Corporations - Definition and General Overview of a Corporation
A corporation is a legal person with the characteristics of limited liability, centralization of management, perpetual duration, and ease of transferability of ownership interests. Corporations have historically been the dominant form of modern business organization. It is an artificial person or legal entity, created by statute and existing separate and apart from its owners or shareholders, so that it may own property, make contracts, and sue and be sued in its own name. The owners of a corporation are called “shareholders.” The management of the business and affairs of a corporation is vested in persons who are called “directors.” Texas corporate law does provide for shareholders to enter into shareholders’ agreements to eliminate the directors and provide for shareholder management.
Small business formation and large business formation can both utilize corporations for entity structure. Corporations vary widely in complexity and number of shareholders, and can include: (1) the individual owner corporation, in which all the shares of stock is owned by one person. Functionally, this type of corporation is similar to a sole proprietorship, and is in many ways an incorporated sole proprietorship; (2) the close corporation, in which the shares of stock are held in a few hands and is not publicly traded. Functionally, this type of corporation is similar to a partnership.
Corporation: Forming a corporation is more complex than forming a sole proprietorship or partnership. A Texas corporation is created by filing a certificate of formation with the Texas Secretary of State. The corporations shareholders, as a general rule, are not liable for claims against the corporation beyond the amount of their individual investment. In addition, unlike a sole proprietorship or partnership, a corporation can have continuous existence. Upon the death of a shareholder or the sale of the shares of stock by one owner to another, as a general rule, will not affect the continuity of the business operation. However, there does exist some procedures by which a “close” corporation can circumvent this general condition. A close corporation is any domestic for-profit corporation or professional corporation that states in its certificate of formation that "this corporation is a close corporation." The statement can be included in a corporation’s initial certificate of formation, or it can be added later by filing a certificate of amendment. A close corporation may be managed according to a shareholders' agreement instead of by a board of directors or bylaws. Frequently, shareholders in close corporations agree to limit the conditions under which shares may be transferred or sold, apportion profits and losses in a specific manner, or set terms and conditions for share ownership or management positions. More information on "Close corporation" can be found in BOC Sec. 21.701.
S Corporation: A corporation is subject to taxation on its income unless the corporation and its shareholders have elected, under Subchapter S of the Internal Revenue Code, to be an S corporation and therefore treated as a partnership for income tax purposes. An “S” corporation is not a matter of state corporate law but rather a federal tax election. A for-profit corporation elects to be taxed as an “S” corporation by filing an election with the Internal Revenue Service.
S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income. Valuable information can be found on the IRS website on S Corporations. To qualify for S corporation status, the corporation must meet the following requirements:
Be a domestic corporation
Have only allowable shareholders a) including individuals, certain trust, and estates and b) may not include partnerships, corporations or non-resident alien shareholders
Have no more than 100 shareholders
Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.
In order to become an S corporation, the corporation must submit IRS Form 2553 Election by a Small Business Corporation form signed by all the shareholders. Thomas P. Finley, Jr., does not give tax advice to his clients and it is recommended to retain competent tax counsel regarding the decision to be taxed as an “S” corporation and the requirements for filing the election. Employer and Tax information can be found on the Texas Secretary of State website. Thomas P. Finley, Jr., Attorney & Counselor at Law will not assist with tax matters but can recommend a Certified Public Accountant (CPA).
Corporations - General questions and overview checklist when forming a Corporation:
1. Will the company be For-profit, Close for-profit, Professional (PC), Close (PC), or Nonprofit (NP)?
2. What is the proposed name for the corporation? It is best to provide your preferred name and two alternatives. For-profit and close corporation names must include the words “company”, “corporation”, “incorporated”, “limited”, or an abbreviation. Professional corporation (PC) names must include “professional corporation” or an abbreviation. Nonprofits require no special words.
3. What is the purpose of the corporation? Most corporations that I assist in formation are a corporation formed for “For-profit” and for “any lawful purpose”.
4. Corporations For-profit, close and professional corporations must provide the total shares of stock authorized and the Par value of the shares.
5. Who will be the Registered Agent for the corporation and what will be the registered office street address for the corporation? A Registered Agent must consent to serve as registered agent for the corporation.
6. How many initial Directors will the corporation have (at least 3 for nonprofits and at least 1 for all other corporations), who are the initial Directors, and what are their complete addresses?
7. Are there any special clauses that need to be added to the Certificate of Formation? For example, voting, Subchapter S status, Close corporation, and other special clauses.
8. Will the corporation need corporate books and/or shares or stock certificates? Will there be custom clauses needed for the certificates?
9. What will be the principal place of business of the corporation after formation?
10. When will be the Organizational Meeting for the corporation?
11. Who will be the Organizational Meeting Chair person and meeting Secretary?
12. Who will be the Officers of the corporation such as President, Vice-President, Secretary, Treasurer? President and Secretary designations are required for all corporations. For nonprofits they cannot be the same person.
13. For regular corporations, close corporations, and professional corporations what will be the per-share price of shares to the initially issued at the organizational meeting? What is needed is the Shareholder name, Number of initial shares, and Nature and value of payment for the shares.
14. Does the corporation have a banking resolution?
15. Will there be any custom clauses or documents needed to be attached to the Bylaws and/or Minutes at the organizational meeting?
The above is a general overview of the items needed when forming a corporation. Contact me to discuss the general questions and checklist above to form a corporation and schedule an office appointment with me to begin formation of your corporation.
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