Texas Corporations

Incorporate in Texas

Form a Texas Corporation

Corporations in General

Forming a Texas corporation creates a legal entity that exists separate and apart from its owners. When drafted and managed properly, the owners of a Texas corporation enjoy liability protection from the debts and obligations of the entity. The owners of a corporation are known as shareholders and the people who typically manage the business and affairs of a corporation are known as directors.

To form a Texas corporation or to incorporate in Texas you must file a Certificate of Formation (formerly known as Articles of Incorporation) with the Texas Secretary of State.

S Corporation

The S Corporation is a typical corporation except the shareholders have elected, under Subchapter S of the Internal Revenue Code, to be an S Corporation and therefore treated as a partnership for income tax purposes. Unless the corporation and its shareholders make this S Corporation election (typically completed by the corporation’s accountant), the corporation itself is subject to taxation on its income. S Corporations are subject to very technical rules of federal income tax law regarding the qualification and maintenance of S Corporation status. As with a C Corporation, shareholders of S Corporations are generally not liable for debts or claims against the corporation unless they have otherwise agreed to be obligated for such debts by a personal guarantee.

To qualify for S Corporation status, the corporation must meet the following requirements: (1) Be a domestic corporation; (2) Have only allowable shareholders (allowable shareholders includes individuals, certain trusts, and estates and does not include partnerships, corporations or non-resident alien shareholders); (3) Have no more than 100 shareholders; (4) Have one class of stock; (5) Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.

Advantages of a Texas S Corporation over a Texas LLC

One of the advantages of an S Corporation over an LLC involves the payment of self-employment taxes.** The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security and 2.9% for Medicare. A shareholder in an S Corporation is only subject to self-employment tax on such shareholder’s share of the S Corporation’s income to the extent that it is attributable to services performed by the shareholder on behalf of the S Corporation. Any amount that is in excess of the amount attributable to services performed is considered a return on the shareholder’s investment and is not subject to self-employment tax. On the other hand, distributions of income to the members of an LLC can be subject to self-employment tax. The ability to minimize self-employment tax can be a huge benefit. Should you have questions about self-employment tax, including the implications of your entity decision and IRS elections, you should consult your tax professional.

Form a Texas Corporation Today

If you need to form a Texas corporation, contact our Texas corporate formation lawyer today.