If you have set your mind to start a business in Texas, this is the best guide you could have landed on. This article articulately outlines every piece of information you might need if you plan to start your incorporation in Texas. It is usually asserted by the business community that the laws governing businesses and industries in Texas should be favorable to startups of every form. The conditions in this state support every business to grow and prosper without heavy taxes.
A Guide to Incorporating in Texas
The first and the foremost thing you need to decide is to start contemplating the type of business entity you think suits you the most. Popular corporate entities include the Limited Liability Company (LLC). An LLC and incorporation differ on several levels, such as the type of maintenance both the entities require, tax structure, investors, and business prestige.
Generally, an LLC is popular for having minimal requisites for its establishment and maintenance compared to incorporation. The latter of the two calls for enhanced legal formalities and business engagements. Taxes are more advanced and thorough in incorporations as compared to LLCs, but the name prestige of incorporation is unmatched. Investors are seen to be more interested in investing their money in established incorporation rather than an LLC.
Differences between an LLC and Incorporation in Texas
1. No Tax on Personal Income in Texas
Among the seven most business-friendly states of the country, Texas is the one that does not have an income tax imposed. This is an excellent enticing offer for all the startups that are looking for business avenues in Texas. If you form incorporation in this state, your income passes through the company’s income, making it not subjected to any kind of taxation.
2. Little to No Tax on Corporate Income
There is little to no corporate income tax imposed in the state of Texas. If you are incorporating in Texas, you are saving a big chunk of your business profits.
3. Texas Business Franchise Tax
This is a type of gross receipts tax applied on both the incorporations and LLC in Texas. Nevertheless, the rate of this tax is very low than most other states that apply franchise tax. Also, there is a fluctuating threshold amount. If your incorporation does not cross it, you are good to go without any tax.
4. LLC Has More Protection from Creditors in Texas
In Texas, the creditors cannot have the LLCs that have taken their money closed through a court order, unlike other states. The creditors cannot do much against the LLCs in case of a defaulter situation.
Incorporating in Texas
Now that you have all the information regarding establishing an LLC or a corporation in Texas, you can make an informed decision about the type of business entity you want yourself linked with. Once you have decided to incorporate in Texas, this information will help you go through the process step by step.
1. Certificate of Formation
The first thing you need to do to start incorporating in Texas is to file the Certificate of Formation (also known as Form 201) with the Secretary of State. It is quite an easy step as you can conveniently download the certificate online from the state Secretary’s Website. Once this is done, your incorporation is formally documented with the state, and you can initiate your business by carrying out some easy additional steps.
- Choosing a Name For Your Corporation
Before you file your certificate of formation, you need to have an appropriate name for your company. It is advised that the name you choose rightfully includes the words “Incorporated,” “corporation,” “Limited,” or the short form of a corporation, “Corp.” The name you choose should be unique and distinguishable from the other names registered with the Texas Secretary of State.
If you go online and start filling out Form 201, you will see an availability check for your name. Your name is reserved in the documentation for about 120 days.
- Appoint a Registered Agent
A registered agent is an individual that carries out all the legalities of your corporation. He or she must take care of all the legal papers and prepare a case if the company is ever sued.
- Registered Office
A street address of an office where your registered agent is available is mandatory when filing the certificate of formation. The address is made public in all the legal documentation and other requirements.
2. Draft Bylaws for the Corporation
Bylaws are very important as you have invested your money and sweat into starting your company. Bylaws refer to the internal corporate business document outlining the basic rules governing your company. These laws elucidate how the decisions in your company will be made and outline a hierarchy. Though you do not require this document when filing for the certificate with the state, drafting the bylaws and adopting them is better for your own good.
3. Obtain an EIN for Your Corporation
EIN (or FEIN) is the federal tax ID that you need to file your taxes. Obtaining an EIN or tax ID for your business also helps in other related paperwork, including opening a business account. Fill out the application on the IRS’s website for free. The best way is to check the box of EIN service in the Texas incorporation services form.
4. Opening a Corporate Bank Account
This is also an essential step in starting your company in Texas. A corporate bank account helps you deal officially with all the investments and profits while monitoring all the transactions. You will need the following for opening a bank account:
- Copy of the Texas Certificate of Formation
- Texas corporation bylaws
- EIN issued to your corporation
5. Appoint Directors
As the incorporator who signed all the articles, it is your responsibility to appoint people serving as corporate directors. Usually, these members are hired by the shareholders, but until they are finalized, the first formal meeting of your corporation should be head by these appointed directors.
The first meeting should discuss and adopt bylaws, draw consensus on a corporate bank, issue stock and formalities of the fiscal year, and obtain the stock certificate and corporate seal.
6. Issue Stock
This is imperative to maintain the cycle of investment and profit in the corporation. Issuing stock is important to offer something in return to the shareholders for their cash contributions. All this information and transaction should be documented with all the legal formalities in place.
Top Advantages of Incorporating in Texas
1. Most Favorable Tax Climate
One of the most enjoyable features of doing business in Texas is its tax favorable climate. The rate of business tax in Texas is far lower than in other states. Also, as stated before, there is no personal or corporate income tax in the state (however, they have other taxes that are quite high, such as sales and property tax). This is very beneficial for companies to hire new talent and hone their abilities without worrying about losing profit.
2. Texas Enterprise Fund
The TEF or Texas Enterprise Fund is a massive advantage that makes you favor Texas over other states to start your company in. This cash grant helps you strengthen your investment. It is an amazing incentive tool that helps your company establish its roots and multiply job creation opportunities.
Registering an Incorporation in Texas
If you are still pondering whether you should incorporate in Texas, then fret not; this is probably the best decision you will take. Incorporating in Texas has several advantages and no significant disadvantages. With an initial registration fee of $300 when you file with the Secretary of State to get your Certificate of Formation, incorporation in Texas is quite cheap.
The paperwork and all legalities should be thorough, but the process is worth the wait of profits you obtain with no or minimal income taxes.