Starting a corporation in any state comes with various advantages; however, when starting a corporation in Texas, business owners enjoy the benefit of the Texas Enterprise Fund. The Texas Enterprise Fund provides a cash reward to strengthen startups that incorporate in the state.
Other advantages of incorporating in Texas include limited personal liability, name protection, tax advantages, and pass-through taxes.
The following guide shows you how to start a corporation in Texas.
1. Select a name for your corporation
Every business based in Texas needs a unique name, and your Texas corporation is no exception.
Prior to deciding on a name for your Texas corporation, it is recommended that you do a name search to check the availability of the name in the state.
General corporate name guidelines
There are some general rules for naming a Texas-based corporation, such as:
- The name should not be similar to any other domestic business or foreign corporation in the state
- The business name must include the words limited, corporation, incorporated, or at least abbreviations of these words
Additionally, the Texas Secretary of State requires that business names:
- Are not similar to federal government names like FDA, FBI, etc.
- The name should also not contain the word Olympic or Olympic organization
- The business name should not suggest any type of affiliation with a federal Texas agencies
- The name should not imply that illegal business activities could possibly be carried out
You may want to register your business name as a trademark in Texas. This ensures that other businesses or entities don’t benefit from using your trademark.
In other words, a Texas trademark allows you to have sole ownership rights to that specific trademark in connection with the products or services you sell.
In order to register your business name as a trademark, you should complete a Trademark or Service Mark Application Form.
A complete list of the requirements for registering a Texas trademark may be found on the Texas Secretary of State’s website.
The entity name is the legal name that is registered with the state of Texas. This is the name that will be included in all legal and formation documents.
DBA (Doing-business-as) name
In Texas, a DBA or “doing business as name” is also referred to as an assumed name. If you plan on doing business under any other name aside from the legal entity name registered with the state, you need to register for a Texas DBA.
The first step is making sure that another business entity in the state hasn’t already taken the name. Once you’ve determined assumed name availability, you may file a DBA with the county clerk in Texas. To find your county clerk, refer to the Texas Secretary of State’s website.
2. Nominate a registered agent
Choosing a Texas-registered agent is the next step in the process of incorporating the state.
Registered agents are also referred to as statutory or service of process agents and serve a critical role within the organization. They are tasked with receiving service of process, compliance documents, and government correspondence from the state on your business’s behalf.
A resident agent can be any member of your corporation, provided they meet the following requirements:
- The resident agent must be at least 18 years of age or older
- The resident agent must have a physical address in the state of Texas (not a P.O. box)
- The resident agent must maintain availability during normal business days
- The resident agent must consent to the appointment
3. Appoint initial directors at the organizational meeting
The initial corporate directors of the Texas organization must be appointed by the incorporator, who is the person designated to sign the organization’s Articles of Incorporation. The initial corporate directors that are nominated will serve on the board until the first annual meeting of shareholders.
Additionally, during the first organizational meeting, an Incorporator’s Statement must be filled out and signed by the chosen incorporator. The Incorporator’s Statement should reveal the names and addresses of the initial directors. A copy of this statement must be kept with the corporation’s corporate records and need not be filed with the state of Texas.
The first organizational meeting must be held in order to elect the corporation’s board of directors and officers and adopt bylaws, organize the issuance of shares of stock, select a corporate bank account, adopt an official stock certificate form, and corporate seal, and also set the corporations fiscal year.
Corporate minutes need to be taken to document the director’s actions and also decide whether the corporation will be a corporation or an S corporation. If you decide to opt for the election of an S corporation status, the directors must also consent and approve this decision.
4. File Articles of Incorporation
Every corporation or Texas business must file a Certificate of Formation.
The Certificate of Formation officially marks the creation of your business and comes with various benefits such as:
- Offering effective governance and adding credibility to a corporation
- Enabling you to register the name of your business
- Offering personal liability protection to directors, officers, and shareholders
This is the most crucial step in the process of incorporation and if the Certificate of Formation is not approved, your business cannot apply for tax IDs, business licenses, and permits or conduct business in the state.
Your Certificate of Formation must include the following information:
- Name and type of corporation
- The names and addresses of the Board of Directors
- The name and address of the registered agent
- The purpose of the corporation
- Authorize share capital or number of shares
- Name, address, and signature of the corporation’s incorporator or organizer
- The effective date of formation
Additionally, you are expected to draft your Certificate of Formation to meet the requirements of the relevant statutory provisions. You will not be eligible for federal tax exemption unless this is done. Therefore, the Certificate of Formation must also comply with some additional provisions set forth by the IRS.
5. Create and approve bylaws
All business organization’s in Texas must create and approve corporate bylaws. These governing documents determine the operating procedures of the organization. Ultimately, these essential documents bring clarity to the priorities and rules
of the corporation. The corporate bylaws are also designed to supplement the rules laid out by the federal government or the state of Texas.
Your corporation’s bylaws need to include the following information:
- The role of directors and officers, including how the corporation will be governed
- How records will be stored and maintained
- The process of holding meetings, electing directors and officers
- The corporations voting procedures
- How the bylaws will be adjusted or amended in future
- The process of handling disputes
- How contracts will be negotiated
- The fiduciary duties to the organization
- What constitutes a quorum for voting purposes
A quorum is basically the minimum number of members or how many members need to be present during any board meeting to make the meeting valid.
6. Select a share structure
The next in the process of incorporating in Texas is choosing a share structure. The unit of ownership of a corporation is referred to as a share of stock. Each share of stock is represented by the percentage of ownership of the company. That is, if an organization issues one share of stock, the stock owner or shareholder then owns 100% of the corporation.
7. Obtain an EIN
Irrespective of whether you plan on running a large or small business in Texas, you still need to apply for an Employer Identification Number. This is also referred to as a Federal Tax Identification Number. It’s a unique code used by the Internal Revenue Service to identify business entities in the state. Essentially, it’s more of a social security number for your corporation.
In order to obtain an Employer Identification Number, you need to compete in the IRS Form SS-4. This form is completely free of charge, and so is receiving your EIN. All you need to do is complete the relevant form and submit it online to receive your EIN immediately.
Alternatively, use the online EIN Assistant.
8. File Texas state taxes
Aside from paying state taxes, corporations are also liable for federal taxes such as:
- Income tax
- Estimated tax
- Self-employment tax
- Employment tax
- Excise tax
Additionally, the following Texas tax obligations will apply to your corporation:
- Texas franchise tax: Business tax is referred to as franchise tax in the state of Texas. Most businesses in the state pay a tax rate of one percent, and some small businesses may have a tax rate that is much lower than this.
Aside from some general partnerships and sole proprietorships, most business types in Texas are subject to the franchise tax.
Retail and wholesale companies pay 0.5% franchise tax, and businesses raking in less than $10 million in yearly revenue and who file an E-Z Computation Form will only be liable for a tax rate of 0.575%.
The state of Texas also has a no-tax due threshold if your business brings in less than $1.08 million of revenue per year. So you are not liable for any franchise tax in this case. You may contact the Texas Comptroller of Public Accounts for more info.
- Texas unemployment taxes: If you plan to hire employees, you must participate in the Texas state unemployment tax program. This means that all salaries paid to employees must be reported, and the unemployment tax on salaries must also be paid as per the Texas Unemployment Tax Act.
- Employment taxes: All business owners in Texas must comply with workers’ compensation and unemployment insurance taxes.
9. Texas business licenses and permits
A general business license is not a requirement in Texas. The only permit required in Texas is the seller’s permit.
A seller’s permit is necessary when you engage in business activities in Texas or plan on selling tangible personal property or taxable services.
In order to obtain a seller’s permit in Texas, you can apply online with the Texas Comptroller.
Alternatively, you may download the Texas Seller’s Permit Application Form and submit it via mail to the following address:
Texas Comptroller of Public Accounts
111 E. 17th St.
Austin, TX 78774-0100
In terms of professional service business licenses, refer to the Texas Department of Licensing and Regulation for additional information on what’s required based on your business type and location.
10. Annual report requirements in Texas
Texas corporations are not required to file an annual report; however, they must submit a public information report and pay a yearly franchise tax. The public information report must be submitted to the Texas Comptroller of Public Accounts.
11. Costs of starting a corporation in Texas
The filing fees below include federal and state fees applicable to all Texas corporations:
- DBA name: $25 per county
- Certificate of Incorporation: $300
- Public information report: $0
- Texas Certificate of Good Standing: $15
Next steps after forming a corporation
There are some essential next steps after forming your Texas corporation. These steps are designed to ensure that your business finances and accounting are organized well ahead of tax season and provide you with peace of mind.
Separate personal and business expenses
Separating your personal and business expenses protects your personal assets from liability. Additionally, it also streamlines the tax process when you have a designated business bank account containing your business expenses instead of having expenses muddled up between two separate accounts. It is recommended that you choose a checking account for your Texas corporation.
Look into business funding options
Having a backup option in the event that your business runs out of cash flow is a good idea. There are several ways to raise capital, including:
- Applying for an online business loan
- Getting a business credit card
- Looking into government financing options using the SBA and Business USA’s Financing Tools
- Raising funds from investors, family, and friends
Finding information on a business or verifying the existence of a corporation in Texas may be done by conducting a corporation business entity search on the Texas Secretary of State’s website.
LLCs and Texas corporations have their similarities; however, they also have many differences. Corporation owners are referred to as shareholders. LLC owners are referred to as members. Additionally, owners of corporations are not paid and receive dividends which they are taxed on. Owners of an LLC receive a percentage of profits made in any given taxable year.
A Texas for-profit corporation has one primary goal: to make money. They earn revenue by selling products or services and, in some cases offering a professional service. The owners of corporations earn an income from the profits and pay shareholders and investors from the same profits.
The difference between Texas corporations and Texas nonprofits is that the law treats corporations as individuals and grants them the same rights as individuals. Alternatively, a nonprofit is structured differently from a corporation and also is formed for different purposes. Corporations are for-profit, and nonprofits are designed for purposes other than making a profit.
Some of the advantages of incorporating a business in the state of Texas include deductible employee profits, consistency, lawsuit protection, protection of personal assets, and tax savings.