Why Incorporate in Texas: What You Need to Know
Why incorporate in Texas? Incorporating your Texas business can be beneficial in many regards.3 min read
Why incorporate in Texas? Incorporating your Texas business can be beneficial in many regards. After the business has been incorporated, company shareholders will find themselves shielded from the company's liabilities and may also enjoy tax advantages not available to other business entities.
Pros and Cons of Incorporating in Texas
If you're thinking about incorporating your business in Texas, it's important to learn some of the advantages and disadvantages of incorporation. Let's start by discussing the benefits of forming a corporation.
Limited liability protection is the best reason to incorporate your business. Corporate shareholders cannot be personally held responsible for company debts, and their assets are not subject to seizure if the corporation receives an unfavorable judgement in a lawsuit.
In general, a company shareholder is only liable for what they have invested in the company. For instance, if you contributed money to the company and the company gets sued, you could lose this investment in the judgment, but you won't lose your personal assets such as your home or car. Corporate officers, however, can be legally held liable for their own actions, such as neglecting to collect and pay company taxes.
Another benefit of corporations is that they can raise capital much more easily than other business entities. If a corporation needs to raise funds, it has the option of selling stock.
To lower their tax burden, corporations can elect S corp status after meeting a few qualifications. S Corp election means the corporation will get taxed as a partnership, eliminating double taxation.
There are three main disadvantages of forming a corporation that you should consider:
- Incorporating requires a big investment of time and money, and the formation process is much more complex than with other businesses.
- Corporations are subject to oversight from all levels of government, resulting in the need to handle a large volume of paperwork and follow countless regulations.
- In some cases, incorporation can result in higher taxes. Shareholder dividends are not eligible for business income deductions, meaning they are subject to double taxation.
Completing Texas Incorporation
The process of incorporating in Texas requires the same steps as in other states. First, your corporation needs a name. Whatever name you choose, you should include the word Corporation, Incorporated, Company, or Limited. An abbreviation of one of these words is also acceptable. You are not allowed to use symbols or the word "lottery" in the name of your Texas corporation.
When choosing a name for your company, make sure that your name doesn't indicate a purpose that conflicts with the purpose listed in your Certificate of Formation. Also, you cannot use a name that's similar to another corporation's name. It is possible to use the name that another business has already registered if you obtain written consent from the business and inform the Secretary of State.
You are only allowed to use words related to education after obtaining the Texas Higher Education Coordinating Board's approval. Other words that require approval before use include:
- Words that indicate your corporation is associated with veterans.
When choosing directors for your Texas corporation, there are several requirements. You must appoint at least one director. However, directors do not need to be Texas residents or meet any age requirements.
To form your corporation, you must file a Certificate of Formation with the Texas Secretary of State. This document will need to include several pieces of information about your incorporation. Unlike in other states, Texas does not require that you disclose the names or addresses of company officers in your formation documents. This is one of the biggest advantages of incorporating a business in this state.
In your Certificate of Formation, you must state how many shares your corporation is authorized to issue, as well as the par value of these shares. Increasing your corporation's authorized shares or their par value will not impact your filing fees.
Texas corporations must maintain a registered agent. The agent must possess a physical Texas address, not a Post Office Box, and you must provide their name and address in your Certificate of Formation. Your registered agent should be available to accept government and legal documents during normal business hours. Certain professionals such as attorneys, doctors, and accountants can establish a professional corporation in Texas.
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