Welcome to entry #6 of our business formation series—Selecting a Business Structure. Long time readers will remember that some business structures require specific filings with the Texas Secretary of State in order to be a valid business form.
If you will recall from Selecting a Business Structure, a Corporation is a legal person with the characteristics of limited liability, centralization of management, perpetual duration, and ease of transferability of ownership interests.
What is a Corporation?
According to Texas law, a corporation is an entity governed as a
corporation under Title 2 or Title 7 of the Texas Business Organizations Code. The term “corporation” also includes a for-profit corporation, a nonprofit corporation, and a professional corporation.
—See Definitions—Tex. Bus. Org. Code § 1.002(13)
A corporation is a filing entity, which means that it must file a certificate of formation with the Secretary of State to be a valid corporation. The certificate of formation must include certain statements regarding the name of the filing entity being formed, the type of filing entity being formed, the purpose for with the filing entity is formed, the period of duration, the street address of the registered office and the name of the registered agent, and the name and address of the organizer.
—See Certificate of Formation—Tex. Bus. Org. Code § 3.005
Additionally, the corporation must also provide supplemental provisions in its certificate of formation. It must state particular information about the shares, how the corporation will be managed, the board of directors, shareholders’ agreement, and shareholders’ voting rights.
What is a Director?
A Director is an individual who serves on the board of a directors of a corporation.
—See Definitions—Tex. Bus. Org. Code § 1.002(16)
The Board of Directors includes each person who is authorized to perform the functions of the board of directors under a shareholders’ agreement as authorized by Texas law.
—See Definitions—Tex. Bus. Org. Code § 21.002(2)
Basically, the board of directors is elected by the voting shareholders. They are then entrusted with the power to conduct the business of the corporation. Think of all the people sitting around a table at a corporate board meeting. These are your directors.
What is a Shareholder?
A Shareholder is the person in whose name shares issued by a corporation are registered in the share transfer records maintained by the corporation, or the beneficial owner of shares issued by the corporation whose shares are held in a voting trust or by a nominee on the beneficial owner’s behalf.
—See Definitions—Tex. Bus. Org. Code § 1.002(81)
Why Choose a Corporation?
Corporations are an excellent choice for business owners who like limited liability, centralization of management, perpetual duration, and ease of transferability of ownership interests.
For many years, the Corporate structure was the most popular among business owners for these reasons. It has only recently been usurped in popularity by the Limited Liability Company, which will be discussed in a later blog in this series.
Why Should I Avoid Corporations?
There are many considerations on the front end in setting up a corporation. Who will comprise the initial board of directors? How many shares will the corporation offer, and what is the set value of those shares? Will the corporation offer different series of shares? How will voting occur?
Additionally, the decision making power of the corporation belongs to the board of directors. If you want a more involved role in your business affairs, you should choose a different business organization structure that allows you to keep decision-making authority.
What Else Should I Know?
You can elect for your corporation to be an “S Corporation” or a “C Corporation.” These two distinctions are based on the federal tax code and determine how your corporation will be taxed. At the most basic level, C Corporations are separately taxed entities in that they must file a corporate tax return and pay taxes at the corporate level. S Corporations are pass-through entities in that no income tax is paid at the corporate level, which means taxes are due at the individual level.
You should check federal, state, and county or city laws for business license, general license, building permit, and zoning clearances that may apply to your business. Additionally, if you plan to hire employees, you will need to obtain an Employer Identification Number (EIN), which is the nine-digit number issued by the IRS for tax reporting purposes.
Your attorney can help you navigate the many requirements for any business organization form. She can also discuss the reasons for and against forming or continuing a Corporation in more detail.
–Authored by Carrie A. Harris, Esq.,
Matthew Harris Law, PLLC – Business Law Division
1001 Main Street, Suite 200, Lubbock, Texas, 79401-3309
Tel: (806) 702-4852 | Fax: (800) 985-9479