Texas S Corporation Formation
How it Works
Lauren Roberts, Esq.
Texas S Corporation Formation
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Why use UpCounsel to form an S Corporation in Texas
Starting an S Corporation in Texas with a business startup attorney on UpCounsel is easy, informative, and cost-effective. In just three simple steps, our S Corporation attorneys will help you protect your business and personal assets, and help you organize your business for state and federal compliance for an S Corporation.
When forming an S Corporation in Texas with UpCounsel, the attorney you choose to help you will conduct a business name search for your Texas corporation and assist you in preparing your S Corporation Operating Agreement, along with providing other legal services based on your needs. Once your Certificate of Formation For-Profit Corporation have been prepared and successfully filed with the Texas Secretary of State, your Texas corporation has been formed and begins its existence as a Corporation entity.
However, a corporation does not register as an S Corporation with the Secretary of State. It registers as a corporation with the state and then may file for S Corporation status with the IRS. S Corporation status is a taxation category which provides income tax advantages to small businesses.
Requirements for Forming a Texas S Corporation
Choosing a Company Name for Your S Corporation
One of the first steps in the process of forming your Texas S Corporation is to choose your business name.
It must be distinguishable (not the same as or deceptively similar to) the name of any Texas S Corporation reserved or registered and cannot contain the words "bank", "trust", "trustee,""incorporated", "inc.", corporation", or "corp.", or "insurer" or "insurance company" or any other words suggesting that it is in the business of issuing policies of insurance and assuming insurance risks.
Your S Corporation name may contain the name of one or more members.
By using UpCounsel, you can choose several business names in order of preference. Your attorney of choice can then conduct a name check for your Texas S Corporation before filing to see which names are available. Once you have chosen an available name, your chosen S Corporation attorney can help you properly register your name with the State of Texas.
Certificate of Formation: When forming an S Corporation in Texas, the Certificate of Formation must be filed with the Secretary of State. Texas state law requires that certain information be included in your Certificate of Formation when forming your Texas S Corporation.
This information must include:
- The S Corporations name.
- Address and Name of Registered Agent.
- Registered Agent's signed consent form
- Purpose for which S Corporation is being formed
- Whether S Corporation will be manager-managed or member-managed
- Addresses, Names, and Initials of managers or members
- Name and addresses of the Board of Directors
- The effective date of certificate.
S Corporation Qualification Requirements: For a corporation to qualify as a S Corporation for tax purposes, it must meet the following requirements:
- Must be a domestic corporation.
- Have only allowable shareholders including individual, certain trusts, and estates; and may not include partnerships, corporations or non-resident shareholders.
- Have only one class of stock
- Have no more than 100 shareholders
- Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
Additionally, a Texas S Corporation formation generally requires inclusion and/or consideration of the following:
Organizers: One or more people may form a S-Corp, yet they do not need to be members of the S Corporation.
Minimum Number of S Corporation Organizers: One (or more).
Eligibility: An organizer may be an individual, partnership, limited partnership, trust, estate, association, corporation, S Corporations, or other entity, whether domestic or foreign.
S Corporation Operating Agreement: Although not required in Texas, it is strongly recommended that a S Corporation with more than one member adopt an operating agreement for the company, which may also be amended and repealed as allowed by the agreement or applicable law. The Certificate of Formation may contain restrictions or prohibitions on the power of the members to adopt, amend, or repeal an operating agreement. If there is more than one member, any operating agreement shall initially be agreed to, in writing, by all of the members.
Eligibility Requirements: A natural person or an entity.
Procedure for Membership: The member may acquire an interest in the S Corporation directly from the corporation at the time of formation and, after formation, at the time provided in and upon compliance with the Certificate of Formation or the operating agreement or, if not provided, only upon the vote of a majority in interest of the S Corporation members, excluding the vote of the person acquiring the membership interest, and only when the person becomes a party to the S-Corp's operating agreement.
Resident Agent needed for a Texas S Corporation
UpCounsel attorneys can also provide your business with a registered agent in Texas. Every Texas S Corporation must have a registered agent in Texas, which is the person or office designated to receive official state correspondence and notice if the company is "served" with a lawsuit. The registered office may be a place of its business.
The company must have the chosen registered agent fill out and sign an acceptance of consent, Form 401-A. This must also be filed with the Secretary of State.
Texas Secretary of State
Once you create an S Corporation in Texas, the Texas Secretary of State will require that certain recurring responsibilities and duties be fulfilled. The most important of these are explained below.
For further information, contact the Texas Secretary of State.
Recurring Responsibilities and Duties for Texas S Corporations
Annual Report: Each S Corporations shall provide an annual report to the Texas Secretary of State regarding its financial condition to each of its members.
Records: Each Texas S Corporations must keep the following records open to inspection at its office:
- A current list of the full name and last known business or residence address of each member and of each holder of an economic interest in the S Corporations set forth in alphabetical order, together with the contribution and the share in profits and losses of each member and holder of an economic interest.
- If the S Corporations is manager-managed, you will need a current list including the full name and business or residence address of each manager.
- A copy of the Certificate of Formation and all amendments thereto, together with any powers of attorney pursuant to which the Certificate of Formation or any amendments thereto were executed.
- Copies of the S Corporations's federal, state, and local income tax or information returns and reports, if any, for the six most recent taxable years
- A copy of the S Corporations's Operating Agreement, if in writing, and any amendments thereto, together with any powers of attorney pursuant to which any written operating agreement or any amendments thereto were executed.
- Copies of the S Corporations's financial statements, if any, for the six most recent fiscal years.
- The books and records of internal affairs as they relate to the S Corporations for at least the current and past four fiscal years.
- A signed "Incorporator's Statement" showing the names and addresses of the initial directors who will serve on the board until the first annual meeting of shareholders.
Filing Fees for a Texas S Corporation
Filings must be made with the Texas Secretary of State in which the S Corporation was organized, along with the appropriate state filing fee. The filing fee for the Certificate of Formation is $300. Fees are subject to change so make sure you check with the Secretary of State. This may be done online on the Texas Secretary of State's website or by mail.
Taxes for a Texas S Corporation
A Texas S Corporation is a special type of corporation created through an IRS tax election. An eligible corporation can avoid double taxation (once to the corporation and again to the shareholders) by a corporation with a Subchapter S designation by the IRS. A corporation must file a Form 2553 to elect "S" status within two months and 15 days after the beginning of the tax year.
Owners of the S Corporation report business losses or profits on their personal tax returns, and therefore the business itself is not taxed. Each shareholder is responsible for paying taxes on their pro rata share of the S corporation's items of income, deductions, and credits (through a Schedule K-1 form).
Texas state law follows federal law for income tax purposes. Therefore if a corporation is classified as an association taxable as a S Corporation for federal income tax purposes, so will it be taxable as a corporation for state tax purposes.
Federal Income Tax: An S Corporation does not pay federal income tax.
Texas State Income Tax: While Texas does recognize the federal "S" election, S corporations are nevertheless subject to the state's franchise tax. An individual shareholder, however, does not owe state tax on whatever portion of the corporation's net income he or she ultimately receives. S Corporations in Texas are subject to a state franchise tax. In order to be in compliance, you must submit a franchise tax report with a public information report to the Texas Comptroller of Public Accounts. This will be a yearly requirement and annual reports will be due on May 15th every year.
Federal Tax Identification Number: Your corporation will need to obtain a federal tax identification number, which is also known as an Employment Identification Number (EIN). You do not need to get a new EIN after the corporation choose to become a S Corporation. An EIN is similar to an individual's social security number. You will need an EIN for your S Corporation as long as there is one member, even if the S Corporation does not have employees. For certain tax filing requirements the attorney you choose on UpCounsel can help prepare your Federal Tax ID Application, if you have not done so already.
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