What is a Corporation?

What is a Corporation?

     A corporation is a business structure that is distinct from it’s shareholders. Corporations are more complex than other business structures and can have more costly administrative fees and complex tax and legal requirements. A corporation is owned by shareholders, there is no limit to the number of shareholders but at least one is required.

     There are many advantages to forming your business into a corporation, these include limited liability, corporate tax treatment, effective capital raising methods, and the professional image as a corporation. A corporation is legally separate from its shareholders and thus imputes limited liability to the owners. Shareholders will generally only be held accountable for their investment in shares of the company. Corporations also file separate taxes from their shareholders. Shareholders only pay taxes on salary from the corporation or from capital returns. Taxable income, including capital gains to the corporation, are taxed by the federal government at the corporate tax rate, often lower than the personal income tax rate. Corporations have an advantage over other business structures through the ease of generating capital by selling stock. Finally, because corporations have more complex statutory requirement,s they are seen as more stable and attractive to future employees and business partners.

     Though the advantages are great, the disadvantages of forming a corporation must also be considered. The disadvantages of forming a corporation are the time and money involved in creation and maintenance and double taxation. Corporations require much more paperwork and maintenance than the typical LLC. Corporations are costly and time consuming ventures to start and maintain, see below for how to generally start and maintain a corporation. Corporations are also generally double taxed (the exception being an S-Corporation). The typical corporation is taxed once when it makes a profit (both federal corporate income taxation and the Texas franchise tax) and again when shareholders are taxed on the dividends paid to them.
Texas also requires that a corporation have directors, these are individuals who are responsible for managing the business’ affairs. At least one director is required to form a corporation in Texas. However, after the initial formation the shareholders may agree to enter into a shareholder’s agreement which eliminates the directors and creates a shareholder management agreement.

     In Texas, a certificate of formation must be filed with the Secretary of State (the form can be found here). There are many statutory formalities that are required for a corporation to be formed and maintained within the state of Texas. A registered agent must be maintained from formation until dissolution of the corporation. A registered agent can be a domestic or foreign entity with the right to do business in Texas or an individual resident of the state. Corporations cannot act as their own registered agents in Texas. In the certificate of formation you will also indicate the number of shares that the corporation will be authorized to distribute as well as the par value of each share. Bylaws do not need to be filed with the certificate of formation to create the corporation, but bylaws are important because they set the rules for how the corporation will be governed. Having well drafted corporate bylaws can save thousands, if not millions, in legal fees later.

     To maintain corporate status in Texas, a corporation must: maintain books and records of accounts, maintain the minutes of the proceedings of owners or directors, hold annual shareholder’s and director’s meetings, and file a separate corporate income (federal) and franchise (Texas) tax. Since these requirements can be time consuming and costly, it is generally recommended that established, larger companies with multiple employees file to become a corporation. If the corporation becomes large and sells shares to many individuals, it may have to register with the Securities and Exchange Commission (SEC) and state regulatory agencies.

     A corporation can help take your business to the next level, providing capital generation, limited liability, and a professional image. Reidel Law Firm offers flat fee corporate formation and maintenance. We can help you get your business off the ground quickly and effectively, leaving you more time to focus on making a profit. For more information on forming a Texas corporation and how to structure your Texas small business fill out the contact form below or call Reidel Law Firm at 832-510-3292.