your business.
Operating Agreement for a Texas LLC
While not required by Texas law, it is advisable to have a detailed operating agreement for your Texas LLC. The operating agreement contains detailed information about how the entity will be operated. The Company Corporation can provide you with an excellent Texas LLC operating agreement template for you to review and use.
Get Texas Business Licenses
Texas not only has the second largest population of any state in the United States; it also has several thriving industries that attract new businesses every year. Some of the most popular industries in Texas include energy, land development, medical technology, and agriculture. If you want to start a business in this state, then you need to make sure that you have the proper Texas business license.
You can do several things now that will help you complete your Texas business license applications in a timely manner. If you have not yet acquired a tax ID number from the IRS, then you should apply for one as soon as possible. They can be obtained easily through The Company Corporation’s web site. Without one, however, you cannot hire employees or file taxes for your business.
You can also decide what kind of business you want to create. There are advantages to owning LLCs, corporations, sole proprietorships, and other types of organizations. It's important to know which one suits your needs best. Visit The Learning Center to learn more.
Which Texas Small Business License Do You Need?
The specific business license that you need in Texas can vary by location and industry. Before you start operating your company in Texas, The Company Corporation can help you research and obtain the business licenses you will need.
In many cases, your Texas corporation will need to obtain a city license in addition to any state licenses and permits. Having a state of Texas business license ensures that you can operate according to the state government, but you also need to make sure that you meet all city requirements. Otherwise, you could find that you have unintentionally broken the law, which can lead to severe fines.
Do You Need Additional Texas Business Licenses?
You also need to know what types of Texas small business licenses you need for your industry. A business in the oil industry obviously needs different types of permits and licenses than one in the cattle industry. If your business needs to transport goods and materials over long distances, then you might also need a commercial driver's license.
The situation can vary significant from industry to industry. The situation can become complicated rather quickly. With The Company Corporation's experience on your side, you don’t have to worry that you have missed any important license or permit required by state or local governments.
Documents Needed for Your Texas Business License Application
You will find yourself turning to several documents as you fill out your Texas business license application. Having them handy will help you complete the application quickly and correctly. Some of the documents that you might need include:
Your tax ID number
Any insurance policies for your business
Your articles of organization or articles of incorporation
A statement detailing your organization's mission
Your tax ID for selling retail goods
The Company Corporation uses these and other documents to make sure that clients get their business license in Texas quickly so they can start generating revenues as soon as possible.
C Corporation and S Corporation Differences
A C Corporation is taxed as a separate entity and must report profits and losses on a corporate tax return. The C Corp pays corporate taxes on its profits while the shareholders are not taxed on the corporation’s profits. C Corp shareholders report and pay income taxes only on what they are paid by the corporation. Now when the corporation chooses to pass along any of its after-tax profits to shareholders in the form of dividends, the shareholders must report those dividends as income on their personal tax returns even though the corporation has already paid corporate taxes. This is commonly referred to as “double taxation”, something that is avoided with an S Corporation (a pass-through tax entity).
While an S Corporation with more than one shareholder does file an informational K-1 tax return, the corporation itself does not pay any income taxes. Instead, the individual shareholders (owners) must include their share of the corporation’s profits on their personal tax returns, paying tax at their individual tax rate.
S Corporations provide another advantage should the corporation experience losses. Unlike C Corporation shareholders, S Corp shareholders are allowed to offset other income by including their share of the corporation’s losses on their personal tax returns provided, however, they cannot deduct corporate losses in excess of their "basis" in their stock – that being the amount of their investment in the company, with a few adjustments.
Keep in mind that no more than 25% of an S Corporation’s gross corporate income may be derived from passive income.
States generally treat S Corporations the same way the federal government treats S Corporations but there are exceptions with individual states treating S Corporations in a variety of ways.
For example, some states just don’t recognize S Corporations. While you can still have an S Corporation in the state and enjoy the federal tax savings, it is an S Corporation for federal tax purposes only - not for state tax purposes, where the corporation will be treated as a regular C Corporation. And a few states tax both the S Corporation's profits as well as the shareholders’ proportional shares of the S corporation's profits. In such states, the S corporation is double-taxed in a manner similar to a C Corporation that paid all of its profits as dividends. Still other states tax S Corporations on only part of their income even though they do recognize the S Corporation. And there are even more ways some states tax S Corporations.
You will want to find out specifically about Texas in order to avoid any surprises. Prior to electing to become an S Corporation in Texas, you should know exactly how Texas treats S Corporations. Consult with your tax advisor or contact the Texas income tax agency to determine whether a separate S Corporation election form is required for Texas and what, if any, Texas taxes apply to S Corporations.
Compensation of Officers
The IRS requires that owner-employees of an S Corporation be paid wages and that the salary paid an owner-employee be a “reasonable amount” for the work being performed. Of course that means employee-owners cannot avoid paying payroll taxes by paying themselves nothing. And their salaries will be subject to payroll taxes, even if the corporation is losing money.
While both C Corporations and S Corporations are allowed to provide employee benefits that are deductible by the corporation and tax-free to the employees, the tax-free status of some fringe benefits is not nearly as generous for S Corporation shareholders who own more than 2% of the corporation’s stock.
Since the corporate tax rate is typically lower than an individual’s tax rate and profits retained in the corporation will not be double taxed as dividends, a C Corporation can generally accumulate capital more effectively than an S Corporation. Of course an S Corporation could accumulate even more capital if it did not distribute any of its profits to the shareholders – but doing so would create obvious problems for some owners who would have to pay income taxes on this “phantom income” which they did not actually receive.
Each S Corporation shareholder must be a U.S. citizen or resident. C Corporations can have multiple classes of stock while S Corporations are limited to one class of stock (voting rights can differ).
S Corporations are not allowed to conduct certain kinds of business. Business corporations that are not eligible for S Corp status include banks, insurance companies taxed under Subchapter L, Domestic International Sales Corporations (DISC), and certain affiliated groups of corporations.
Generally speaking, C Corporations offer more flexibility than S Corporations and are therefore the best choice for large companies with a large numbers of shareholders, especially if they are publicly traded.
C Corporations can choose when their fiscal year ends while an S Corporation’s fiscal year end must be December 31. If a C Corp has been using a fiscal year end other than December 31, it must change to a December 31 fiscal year end if it converts to an S Corp. And if the S Corp status is later revoked, it cannot change from the 12/31 fiscal year.
C Corporations not considered a small corporation ($5,000,000 or less in gross receipts) are required to use the accrual method of accounting while only those S Corporations that have inventory must use the accrual method of accounting.
Conversion from C Corp to S Corp
A C Corporation can make its original conversion to an S Corporation at any time after being originally formed by filing a Form 2553 with the IRS. A few states require that an S election also be filed with the state. In cases where a C Corp is converted from an S Corp, it must remain a C Corp for at least 5 years before it can be converted back to an S Corp.
Conversion of an S Corp back to a C Corp
An S Corporation can convert back to a C Corporation anytime by filing a formal request with the IRS. However, the C Corp must keep the December 31 fiscal year and it cannot convert back to an S Corp for at least five years (restrictions that hamper the ability to save taxes by shifting income between taxable years, a strategy practiced by some). It can sometimes be more beneficial to form a brand new C Corporation rather than converting.
C Corporation and S Corporation similarities
Both C Corporations and S Corporations are legal entities and treated as individuals under the law.
Both C Corporations and S Corporations are initially the same, regular corporations (C Corporations) created by officially filing what is normally called Articles of Incorporation or a Certificate of Incorporation with a state.
Both C Corporations and S Corporations have unlimited life, continuing to exist after the death of owners.
Both C Corporations and S Corporations are made up of shareholders who are owners of the corporation, directors (elected by the shareholders) who make major management decisions, and officers (elected or appointed by the board of directors) who are responsible for the day to day operations of the corporation.
Both C Corporations and S Corporations provide limited liability protection for shareholders (owners) who cannot normally be held responsible for the corporation’s obligations.
Both C Corporation and S Corporation ownership is transferred by selling shares of the corporation’s stock.
Both C Corporations and S Corporations can raise additional capital by selling stock
Both C Corporations and S Corporations are allowed to provide employee benefits that are deductible by the corporation and tax free to the employees. Retirement Plans, Medical Plans, Life Insurance, Childcare, and Education Plans are some of the types of benefits frequently offered. While the rules vary for the plans, the tax-free status of some is not nearly as generous for owners with more than 2% of an S Corporation’s stock.
Personal Income Taxes
Both C Corporation and S Corporation shareholders (owners) must pay personal income tax on any salary drawn from the corporation as well as any dividends paid or earnings that are distributed.
Both C Corporations and S Corporations must comply with state requirements regarding the organization and operation of corporations. That would include the adoption of bylaws, issuing stock and maintaining shareholder records, holding and recording the minutes of meetings of shareholders and the board of directors, and preparation and filing of all required state and federal reports. It is very important that all required procedures are followed since courts can find that a corporation’s principals have not operated the business as though it is a corporation and are therefore not entitled to the limited liability protection they would otherwise have. In such cases, courts may “pierce the corporate veil” and hold a corporation’s principals personally liable for what would otherwise be a liability of the corporation.
I am providing a Incorporation Checklist for you to print out and use if you think a corporation is the best solution to your new business!
I hope you find this information useful as you determine whether a C Corporation or S Corporation is best for you. I’d also like to remind you to consult with an attorney, accountant or tax advisor. I cannot guarantee that all of the information above is accurate, complete and/or current, and it should therefore be independently verified.