TexasLegalEntities.com (512) 472-2431

 
Have Questions?
Pre-Run Google Searches

Texas S Corporation, Forming a Corporation in Texas


What Is an S Corporation?

An S corporation is a regular corporation that has elected "S corporation" tax status. An S corporation lets you enjoy the limited liability of a corporate shareholder but pay income taxes on the same basis as a sole proprietor or a partner.

In a regular corporation (also known as a C corporation), the company itself is taxed on business profits. The owners pay individual income tax only on money that they draw from the corporation as salary, bonuses or dividends. By contrast, in an S corporation, all business profits "pass through" to the owners, who report them on their personal tax returns (as in sole proprietorships, partnerships and LLCs). The S corporation itself does not pay any income tax, although a co-owned S corporation must file an informational tax return like a partnership or LLC -- to tell the IRS what each shareholder's portion of the corporate income is.

Most states follow the federal pattern when taxing S corporations: They don't impose a corporate tax, choosing instead to tax the business's profits on the shareholders' personal tax returns. About half a dozen states, however, do tax an S corporation like a regular corporation. The tax division of your state treasury department can tell you how S corporations are taxed in your state.

ASK AN EXPERT! CLICK HERE IF YOU HAVE ANY QUESTIONS
 Choosing an ownership structure for your business can be complicated. To find out whether an S corporation, a C corporation or an LLC is the best fit for your company, consult a tax lawyer or an experienced accountant who is knowledgeable about tax advantages and disadvantages of the various types of ownership structures.

Should You Elect S Corporation Status?

If your corporation meets certain criteria, such as having only shareholders who are U.S. citizens or residents, you can elect to do business as an S corporation. Operating as an S corporation rather than a regular corporation may be wise for several reasons:

But aside from the benefits, S corporations impose strict requirements. Here are the main rules:

  • Each S corporation shareholder must be a U.S. citizen or resident.
  • S corporation profits and losses may be allocated only in proportion to each shareholder's interest in the business.
  • An S corporation shareholder may not deduct corporate losses that exceed her "basis" in her stock -- which equals the amount of her investment in the company plus or minus a few adjustments.
  • S corporations may not deduct the cost of fringe benefits provided to employee-shareholders who own more than 2% of the corporation.

Fortunately, your decision to elect to be an S corporation isn't permanent. If you later find there are tax advantages to being a regular corporation, you can drop your S corporation status after a certain amount of time.

How to Elect S Corporation Status

To be treated as an S corporation, all shareholders must simply sign and file IRS Form 2553. Shareholders then pay income tax on their share of the corporation's income whether or not they actually receive the money. If the corporation suffers a loss, shareholders can claim their share of that loss.

S Corporation Alternatives

You can accomplish the simultaneous goals of limited liability and pass-through taxation by creating a limited liability company (LLC). Because an LLC offers its owners the significant advantage of greater flexibility in allocating profits and losses, and because LLCs aren't subject to the many restrictions of S corporations, forming an LLC is often the better choice.

ASK AN EXPERT! CLICK HERE IF YOU HAVE ANY QUESTIONS
 Choosing an ownership structure for your business can be complicated. To find out whether an S corporation, a C corporation or an LLC is the best fit for your company, consult a tax lawyer or an experienced accountant who is knowledgeable about tax advantages and disadvantages of the various types of ownership structures.

Incorporating in Texas

Corporate Name:

Choosing a business name is one of the first steps in the process of forming your Texas Corporation. The name that you choose:

  • Must not the same as, or similar or deceptively similar to, the name of any other registered Texas business entity and any reserved names on record, subject to certain exceptions under state law.
  • May not contain language stating or implying that it is organized for a purpose other than that permitted by state law and its certificate of formation.

Texas corporation, in order of preference. We will conduct a name check before filing to see which names are available.

In addition, the name must contain one (or an abbreviation of) the following words:

  • "Incorporated"
  • "Corporation"
  • "Company"
  • "Limited"

Texas state law restricts the use of certain words and phrases in business names.

Certificate of Formation:

To incorporate in Texas, a certificate of formation must be filed with the Texas Secretary of State. The Texas Business Corporation Act requires that certain information be included in your certificate of formation. The following is a summary of those requirements:

Organizers:

  • Minimum Number of Organizers - One or more.
  • Eligibility Requirements - An organizer must be a person having the capacity to contract for himself or herself or for another.
  • Duties - Signing the certificate of formation
  • Listing Requirements - The name and address of each organizer must be listed.

Corporate Purpose(s): Incorporating in Texas can occur for any lawful business activity

  • Listing Requirements - The general business purpose is required to be listed in the certificate.

Director Information:

  • Minimum Number of Directors - One or more.
  • Eligibility Requirements - None. The certificate of formation or bylaws may prescribe qualifications for directors.
  • Listing Requirements - Not required in the certificate when incorporating in Texas

Other Required Listing Information:

  • The type of filing entity being formed;
  • The number of shares that the corporation is authorized to issue.
  • The period of duration of the corporation, if not perpetual; and
  • The street address of the initial registered office of the filing entity and the name of the initial registered agent of the filing entity at the office.

Initial Capital:

In Texas, a corporation may not commence business until it has received for the issuance of its shares consideration of the value of one thousand dollars ($1,000). This requirement must be stated in the certificate of incorporation.

Optional Provisions:

Texas permits optional provisions to be included in the certificate of formation for corporations that wish to formalize additional requirements, such as provisions managing the business and regulating the affairs of the corporation.

Bylaws:

A corporation maintains its bylaws at its principal executive office and is not required to file them with the state. The board of directors must adopt initial bylaws for the Texas incorporation.

Officer Information:

Officers must be elected by the board of directors in accordance with the bylaws, and there must be at least a president and a secretary. Any officer may hold more than one office in the corporation unless otherwise prohibited by law.

Registered agent:

Every Texas corporation must have a registered agent in Texas -- the person or office designated to receive official state correspondence and notice if the corporation is "served" with a lawsuit.

  • Eligibility Requirements - The registered agent in Texas must have a business office identical to the registered office and must be either: (1) an individual residing in the state, or (2) a business entity with authority to transact business in the state.

Registered office:

Texas requires that every corporation maintain a registered office in the state. The registered office: (1) must be located at a street address where process may be personally served on the entity's registered agent, (2) is not required to be a place of business of the filing entity or foreign filing entity and (3) may not be solely a mailbox service or a telephone answering service.

Professional Corporations:

Under Texas law, a professional corporation is formed in order to render services within one specific profession, subject to certain state exceptions. Professional corporations generally may not provide any other non-ancillary services and must comply with particular conventions in its choice of corporate name.

Professionals that may form professional corporations (rather than professional associations) include: accountants; acupuncturists; athletic trainers; attorneys;chiropractors; nurses; optometrists; insurance agents; and physical, occupational, respiratory care, and massage therapists. Doctors must form professional associations.

Annual Report:

A report must be filed with the Texas Comptroller before May 16th each year, except for the year of incorporation. This report must indicate:

  • The financial information of the corporation necessary to compute the corporation's franchise tax;
  • the name and address of each officer and director of the corporation;
  • the name and address of the agent of the corporation; and
  • Any other information required by the comptroller.

Other Reports:

A public information report must be filed each year with the Texas Comptroller, which will then be forwarded to the Secretary of State, that includes:

  • The name of each corporation in which the corporation filing the report owns a 10 percent or greater interest and the percentage owned by the corporation;
  • The name of each corporation that owns a 10 percent or greater interest in the corporation filing the report;
  • The name, title, and mailing address of each person who is an officer or director of the corporation on the date the report is filed and the expiration date of each person's term as an officer or director, if any;
  • The name and address of the agent of the corporation; and
  • The address of the corporation's principal office and principal place of business.

Taxes:

Texas does not collect personal or corporate income tax. However, a corporation franchise tax is computed on both taxable capital and a taxable earned surplus basis. A corporation pays on the basis that produces the greater tax. For information on the Texas state taxes, including sales tax, visit: http://www.window.state.tx.us/m23taxes.html


 

Slater Kennon & Jameson, LLP Click here if you have a general question. Click here if you want to  form a new entity and retain an attorney. Click here if you want to form an entity but don't know which type is best suited to your needs.

More Links