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FAQ’s
On Formation of a Business Entity
1. How do
I form a "C" corporation, an "S" corporation or a
"501(c)(3)" corporation?
The Texas
Business Corporation Act and the Texas Non-Profit Corporation Act do not
distinguish between corporations using these designations. When articles
of incorporation are filed with the secretary of state pursuant to one
of those statutes, either a business corporation or a non-profit
corporation is created. Designations such as S, C, or 501(c)(3), relate
only to federal tax provisions. If you need information regarding those
provisions or how they might affect the filing of articles of
incorporation you should contact your own tax counsel or the Internal
Revenue Service.
2. How do
I form a minority-owned business?
Formation of
a minority-owned business is not addressed by the Texas Business
Corporation Act and therefore, this information is not available from
the secretary of state. Information regarding certification as a
historically underutilized business (HUB) may be obtained by calling the
Texas General Services Commission at (512) 463-3419. The Small Business
Program and the Business Information and Referral Office in the Texas
Department of Commerce, (512) 936-0223 or (800) 888-0511, may also be of
assistance.
3. Do you
have to be a U.S. citizen or a U.S. resident to incorporate and/or own a
corporation in Texas?
No. The Texas
Business Corporation Act and the Texas Non-Profit Corporation Act do not
place any restrictions on who can incorporate or own shares in a
corporation except that the incorporator must be at least 18 years old.
A corporation may provide residency or citizenship limitations in its
articles of incorporation or bylaws. You should consult tax counsel or
the Internal Revenue Service to determine any ownership or other
restrictions that apply to S corporations.
4. Can a
person under 18 years old be a director, officer or shareholder of a
corporation?
Yes. Neither
the Texas Business Corporation Act nor the Texas Non-Profit Corporation
Act place any restrictions on who can own shares in or manage a
corporation. Such restrictions may be set forth in the corporation's
bylaws. The capacity of a minor to own property and/or sign a contract
would be considerations in whether a corporation should have a minor as
an officer or director.
5. What is
a registered agent? What are the agent's duties? Where may a registered
office be located? Can the secretary of state be designated as the
registered agent of a corporation, limited liability company or limited
partnership?
A registered
agent is a natural person or an entity which is authorized to transact
business in Texas that is responsible for receiving service of process
or official notices addressed to the entity. The registered agent
generally has a contractual obligation to forward any such process or
notice to the entity. The secretary of state may not be appointed to be
the registered agent of a corporation, limited liability company, or
limited partnership.
The
registered office must be a physical address where the registered agent
may be located during business hours. It cannot be a post office box or
a lock box that is part of a commercial mail/message service unless that
commercial enterprise is designated to be the registered agent. However,
the registered office may be a post office box if the population of the
city in which the registered office is located is less than 5,000.
6. Does a
corporation have to issue stock? What is par value? How do you determine
the par value of the corporation's stock? Is there a minimum or maximum
value for corporate stock?
A business
corporation must sell shares of stock in order to capitalize the
corporation, that is, provide the corporation with its own capital,
separate from the money of its owners. This separation provides part of
the support for shielding the shareholders from personal liability for
the debts and obligations of the corporation.
Shares of
stock sold by the corporation represent proportionate ownership
interests held by shareholders in the corporation. "Par value"
is a dollar value assigned to shares of stock which is the minimum
amount for which each share may be sold. There is no minimum or maximum
value that must be assigned. Shares may also have "no par
value," which means that the Board of Directors will assign a value
to the stock below which the shares cannot be issued.
There is no
minimum number of shares that must be authorized in the articles of
incorporation. One or more shares may be authorized. However, the
corporation may not sell more shares than it is authorized to issue and
it must receive consideration of a value of not less than one thousand
dollars ($1,000.00) for its shares prior to beginning business.
7. Where
does the corporation obtain its corporate seal, stock certificates and
books for its minutes and other records?
The Texas
Business Corporation Act does not require that a corporation have a
corporate seal, therefore the secretary of state does not have
information or regulations on how to design a seal or where to obtain
one. Seals, stock certificates and corporate minute books generally may
be purchased from legal materials suppliers or corporate service
companies.
8. Can I
file the corporation's bylaws with the secretary of state?
No. The
bylaws of a corporation are documents kept by the corporation at its
principal office. There is no statute that permits the filing of bylaws
with the secretary of state and the secretary of state will not accept
them for filing.
9. Can I
register a trade name?
There is no
statute in Texas that permits the registration of the name of a
business, that is, its trade name or commercial name, whether that
business is incorporated or unincorporated.
Individuals
and unincorporated entities that regularly conduct business using an
assumed name (often referred to as a "dba") must file an
assumed name certificate with the county clerk in each county in which
business premises are maintained. If corporations, limited liability
companies or limited partnerships (entities created by filing with the
secretary of state) do business with a name that is different than the
name set forth in the organizational documents, they must file assumed
name certificates in the county or counties where the registered office
and the principal office are located, and must also file with the
secretary of state.
10. If I
file articles of incorporation, will incorporating keep others from
using my company's name?
Incorporating
will not keep another business from using your name. Generally, every
business must protect its own business name and the good will that it
has acquired from the sale of its goods or services in a specific
geographic area. Filing articles of incorporation only prevents the
secretary of state from filing a document to create another corporation,
limited liability company or limited partnership that has the same, a
deceptively similar, or similar name as the entity already in existence.
11. How
can I protect a trade name nationwide?
There is no
national registration of trade names. Generally, businesses, including
corporations, protect their trade names by registering their trade name
as a service mark or trademark if the trade name also functions as a
service mark or trademark. The secretary of state recommends that
businesses obtain private counsel to get advice on how to protect a
trade name in interstate commerce.
12. Can
the same person be the shareholder, director and officers of a
corporation?
The Texas
Business Corporation Act requires that there be at least one director in
a corporation and two officers. The required officers are a President
and a Secretary. One natural person may hold both offices and be the
sole director. That one person may also be the sole shareholder. A
corporation may not be a director of another corporation.
In the case
of a non-profit corporation, the Texas Non-Profit Corporation Act
requires that there be at least three directors in a non-profit
corporation. The required officers of a non-profit corporation are a
President and a Secretary; however, the same person cannot hold the
offices of President and Secretary. Only an individual may serve as a
director of a corporation.
13. Do I
need to publish a notice before incorporating a business?
The Texas
Miscellaneous Corporation Laws Act requires only that an existing
unincorporated business which intends to incorporate without a change in
its name publish its intent to incorporate in the local newspaper for
four consecutive weeks.
14. What
are the differences between a corporation, a limited liability company (LLC),
and a registered limited liability partnership (RLLP)? What are the
benefits of forming a corporation?
Corporations
are formed pursuant to the Texas Business Corporation Act or the Texas
Non-Profit Corporation Act. Corporations have shareholders, are managed
by a board of directors, and the daily affairs are administered by
officers. Similarly, a limited liability company has members and may be
managed by one or more managers. Both entities must pay Texas franchise
tax, but may have different federal tax liabilities. Generally, persons
form corporations or limited liability companies in order to shield the
shareholders or members and officers or managers from personal liability
for the debts and obligations of the entity. There may also be various
tax advantages to forming these entities which may not be available for
sole proprietorships and general partnerships.
A registered
limited liability partnership, also called an L.L.P., is either a
general or limited partnership that registers annually with the
secretary of state and carries a minimum of one hundred thousand dollars
($100,000) in errors & omissions insurance. Once registered, the
general partners have a liability shield under various circumstances for
the wrongdoing or malpractice of other general partners, as well as for
the general obligations of the partnership incurred while the
partnership is a registered limited liability partnership.
The secretary
of state does not provide specific information as to whether a person
should incorporate or form a limited liability company or a partnership.
Persons contemplating forming any of these entities should consult with
private counsel regarding their individual fact situation.
15. What
is a close corporation? What are the benefits of forming a close
corporation?
A close
corporation is any domestic corporation that has in its articles of
incorporation a provision stating that "this corporation is a close
corporation." A corporation may be formed initially as a close
corporation or may amend its charter to include this statement. A close
corporation may be managed according to a shareholders' agreement
instead of by a board of directors. In addition, bylaws are not required
if provisions normally included in bylaws are included in the
shareholders' agreement. Frequently, shareholders in close corporations
agree to limit the conditions under which shares may be transferred or
sold, to apportion profits and losses in a specific manner, and/or to
set terms and conditions for share ownership or management positions.
Persons interested in close corporations should consult Part Twelve of
the Texas Business Corporation Act. Both professional corporations and
professional associations may utilize the provisions of Part Twelve of
the Texas Business Corporation Act in their formation documents.
16. What
is a non-profit corporation?
A non-profit
corporation is created by filing articles of incorporation with the
secretary of state in accordance with the Texas Non-Profit Corporation
Act ("TNPCA"), articles 1396-3.02 amd 1396-3.03.
"Non-profit corporation" means a corporation no part of the
income of which is distributable to members, directors, or officers [TNPCA,
article 1396-1.02A(3)]. A non-profit corporation may be created for any
lawful purposes, which purposes must be fully stated in the articles of
incorporation. Not all non-profit corporations are entitled to exemption
from state or federal taxes.
17. Is a
non-profit corporation exempt from taxes?
Exemption
from federal and state taxation is not automatic and eligible
corporations must apply with the Internal Revenue Service
("IRS") and the State Comptroller to obtain an exemption. Not
all non-profit corporations are entitled to exemption from state and
federal taxes. The secretary of state, however, does not make the
determination of exemption.
Exemption
from federal taxes is determined by the IRS. You should consult the IRS
prior to filing the articles of incorporation to determine what
provisions should be included in the articles for the corporation to be
exempt from federal taxes. IRS Publication 557 titled "How to Apply
for Recognition of Exemption for an Organization," describes the
rules and procedures for non-profit organizations requesting exemption.
The publication can be obtained from either the IRS or the Government
Printing Office. Questions about exempt status can be directed to:
IRS
Exempt
Organizations
1100 Commerce
Dallas, Texas 75242
(214) 767-6023 [Customer Service]
(214) 767-0040
A non-profit
corporation may be exempt from the payment of state franchise taxes if
its purposes fall within one of the exemptions listed in the Texas Tax
Code, Chapter 171, Subchapter B. Questions on exemption procedures
should be addressed to:
Comptroller of
Public Accounts
Tax Assistance
Exempt Organizations Section
Austin, Texas 78774-0100
(512) 463-4600
(800) 252-1381
TDD: (800) 248-4099 or (512) 463-4621
18.
Can a non-profit corporation pay a salary to its officers, directors
and/or employees?
Yes. Any
corporation may pay reasonable compensation for services rendered to the
corporation.
19. Can a
non-profit corporation give political contributions?
Generally,
political and social action activities are permissible purposes for a
non-profit corporation as long as the purpose is set forth in the
articles of incorporation. Specific questions regarding contributions
should be directed to the Texas Ethics Commission, (512) 463-5800, the
Federal Elections Commission or the Internal Revenue Service.
20. How
much franchise tax must a corporation or limited liability company pay?
The Office of
the Comptroller of Public Accounts administers the Texas Tax Code which
includes franchise tax provisions. Any questions on tax issues should be
addressed to that agency, (800) 252-5555 or (800) 252-1381.
21. May
chiropractors form professional associations?
Chiropractors
may form professional corporations and therefore are excluded from the
provisions of the Texas Professional Association Act pursuant to Section
3 of the Act. Chiropractors may form professional corporation pursuant
to article 1528f of the Texas Civil Statutes, a professional limited
liability company pursuant to Part Eleven of article 1528n of the Texas
Civil Statutes, or register as a limited liability partnership pursuant
to Section 3.08(b) of the Revised Partnership Act.
22. Can a
corporate general partner of a limited partnership have the same name as
the limited partnership, except for the evidence of incorporation, i.e.,
Co., Corp. or Inc.?
Governing
statutes and administrative rules provide that entities created by
filings with the secretary of state may not have names that are the same
or deceptively similar. Further, the part of the name which indicates a
limitation on liability, such as the words "Corporation,"
"Inc.," "Ltd.," or "L.L.C." may not be
used to distinguish entities. Therefore, notwithstanding the use of
different endings, a general partner which is a corporation may not have
the same name as or a name that is deceptively similar to the limited
partnership. The entities however may have similar names as long as the
entity being created submits a letter of consent with its formation
documents from the entity in existence giving permission to use the
similar name.
Article From The Secretary Of
State
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