How to Incorporate in Texas

Published: July 2, 2023 • Incorporation, M&A

Advantages of Starting a Company in Texas

Thriving Sectors

Texas is known for its robust and dynamic economy, driven by various thriving business sectors. Here are some specific industries that are flourishing in Texas:

  1. Energy: Texas is renowned for its dominance in the energy sector, particularly in oil and gas production. The state is home to numerous energy companies, including major oil and gas corporations, as well as renewable energy companies. With its abundant natural resources, Texas continues to be a significant player in the energy industry.
  2. Technology and Innovation: Texas has emerged as a hub for technology and innovation, attracting both startups and established companies. Cities like Austin, often referred to as “Silicon Hills,” foster a vibrant tech ecosystem. The state boasts a thriving software development, cybersecurity, artificial intelligence, and data analytics sector. Additionally, Texas has become a prominent destination for technology conferences and events.
  3. Biotechnology and Life Sciences: Texas is a leader in biotechnology and life sciences, with a focus on medical research, pharmaceuticals, and healthcare advancements. The state is home to renowned medical centers, research institutions, and biotech companies. Houston’s Texas Medical Center, the largest medical complex in the world, is a prime example of the state’s commitment to advancing healthcare and biotechnology.
  4. Aerospace and Defense: Texas plays a pivotal role in the aerospace and defense industries. The state has a strong presence of aerospace manufacturing and research facilities. Major aerospace companies have operations in Texas, and the state is known for its contributions to space exploration and development. The Johnson Space Center in Houston serves as NASA’s hub for human spaceflight activities.
  5. Financial Services: Texas has a thriving financial services sector, with major banks, investment firms, and insurance companies headquartered in cities like Dallas and Houston. The state’s business-friendly environment and robust economy make it an attractive location for financial institutions.
  6. Manufacturing and Logistics: Texas has a robust manufacturing sector, encompassing diverse industries such as automotive, electronics, machinery, and chemicals. The state’s strategic geographic location and extensive transportation infrastructure make it a prime destination for logistics and distribution operations.
  7. Creative and Entertainment Industries: Texas has a vibrant creative and entertainment sector, with a significant presence in film production, music, gaming, and digital media. Austin’s South by Southwest (SXSW) festival is a globally recognized event that showcases the intersection of technology, music, and film.

These are just a few examples of the thriving sectors in Texas. The state’s business-friendly policies, skilled workforce, strategic location, and access to diverse markets contribute to its attractiveness for businesses across various industries.

Privacy

In terms of privacy, the Texas Secretary of State’s corporate database typically only displays the information of the registered agent and the company’s office address. This means that members’ or directors’ information can be kept relatively private, although the specifics may vary depending on the type of business entity and the details provided in the formation documents.

Personal Liability Protection

Texas, like all other states, offer personal liability protection for company owners. By forming a Limited Liability Company (LLC) or a corporation, business owners can separate their personal assets from the company’s liabilities. This protection ensures that personal assets like the owner’s home, car, or personal savings, are shielded if the company encounters any legal issues or debts.

Costs and Tax Considerations

Texas also offers cost-effective avenues for business formation. The fee to file and form an LLC or corporation in Texas is a flat $300. The fee for changing a registered agent or office is $15. Although the cost of a registered agent may vary, it typically falls within the range of $50-$100 per year.

Notably, Texas has a highly attractive tax climate for businesses. The state has no corporate income tax at the state level, making it a significant tax haven for incorporating a business. This advantage, coupled with the cost-effective startup fees, makes Texas an alluring destination for business formation.

However, even without conducting business in Texas, foreign entities registered in Texas must maintain a registered agent or registered office in the state, and failure to comply with these requirements or pay any associated fees could lead to the revocation of the foreign entity’s registration.

Thriving Business Sectors

Texas boasts a diverse and thriving economic landscape with several key business sectors. These sectors range from biotechnology to aerospace, cloud engineering, and more. This diversity offers a breadth of opportunity for businesses in various industries, underpinned by a highly motivated and skilled workforce, a competitive tax climate, and quick market access.

Considerations for Non-Residents

Non-residents can indeed open a company in Texas. However, as previously mentioned, they will need to maintain a registered agent or office in the state. In terms of taxes, as long as no business activity is conducted in Texas, there should be no state taxes. However, it’s important to consult with a tax professional to understand the specific tax implications.

Comparison with Other States

While other states like Delaware, Wyoming, and Nevada also offer attractive business environments, Texas stands out with its lack of corporate income tax, affordable incorporation fees, and vibrant business sectors. California, while a significant player in the business arena, often presents higher costs of living and business operation, along with a more complex tax structure.

In conclusion, Texas offers a compelling combination of advantages for business formation, from its cost-effective startup fees and favorable tax climate to its thriving economic sectors and robust personal liability protection. However, each business’s unique needs and circumstances should be considered, and professional advice sought, when deciding on the state of incorporation.

Selecting a Business Structure

Incorporating a business in Texas involves a few steps depending on the type of business structure you wish to establish. Here’s a summary of the Texas-specific information that I found on the website of the Office of the Texas Secretary of State:

Sole Proprietorship

This is the simplest form of business and is conducted by a single individual without the need for formal organization. If the business is conducted under an assumed name (a name other than the surname of the individual), an assumed name certificate (also known as a DBA) should be filed with the office of the county clerk in the county where a business premise is maintained. If there’s no business premise, the DBA should be filed in all counties where business is conducted under the assumed name.

Pros:

  • Simplicity: A sole proprietorship is the easiest and least expensive business structure to establish. You don’t have to register with the state and you are free to operate under your own name or a business name.
  • Control: As the sole owner of the business, you have complete control over all decisions.
  • Easy Tax Preparation: Business profits are taxed once, on your personal tax return.

Cons:

  • Personal Liability: As a sole proprietor, you are personally liable for all the business’s debts. If the business incurs debt or is sued, your personal assets are at risk.
  • Funding: It may be more difficult to get bank loans or investor funding because many consider this business structure to be risky.

General Partnership:

This form of business is created when two or more persons associate to carry on a business for profit. It generally operates in accordance with a partnership agreement, but there’s no requirement that the agreement be in writing and no state-filing requirement. If the business of the partnership is conducted under an assumed name (a name that doesn’t include the surname of all of the partners), then a DBA should be filed with the office of the county clerk in the county where a business premise is maintained. If there’s no business premise, the DBA should be filed in all counties where business is conducted under the assumed name.

Pros:

  • Simple Formation: Like a sole proprietorship, a general partnership is easy to form.
  • Shared Responsibility: Partners can share the responsibilities and the workload of running the business.
  • More Financial Resources: With more than one owner, there might be more start-up money available.

Cons:

  • Joint Liability: All partners are personally liable for the business’s debts. If the partnership cannot meet its obligations, your personal assets can be used to pay off debts.
  • Disagreements: Partners must agree on how to run the business. Disputes can arise on important decisions.

Corporation

To form a corporation in Texas, a certificate of formation must be filed with the Texas Secretary of State. The Secretary of State provides a form that meets minimum state law requirements and offers online filing through SOSDirect. The management structure of a corporation is determined by the shareholders and directors, and this is a decision you should make with the advice of an attorney.

Pros:

  • Limited Liability: Shareholders have limited liability for the corporation’s debts or judgments against the corporation.
  • Transferable Ownership: Ownership is transferable through the sale of stock.
  • Ability to Attract Investment: Corporations have an easier time attracting high-level investment. Investors are more comfortable investing funds into corporations, which can issue shares of stock as evidence of ownership.

Cons:

  • Double Taxation: Corporations are considered separate legal entities and as such are subject to corporate income tax at the entity level and at the individual level when corporate income is distributed to owners (shareholders) through dividends.
  • Formalities: Corporations are required to hold regular meetings of the board of directors and shareholders and to keep written corporate minutes.

Limited Liability Company (LLC)

An LLC in Texas is created by filing a certificate of formation with the Texas Secretary of State. The Secretary of State provides a form that meets minimum state law requirements and offers online filing through SOSDirect. An LLC can be managed by managers or by its members, and this management structure must be stated in the certificate of formation.

Pros:

  • Limited Liability: Members (owners) of an LLC have limited liability, meaning they are protected from personal liability for business decisions or actions; if the LLC incurs debt or is sued, members’ personal assets are usually exempt.
  • Flexibility: LLCs are free to establish any organizational structure agreed upon by the company members.
  • Tax Advantages: Profits and losses can get passed through to your personal income without facing corporate taxes.

Cons:

  • Cost: It can be more expensive to form an LLC as compared to a sole proprietorship or partnership.
  • Limited Life: In many jurisdictions, when a member leaves an LLC, the business is dissolved and the members must fulfill all remaining legal and business obligations to close the business.

Limited Partnership

A Texas limited partnership is a partnership formed by two or more persons and having one or more general partners and one or more limited partners. The limited partnership operates in accordance with a partnership agreement, written or oral, of the partners as to the affairs of the limited partnership and the conduct of its business. The limited partnership must file a certificate of formation with the Texas Secretary of State, and online filing is provided through SOSDirect.

Pros:

  • Limited Liability for Limited Partners: Limited partners are only liable up to the amount of their investment.
  • Management Control Retained by General Partners: General partners retain control over the management of the business.

Cons:

  • Unlimited Liability for General Partners: General partners are personally liable for the partnership’s obligations.
  • Investment Limitations: Limited partners may jeopardize their limited liability status if they participate too much in management.

Limited Liability Partnership

A general or limited partnership may opt to register as a limited liability partnership to limit the liability of its general partners. The Secretary of State provides a form for registration as a limited liability partnership, and online filing of the registration is provided through SOSDirect.

Pros:

  • Limited Liability: Each partner is protected from personal liability for business debts and the negligence of other partners.
  • Flexibility: LLPs allow partners to participate in management without losing their limited liability protection.

Cons:

  • Liability for Own Actions: Each partner may still be liable for their own actions.
  • State Restrictions: Some states limit the creation of LLPs to certain professions like lawyers, accountants, and architects.

Factors to Consider

The choice between these forms depends on various factors. For startups without definitive investors lined up, an LLC is often a good choice because it’s simpler to set up and maintain, provides limited liability protection, and avoids the double taxation of a corporation.

A corporation might be a better choice if the startup plans to seek funding from venture capitalists, wants to take the company public, or needs to retain earnings in the company to reinvest in growth. Corporations can be more complex to set up and operate, though, with more formalities and potential for double taxation.

For nonresidents looking to establish a business in Texas, you should know that Texas does not have a state income tax, which can make it a more attractive place to do business. However, you might have to pay franchise tax, depending on the type of business entity you form. An LLC might be an attractive option for nonresidents due to its flexibility, limited liability, and pass-through taxation, but consulting with a tax advisor and attorney is always recommended to understand all the implications.

The Company Formation Process in Texas

Starting a business is an exciting adventure, but it also involves navigating through a labyrinth of legal procedures. This guide will walk you through the steps of forming a corporation or a limited liability company (LLC) in the state of Texas.

Naming the Company and Naming Guidelines

The first step in forming a company in Texas is choosing a unique name that is not in use or reserved by another business. The name should be distinctive and indicative of the nature of your business. Remember, your business name is an essential part of your brand and will play a significant role in your marketing efforts.

When choosing a name for an LLC, the Texas state law requires that it must contain the words “Limited Liability Company” or the abbreviations “LLC” or “L.L.C.” For a corporation, the name must include “Corporation,” “Company,” “Incorporated,” “Limited,” or an abbreviation of one of these terms.

You can check the availability of your desired business name on the Texas Secretary of State’s SOSDirect website. If the name is available, you can reserve it for 120 days by filing a Name Reservation form and paying a small fee.

Choosing a Registered Agent

A registered agent is a person or entity designated to receive legal documents on behalf of your business. This includes service of process of legal action (lawsuits) as well as state communications.

The registered agent must have a physical street address in Texas (P.O. Boxes are not acceptable). They must also be available during standard business hours. You can serve as your own registered agent, but many businesses choose to hire a professional service to ensure availability and receive help with managing legal documents.

Filing

Once you have a name and a registered agent, you can file your company’s formation document with the Secretary of State. For an LLC, this document is known as the Certificate of Formation (Form 205), and for a corporation, it’s called the Certificate of Formation For-Profit Corporation (Form 201).

These documents must include the name of the company, its purpose, the name and address of the registered agent, and the names of the organizers or incorporators. For an LLC, you must also state whether it will be member-managed or manager-managed.

The state filing fee for these documents is $300. You can file online through the SOSDirect website, by mail, or in person. The approval process typically takes about 5-7 business days, but expedited service is available for an additional fee.

Creating an Operating Agreement or Bylaws

An Operating Agreement (for an LLC) or Bylaws (for a corporation) is not required by the state of Texas, but it’s highly recommended. This document sets out the internal rules for the operation of your business.

For an LLC, the Operating Agreement would typically include details about the members’ percentage interests in the business, their rights and responsibilities, the allocation of profits and losses, and procedures for handling the departure and addition of members.

In the case of a corporation, the Bylaws would outline the structure of the corporation, the roles of directors and officers, the processes for decision-making and holding meetings, and provisions regarding shareholders and stock issuance.

Registering for State Taxes

Finally, depending on the nature of your business, you may need to register for various state taxes. If you will have employees, you will need to register for Unemployment Insurance Tax through the Texas Workforce Commission.

Businesses selling goods or certain services will need to register for Texas Sales Tax through the Texas Comptroller of Public Accounts. Texas also imposes a Franchise Tax on most businesses, which is a privilege tax imposed on entities imposed on entities for the privilege of doing business in the state. The franchise tax rates for 2023 are 0.375% for retail or wholesale businesses and 0.75% for other types of businesses, with a No Tax Due Threshold of USD 1,230,000. There’s also an EZ Computation Rate of 0.331% for businesses with a Total Revenue Threshold of up to USD 20 million.

After Formation in Texas: Key Considerations for New Businesses

Embarking on a new business venture is an exciting and fulfilling journey. However, after successfully forming your business entity in Texas, there are several things you need to consider to keep your company compliant and operational. This guide answers some common questions regarding post-formation procedures and requirements in Texas.

Do I have to file an annual report with the Secretary of State?

Annual report requirements vary depending on the type of business entity.

For Texas limited liability partnerships (LLPs), an annual report must be filed with the Secretary of State by June 1 each year. The Secretary of State sends a notice to file the LLP annual report no later than March 31 of the current report year.

Nonprofit corporations, both Texas and foreign, are required to file a periodic report with the Secretary of State upon receiving notice, though not more than once every four years. The Secretary of State will send a notice to the nonprofit corporation at the registered agent address on file.

Certain limited partnerships (Texas and foreign) that are not subject to state franchise tax must also file a periodic report with the Secretary of State upon receiving notice, with the same four-year maximum frequency.

For-profit and professional corporations, professional associations, LLCs, and certain limited partnerships that are subject to state franchise tax laws file annually with the Comptroller of Public Accounts. These entities also file a Public Information Report (PIR), which lists the names and addresses of officers, directors, and managers at the time the report is filed.

Where can I get a corporate seal, stock certificates, and a minute book?

Texas law does not mandate businesses to have a corporate seal, hence there are no specific regulations or information on how to design one or where to get it. However, business owners can purchase seals, stock certificates, and minute books from book stores, office supply stores, or corporate service companies.

Does the Secretary of State issue my federal employer identification number (EIN or FEIN)?

No, the Secretary of State does not issue employer identification numbers. You would need to contact the Internal Revenue Service (IRS) to obtain your EIN or FEIN.

How much franchise tax must an entity pay?

The Texas Secretary of State does not provide information on franchise tax amounts. To understand the franchise tax requirements, you should visit the Texas Comptroller of Public Accounts’ franchise tax website.

Can I file my entity’s bylaws, company agreement or other internal governing documents with the Secretary of State?

No, business entities are required to keep their internal governing documents at their principal office. Texas law does not permit the filing of these documents with the Secretary of State.

Why didn’t I receive a file-stamped copy of my certificate of formation?

To receive a file-stamped copy of your certificate of formation, you must submit a duplicate copy of the filing instrument. If you did not provide a duplicate copy, the Secretary of State would not reject your filing instrument if it conforms to the statutory requirements. However, you would not receive a file-stamped copy.

Do I need to file something with the Secretary of State if I’m ready to issue shares in my corporation or ownership interests in my LLC or limited partnership?

No, you do not need to file a document with the Secretary of State when selling or issuing shares or ownership interests in your entity. However, the offer for sale or sale of shares or ownership interests is regulated under state and federal securities laws. For information on whether a filing is required under Texas or federal securities laws, you should contact the Texas State Securities Board and the Securities and Exchange Commission.

In conclusion, understanding these considerations after forming your business is crucial for its smooth operation. Always consult with a legal professional or business consultant to ensure you’re following all applicable laws and regulations. As a business owner, your focus should always be on the growth and success of your company, and being well-informed about the post-formation processes can help you avoid unnecessary complications and stay on the path to success.

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