Forming a Corporation in Texas
It’s always a good idea to start your own corporation in Texas. After all, more than 2.7 million small businesses are based in Texas, so clearly, you’re not the only one to think that this idea makes sense. In addition, Texas has a large population, which translates to a large potential customer and client base.
You also want to incorporate formally to make sure you protect your personal assets from your business liabilities. For example, if your business gets sued, those claiming damages can’t go after your home, car, and bank account.
At first glance, incorporating may seem complicated and time-consuming. But it’s more straightforward than it appears, especially if you get the right sort of help. This guide should help as well, giving you an overview of the entire process.
To start your corporation, you should take the following steps:
#1.Think of a Good Name for Your Texas Corporation
There are rules to follow, and you’d be well-advised to check out the complete Texas corporation naming guidelines as set by the Texas Secretary of State. However, the rules tend to boil down to a simple rule—you need to name your corporation without falsely defining its nature. So, you can’t use words like bank or law office in your business name if you’re not actually running a bank or a law office.
- Your business name also has to be unique and distinguishable. You can’t use another business name that’s already in use or is already super-famous. The Texas Secretary of State website offers a searchable database so you can double-check that the name you’ve chosen isn’t already in use in Texas. You may want to Google your proposed business name as well so that you can avoid any confusion online. If you’re not creative and you can’t think of a good name that may strike a chord with your potential customers, you may even Google for an online business name generator. The suggestions they offer may help you think of a good name you’d like to use.
- Your name must end with company, corporation, incorporated, limited, or abbreviation of such terms. These words at the end of your name indicate your corporate status.
Reserve Your Name
If you’ve thought of a great name but haven’t formed your corporation yet, then you can have that business name reserved. That means no other new startup in Texas can use that business name, even if they’ve managed to form their corporation ahead of yours. This will cost you $40, and in return, you have that business name in reserve for 120 days. You can fill up the name reservation form from the Texas Secretary of State and then file it to the SOSDirect website of the Texas Secretary of State.
Don’t forget about reserving your business name as your web address. For example, if you’re forming your XYZ corporation, acquiring the XYZ.com web domain makes sense. That way, other businesses can’t use it, and your potential clients and customers can find your website more easily. You may also check our detailed guide here.
#2. Get a Registered Agent Service
A registered agent, in simplest terms, is simply someone who is always ready to receive official documents on behalf of your corporation. This is a legal requirement in Texas (and in almost all states), and you can’t incorporate your business without one. Your Texas corporation will receive documents from time to time, and you must be able to receive those documents on time. These can be required tax forms (such as from the IRS) or requests from the Texas Secretary of State for you to file some reporting like your annual report. You may even be sent a summons when someone sues your corporation.
A registered agent has to be an adult (at least 18 years old) and a resident of Texas. This person (or business entity) must have a physical address in Texas, preferably in Austin. A P.O. box won’t work. In addition, that person has to be there to receive the documents during business hours.
Sure, it’s technically accurate that you can hire anyone to be the registered agent, as an employee, one of the shareholders, or even yourself. However, if you do it yourself, it’s a massive inconvenience for you. First, you’re tied down to that location during business hours. Second, you may not even have a physical address in Texas, which is what happens if you’re running an online business based somewhere else. And then you’d have to figure out how to send digital copies of the documents to the directors of the corporation and keep the documents in your official records.
With a professional registered agent service, you get this service done efficiently. A good registered agent service will have a physical address in Texas, always staffed during business hours, so someone will always be there to receive the official documents. Then they will scan the documents, notify you of the official documents, and allow you to download the documents from their online storage platform.
Having an online storage platform for all your documents (including your formation documents) is exceedingly convenient, as you may need these documents as you go about setting up the company. Banks, for example, will need certain documents before they provide you a loan or even allow you to open a business bank account.
Some of the best-registered agent services even maintain a Texas compliance calendar, giving you a heads up whenever you need to submit reports to the state government at a specific date. Such a service can help ensure your corporation is always in good standing with the Texas Secretary of State.
Complete the Acceptance of Consent Form
Whether you go with the professional registered agent service or not, you need a formal acceptance of consent from your selected registered agent. This form will include:
- The corporation’s name
- The name of the registered agent
- A statement that expresses consent to the registered agent role
- The signature of the registered agent
- The date on which the position is taken
You don’t have to file this with the Texas Secretary of State, but you should file this in your official corporate records.
There are many details concerning hiring a registered agent in Texas, but you can do yourself a huge favor simply by hiring a professional registered agent service. They have the expertise and experience to do the job right, and you’d rest easy knowing they’re doing the job correctly.
#3.Select Your Initial Directors
Yes, you can have just one initial director at the start. But you can have more—later on, you will probably need more. The directors are the decision-makers for the corporation. So they have many responsibilities, though there are two main jobs:
- They’re in charge of the bylaws, which are the rules by which the corporation will operate. The directors are responsible for adopting the bylaws and repealing or amending particular rules as voted upon.
- They also elect and manage the officers of the corporation. The officers are the people in charge of the day-to-day operations. The directors pick and supervise the officers and remove them when they want to.
You will need to record the names and addresses of the initial directors and keep that document in your official corporate records. But with at least one director, you have enough to file for incorporation. Still, you’re better off with several directors if you’re not the corporation’s sole owner.
#4.Define Your Corporate Tax Structure
In this step, you decide whether you want your corporation to be a C-corporation or an S-corporation. Of course, most corporations are C-corporations, although, with this, you have to go through the whole “double taxation issue.”
When your corporation makes a profit, the corporation pays taxes on that profit before the rest goes to the shareholders. But as a shareholder, you will also need to declare that profit as part of your personal income and pay taxes on it again.
You don’t have that problem if you apply for S-corporation status, though the IRS will take a closer look at your operations to make sure that everything’s on the up and up. But, of course, there are restrictions and requirements as well:
- It has to be a domestic corporation.
- Shareholders should be persons, along with certain estates and trusts. Shareholders can’t be corporations, partnerships, or non-resident aliens.
- There are only 100 shareholders or fewer.
- There’s only one class of stock.
To file for S-corporation status, you will need to file Form 2553.
#5.File the Texas Certificate of Formation
In this step, you have to fill up and file your certificate of formation (also known as the articles of incorporation) with the Texas Secretary of State. You can do it online through the Texas Secretary of State SOSDirect website, or it can be filed by mail/fax at the following address.
Fax: (512) 463-5709
Texas Secretary of State
P.O. Box 13697
Austin, TX 78711-3697
James Earl Rudder Office Building
Austin, TX 78701
Filing Fee: $300
Your Certificate of Formation must include the following information:
- The corporation’s name and address, along with the statement of purpose defining the corporation’s goals and purposes
- The registered agent’s name, address, and signature
- The number of shares that the corporation can issue
- The names and addresses of the directors and the officers
- The name address of the incorporator (the person who signs the certificate of formation)
You may choose to go with an online incorporation service for this next step because it’s a hassle to deal with.
#6.Establish Your Corporate Records
You can buy a kit for corporate records to help you out. Basically, your records must include all the official documents. These include your Texas certificate of formation, the bylaws, minutes of board meetings (especially the first board meeting), and stock documents.
It’s typical for a corporation to keep the hard copies of these documents in the main corporate office. But you should have some online storage platform as well. In addition, it’s much more convenient if authorized officers and directors can simply download certain documents from the records.
#7. Hold Your Directors’ Meeting
The first meeting of the board of directors is crucial. The decisions made here will lay the foundation for the corporation itself. You need to record the minutes of the meeting, which refers to all the decisions and information coming out of this meeting.
This starts with formally taking attendance, showing that you have the minimum needed directors to make corporate board decisions. The directors will then vote on the following issues, such as:
- The appointment of various officers, such as the chairmen and secretary
- Adoption of the approved set of bylaws for the corporation
- Approval for a “conflict of interest” policy
#8.Formulate Your Bylaws
We’ve already mentioned the bylaws, so you must formulate them correctly. This set of bylaws is like your Constitution, describing how your corporation operates. You might also think of it as your corporate operating manual. If certain decisions or actions have to be made, the bylaws will describe how that decision or action can be reached or taken.
The bylaws must include the following:
- Here, you have to define the roles of directors and officers clearly. You have to specify the responsibilities of each officer and director.
- The bylaws must specify how meetings are held, how officers and directors are chosen and elected, and how the voting procedures go.
- It should also describe how your corporate records will be maintained and kept.
- If there are any disputes between officers and directors, the bylaws must describe procedures on how you can resolve these disputes.
- The bylaws must also contain a provision on certain parts of the bylaws that can be amended or repealed or new ones added.
You must review all the bylaws at the first board meeting, and the directors must vote to approve them for adoption.
#9. Take Care of Money Matters
The corporation is in the business to make money, and you have to set it up to make it so. Keep in mind that one of the main reasons for incorporating in the first place is to protect your assets. That’s why you need to keep your corporate assets separate as much as you can.
Obtain Your EIN
You start with the EIN or employer identification number. It’s your federal tax I.D. number you get from the IRS. This number will then be part of your corporate identity. It’s like the Social Security number for the corporation, and it establishes the corporation as separate from your own personal identity (and personal assets).
You need the EIN because, without it, you can’t do the following:
- Pay state and federal taxes
- Open a business bank account for the corporation
- Hire employees for the corporation
It’s easy enough to get the EIN online simply by visiting the IRS website. You don’t even have to pay anything to get the EIN. Some incorporation services even offer this service as part of the package.
Open Your Corporate Bank Account
This is another step towards separating the corporation from your personal assets. It provides better protection for your personal assets, just in case someone sues your corporation. They can only go after the corporate bank account if they can claim liabilities, not your own bank account.
Having a separate bank account for the corporation is also just much more efficient. It makes it a lot easier for you and the officers to manage the corporate finances. You can also use good business accounting software and synchronize it with your corporate account.
Build Your Corporate Credit Score
Just as a person’s credit score is essential, so is the credit score for the corporation. For example, a good credit score can enable you to obtain credit cards in the name of the corporation itself and not on your credit score. In addition, a good credit score for your corporation can allow you to borrow more significant amounts of money at lower interest rates.
Your corporate bank account already helps to establish your corporate credit. You can also work with vendors and suppliers who report business credit reporting agencies. That way, you can increase your corporate credit score when the corporation always pays on time for inventory or supplies.
#10. Get Your Accounting Books in Order
There’s no excuse for not having a properly managed accounting system for your corporation in this day and age. However, it’s great if you can hire an accounting service to make sure that everything’s in order. This is the best option for most small businesses, as experienced accountants are less prone to making mistakes.
But even if you can’t afford an accounting service, you can still use good accounting software. Just make sure you know what you’re doing.
With a sound accounting system, you can track your corporate finances accurately. You can track your expenses and bills and your income as well. Such a system can even help you streamline your corporate operations, as the accounting system can help you identify where you can cut down on costs.
Having this accounting system also simplifies the whole tax filing process. You really don’t want to make mistakes here.
All in all, forming a corporation is straightforward. It’s even a lot easier if you get help, and you have two sources of assistance that you should seriously consider.
Professional Online Incorporation Service with Registered Agent Services
This is so important that no expert will recommend that you do the incorporation without help. An excellent online incorporation service can genuinely be valuable and certainly worth the cost. That’s especially true for the best services that combine the incorporation service with the registered agent services.
Look over the best online incorporation services, and they offer lots of guidelines that can help make sure you take the proper steps in forming your corporation. In addition, they can provide templates to various documents you need to create and help you download and fill all necessary forms. They can also answer every question you may have regarding the incorporation process or the registered agent services.
Professional Accountants (At Least at the Start)
Not all small business owner knows about managing the accounting books properly. But it’s a crucial skill for an entrepreneur. A professional accountant can help with that.
You can start by consulting with an experienced accountant so you can learn what you need to do, at least on a day-to-day basis. They can even recommend a good accounting software you can use for your business. You can start with data entry, though it may be slow going at first. But when you become more familiar with your accounting software, it gets easier. You can handle the payroll easily enough as well over time.
But when you want your finances in order for the end of the year, you may want to bring on an accountant to help make sure that everything’s done right. The accountant may even help you find ways of saving money for your business. In addition, they can help you come up with ideas on cutting costs and maybe even help you target high-value customers.
You also want that accountant with you when you’re doing your taxes. Tax agencies like the IRS don’t really take it well when you make errors in your tax reports. They might misconstrue honest mistakes as some tax evasion.
With accountants, you get help with any local county or Texas state taxes as well. You can learn how they do the job, and eventually, you may even know enough that you can do the books yourself with time.
Good luck with your Texas corporation!