How to Form a Corporation in Texas
Corporations are formed in Texas by filing Form 201, Certificate of Formation – For-Profit Corporation, with the Texas Secretary of State, pursuant to Texas statute Business Organizations Code, Title 2, Sec. 20. Texas Corporations are recognized as legally separate entities from their owners, who are known as shareholders.
In this guide we’ll go over the reasons to start a corporation, how corporations compare to LLCs in Texas and review the 5 steps to form a Texas corporation.
Corporations offer a variety of benefits as a business structure, particularly in comparison to starting a business as a sole proprietor or partnership.
- Limited Liability Protection
Corporations provide limited liability protection for shareholders, meaning that they can receive profits via dividends but are not personally liable for the business’ debts.
- Easier to Raise Outside Investment
Most larger businesses or startups that require large outside investments opt to form as a corporation as they can issue stock to raise capital quickly.
- Increased Credibility
Corporations are generally viewed as more credible and prestigious than other business structures. As a result they can more easily obtain loans and credit.
For business owners seeking limited liability protection, the choice often comes down to a corporation vs an LLC. Both business structures provide limited liability protection, however they are taxed differently. By default a corporation is subject to “double-taxation” as they must first pay corporate income tax before distributing profits to the owners who then must also pay personal income tax on earnings. LLCs by comparison are a pass-through taxation entity, meaning that all of their profits are passed on to their owners, who pay tax on their personal return.
If you’re looking to start your business as an LLC in Texas rather than as a Corporation, visit our guide How to Start an LLC in Texas
You can form a corporation in Texas in five steps. In this step-by-step guide we’ll go over the process of how to start a corporation in Texas on your own.
If you’d like professional assistance forming your Texas corporation, consider using an online incorporation service.
The first step in starting a corporation in Texas is choosing a name. You likely already have a name in mind, but if you’re having trouble developing a name, we have a helpful guide on how to come up with a business name that includes 15 tips to pick the perfect business name.
It’s important to note that Texas Corporations must follow the approved naming conventions permitted under state law. The legal name of a corporation must include one of these terms:
Once you have your business name determined you’ll want to conduct a thorough business name availability search. This search should include verifying the name is available to register with the Texas Secretary of State, searching the US Patent & Trademark database, a brand search and domain availability confirmation.
Texas Corporation Name Search
First, you’ll want to ensure that your preferred corporation name is not currently in use in Texas by another business. If you were to submit your Certificate of Formation with a name that is already registered they will be rejected. To complete a search of registered Corporaitons in Texas, use the Texas Comptroller of Public Accounts Taxable Entity Search.
Important Note: If you find that your desired name was used in the past but is now available, you may want to go with a different name. Using a name that was previously registered can significantly delay the issuance of your EIN, due to the highly likely that your application will receive reference error 101. This can make the process of obtaining an EIN go from a 10 minute task to potentially taking weeks.
Once you’ve verified that your desired corporation name is available for registration with the Texas Texas Secretary of State, you also want to verify that the name is not trademarked. You can do this by using the U.S. Patent & Trademark Office TESS Search.
If you plan to use your corporate name as a brand name, you’ll want to conduct a basic search on Google to ensure that another business is not already using the name. Since corporations are formed at the state level, it’s very possible that another corporation is using the same name in a different state already. If your business will depend on branding or is concerned about brand searches, you’ll want to ensure that you’ll be able to show up prominently in search results. If a strong competitor is already using your desired name you’ll likely want to go back to the drawing board.
Domain Name Search
Similar to the brand name search, if you plan to do business under your corporation name and you want to brand yourself, you’ll want to register the .com version of your business name. Using the .com version of domain is highly recommended for most businesses, as they are the go-to for potential customers if they try to directly visit your brands website. In addition, if your domain name exactly matches your branding it will give you the best chance of showing up prominently when someone searches your brand name.
Even if you don’t plan on creating a website or using your corporation name as your brand, you’ll still want to make sure you register your corporation domain name to ensure that others cannot use it. You can purchase the .com version of your name for less than $10 with namecheap.
Every Texas corporation is required by law under Texas statute Business Organizations Code 5.200 to appoint a registered agent.
You may be asking yourself “What exactly is a Texas registered agent?”
A Texas registered agent is an individual or entity that has been chosen by a corporation to receive correspondence from the Texas Texas Secretary of State, compliance notices and service of process on behalf of a business.
Who can serve as a Texas Registered Agent?
Any person who is at least 18 years old or is a business entity can serve as registered agent as long as they have a physical address in the state and are available in person during normal business hours (8am – 5pm). A corporation can choose a founder, director or employee to be the registered agent, which can help to avoid paying a fee for a commercial registered agent, however it could put you at more of a risk.
Why consider a Commercial Registered Agent?
If you can appoint someone as your registered agent for free, you may be thinking “Why pay for a commercial registered agent?” A commercial registered agent can provide a variety of benefits and help mitigate the risks associated with designating a director or employee of the corporation.
- Ensure Compliance
Registered agents services will send you updates and reminders to ensure that your corporation stays legally compliant and up-to-date with all required filings.
- Always Available
A registered agent must always be available during normal business hours. This means that whoever you appoint but always be available to accept service of process at the address listed. For most people involved in a corporation this is not possible or reasonable as they have other duties and may be required to make business trips out of the office.
A commercial registered agent can help provide privacy by listing their address and contact information whenever possible instead of the directors or owners contact information. This can help to avoid the inevitable spam mail that you’re almost guaranteed to receive, especially immediately after your corporation is formed.
With your corporation name and registered agent in place, it’s time to hold your first meeting. Not only is this an opportunity to firm up your operations and cement your corporation’s status, but it’s also the time to confirm board appointments and complete the necessary paperwork and agenda items to complete the incorporation process.
Secretaries prepare documents for minutes, stock certificates, and taxes prior to the organizational meeting, and these forms are signed by participants when the meeting concludes.
Agenda items for the initial meeting include:
- Appoint the board of directors and officer roles
- Draft corporation by-laws and shareholder agreement
- Issue stock to shareholders
- Select employee benefit plans
- Decide on C or S corporation tax filing status
- Sign Certificate of Formation
- Approve the banking resolution
- Present corporate seal and stock certificates
It’s important to note that sometimes interested shareholders won’t have the funds to pay upfront for stock certificates. In this case, the issuing happens after the shareholder payment is received. Each certificate lists the corporation name, number of shares confirmed on the certificate, the shareholder’s name, and the incorporation status of the business.
Once you have determined the legal name you’ll use for your corporation, determined who will serve as a your registered agent and held an organizational meeting you’re ready to complete the legal formation process. To legally form a corporation you’ll need to file Certificate of Formation with the Texas Secretary of State. Your Certificate of Formation will include:
- Legal business name
- Name and address of the registered agent
- Name and Address of the Corporation’s Directors
- Number and value of Authorized Shares
- Pupose Statement (optional)
- Name and Address of the Organizer
- Effective Date of the Filing
To legally form your Texas corporation you’ll need to submit your Certificate of Formation along with the filing fee of $300.
Options to file your Texas Certificate of Formation
File online via the Texas Texas Secretary of State
File your Certificate of Formation by Mail:
Download the Certificate of Formation – For-Profit Corporation Form and complete
Mail the Completed Certificate of Formation and the $300 filing fee to:
Secretary of State
P.O. Box 13697
Austin, TX 78711-3697
The last step in setting up your corporation is signing up for an employer identification number (EIN). This number will be used for legal and tax purposes to identify your business and complete loan applications, bank account setups, and employee hiring.
It’s easy to apply for an EIN online or by fax/mail. Also called a federal tax ID or FEIN, this number is essential to begin a business and a legal requirement for corporations. All corporations are required to obtain an EIN.
Read our guide on applying for an EIN to get a better understanding of this number and why it’s so important for a newly formed corporation.
Steps After Forming a Corporation
Now that you’re familiar with how to incorporate in Texas, you can start planning for the future of your business. There are a few things you can do after incorporating to put your business on the path to better success.
- Open a Business Bank Account
- Complete Texas State Registrations
- Obtain Texas Business Licenses and Permits
- Establish a Business Accounting System
- Set up Credit Card Processing
- Sign Up for Business Insurance
After receiving your EIN you can open a bank account for your business at the bank of your choice. This account will enable your corporation to pay suppliers, process card/check payments, and thoroughly record daily expenses and income with a business credit card. Just remember that signing up for a corporate credit card generates the corporation’s credit record, so spend wisely and make sure the finances are properly monitored.
More info: How to Open a Business Bank Account
Every state has different requirements for corporations, and you need to properly register as an employer and tax-paying corporation. The main registrations to put on your to-do list include:
- Sales tax registration – apply for a sellers permit.
- Employment, withholding and unemployment – register your workforce by visiting your state employment site.
Businesses must adhere to city, county, and state regulations, including license and permit requirements. The necessary permits vary based on the nature of your business and the location, but you must acquire these licenses or face serious consequences.
Common examples of licenses and permits that corporations need are:
- Construction permits
- Land use permits
- Zoning permits
- Fire permits
- Health and safety permits
- Professional licenses
- Liquor licenses
- Natural resource licenses
Part of running a successful Texas corporation is properly managing your finances and making sound financial choices. You can start by setting up an accurate accounting system to track income and expenses.
Choose from accrual basis or cash basis accounting methods, or select accounting software such as Xero, QuickBooks, or Microsoft Business Central.
Learn more: Small Business Accounting 101
In addition to an accounting platform, you also need to look into your options for taking payments via credit card. Look for a merchant provider that allows traditional point of sale purchases as well as mobile and online credit card payments to serve customers with Mastercard, Visa, Discover, and American Express.
To get the most value out of this investment, estimate the sales volume associated with this type of transaction. Then you can choose a merchant account provider or gateway service that approves credit card transactions quickly and securely.
Read more: How to Accept Credit Card Payments
You now know how to form a corporation in Texas, but you also need to understand how to protect it. Considering the time, effort, and money required to establish a business, you must find business insurance. Include this insurance policy as part of your corporation’s risk management priorities and strategies.
Learn more: Small Business Insurance 101