Texas Corporation Status: Everything You Need to Know
In Texas, a corporation's status is established when a Certificate of Formation is filed with the Texas Secretary of State's office.3 min read
In Texas, a corporation's status is established when a Certificate of Formation is filed with the Texas Secretary of State's office, who provides a form that will meet minimum state law provisions.
It's important to meet with an accountant and attorney when deciding on a business structure. There are many important issues that need to be discussed, such as:
- Continuity Management
- Ability to transfer ownership interests
- Formalities related to operations
In Texas, a corporation is established when a Certificate of Formation is filed with the Texas Secretary of State. This document can be filed online on the SOSDirect website.
A corporation offers shareholders:
- Limited liability
- Perpetual duration
- Centralization of management
- A way to transfer ownership interests with ease
Shareholders are the owners of a corporation. The directors of a corporation are responsible for managing the business and operations. According to state law, shareholders may agree to a shareholder's agreement which would eliminate the director's roles and provide shareholders with total control of the organization.
Filing as an S corporation is a federal tax strategy and not a compliance issue at the state level. Electing to file as a for-profit S corporation entails contacting and requesting this election with the IRS.
Benefits of a Corporation
Deciding to incorporate provides shareholders with many benefits, including limited liability. Limited liability provides shareholders with the security that their personal assets cannot be pursued by creditors. Benefits of filing as a corporation include:
- Protecting shareholder's from the actions of employees and business partners
- Possible tax saving
- The ability to easily transfer shares of the business
How to Form a Texas Nonprofit Corporation
Many nonprofits file as a 501(c) (3) tax-exempt business. They are mainly created for religious, scientific, literary, charitable, or educational purposes. In order to file as a 501(c) (3), businesses should first create a Texas nonprofit corporation under the Texas Business Organizations Code and apply with the IRS and state of Texas for tax-exempt status. Once this is completed, the business can move on to the following steps:
1. Choose the initial directors for your nonprofit
Unless the business is managed by shareholders (rather than directors), there must be at least three directors on the board. The incorporator of an organization can be a natural person 18 years or older, another legal entity, or a corporation.
2. Choose a name for your Texas nonprofit corporation
The name chosen by the nonprofit corporation may not be the same as or similar to any current name previously filed with the Secretary of State's office. Business name availability may be verified online on the SOSDirect website.
3. Prepare bylaws for your Texas nonprofit corporation
Bylaws consist of the procedures and rules the business follows when electing directors and officers, holding meetings, and handling other business formalities mandatory by Texas law. The bylaws are not required to be filed with the state but are instead intended to be used internally as an operating manual.
4. Prepare and file your nonprofit Articles of Organization
A nonprofit organization is created by filing the Certificate of Formation with the Texas Secretary of State's office. See sections 3.005 and 3.009 in the Business Organizations Code for more information regarding the Certificate of Formation. The Texas Secretary of State's website has a Certificate of Formation form which can be completed online in order to create a Texas nonprofit corporation.
In order to be eligible for tax-exempt status with the IRS, additional distinct language must be added in the certificate of formation. This includes:
- A statement of purpose (meeting IRS requirements)
- A statement proclaiming that the organization in question will not engage in any political or legislative activity that is deemed prohibitive
- A dissolution of assets statement that designates all assets are assigned to another 501(c)(3) upon dissolution
5. Hold a meeting with your Board of Directors
The initial board meeting is called the organizational meeting of the board. The board is responsible for:
- Approving bylaws
- Appointing officers
- Designating accounting periods and the tax year
- Authorizing the initial transactions, e.g., opening a bank account
6. Set up a corporate records binder
A corporate records binder should be created for all nonprofits. The binder contains essential documents such as the certificate of formation, the bylaws, and the Board of Directors meeting minutes.
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