How to Create an Entity in Texas
This guide will give you answers on how to start your new entity. It is important to create an entity for your new business, as people who conduct business under a DBA or as a sole proprietor receive no legal protection of their personal assets from business debts, liabilities, and obligations
What Type of Entity Should I Choose?Most people starting a business choose either an LLC or an S-Corp. A LLC, or limited liability company, is a very good vehicle for people who do not want to have, or do not understand, the formalities of corporations. LLC owners are called "members," and each member can conduct business for the company, unless you elect to create a manager-managed LLC. In a manager-managed LLC, the managers are the people who run the business, and non manager members do not run day-to-day operations of the business.
A S-Corp, on the other hand, is a good vehicle for people who understand or wish to have a more formal business structure, with a board of directors and officers who have certain responsibilities and duties to the corporation. Texas does not recognize S-Corporations because the election of an S-Corpoation is completed for federal tax purposes, so to create an S-Corp in Texas, you must file as a C-Corporation and then submit a form to the IRS stating you wish to be taxed as an S-Corp. However, there are restrictions on ownership of an S-Corp., so it is very important to review those rules before submitting paperwork as a C-Corporation to ensure you can achieve S-Corp status with the IRS.
Both of these entities have "pass-through" tax status, meaning profits will only be taxed at the ownership level, and not at the business level, which is why they are popular among start-ups.
Although there are many other types of entities in Texas, the two detailed above are the most common, and are usually the most appropriate, for people starting a business. There are other factors involved in choosing an entity, so you should speak with a business attorney and a CPA to determine the best option for you.
How About my Business Name?Once you have decided on an entity, it is time to choose a name. You can run a search on the Secretary of State's website for $1.00 per search. Be sure to include all words of your business. Your business must include "LLC" "limited liability company" "company" or "co:" if it is a LLC, and "Corporation" or "Corp." if it is an S-Corp. The rules regarding names are also on the Secretary of State's website.
Filing a Certificate of FormationOnce a name has been chosen, and no other entities have the same name from your searches, it is time to fill out the form to submit to the state that creates your entity. This is called the certificate of formation. In the certificate of formation you will name your business, name the original members or directors, name the organizer, name the registered agent, and state your business purpose. For a C-Corp you will also determine value of shares, or leave the shares with no par value. You can fill out the certificate of formation online, online at the Secretary of State's website, or by mail. A fee applies to filing each type of entity. Mailing the form takes about a month to receive results, while online takes a few days at most. If the name you chose is rejected by the State, you will receive a rejection notice and you will have to re-file.
I've Registered my Business, Now What?Once you received confirmation from the State that your business is registered, it is important to complete the rest of the formalities in starting a business. If you created a C-Corp and wish to be taxed as a S-Corp (providing pass-through tax status and avoiding the 35% corporate tax rate on revenue) you will need to file a form with the IRS to achieve S-Corp status within no more than two months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year preceding the tax year it is to take effect. You will want to obtain an employer identification number, which can be completed online, obtain a business checking account, and create an operating agreement or bylaws. Operating agreements for LLCs, or bylaws for Corporations, spell out the duties of the members or shareholders, among other items. It is important to have an attorney review this document, or create it, before entering into this agreement. Other important contracts that should be created are buy/sell agreements, non-solicitation agreements, non-compete agreements, and possibly confidential information agreements. Sometimes these agreements are included in the operating agreement or bylaws. Each business and its owners are unique, and these agreements are custom to each business. There is not a "one size fits all solution". It is therefore important to consult an attorney when creating these documents.
Information OnlyThis guide is not for the solicitation of business or for any other reason other than purely informational to those who read it. This guide does not create an attorney-client relationship. Please contact a local attorney to determine what type of entity is best for you, or to answer any questions you may have regarding this process.