Owned by shareholders and managed by directors, a corporation is a group of people functioning as a single legal entity. It has the characteristics of limited liability for its owners, centralized management, perpetual duration, and the ability to transfer ownership easily. Forms to create a corporation are available from the Secretary of State. By completing the paperwork, filing the certificate of formation on-line through SOSDirect, and creating the necessary corporate documents, a corporation meets the minimum state law requirements. Tex. Bus. Org. Code Ann. § 3.001.
Advantages and Disadvantages
A corporation provides many advantages for its members, most notably the fact that stockholders are exempt from personal liability. If for example, a corporation is sued or lacks money to repay a debt, the shareholders themselves are not liable. Valley Forge Motor Company v. Sifuentes, 595 S.W.3d 871, 877 (Tex. App.—El Paso 2020, no pet.); Richard Nugent and CAO, Inc. v. Estate of Ellickson, 543 S.W.3d 243, 266 (Tex. App.—Houston [14th Dist.] 2018, no pet.); State v. DeSantio, 899 S.W.2d 787, 789 (Tex. App.—El Paso 1995, writ ref'd). Another advantage is that corporation statutes are in place which regulate structure, management, and financing to protect both stockholders and creditors. In addition, if a stockholder is incapacitated, resigns, or dies, the corporation itself is not compromised, in part because a corporation offers greater flexibility when transferring ownership. Tex. Jur. 3d, Corporations § 19.
Creating a corporation has disadvantages as well. Incorporating a business is expensive and requires a large amount of detailed paperwork. A corporation must also report regularly to the state. One of the biggest disadvantages is that sometimes corporate earnings are double-taxed as well. See Internal Rev. Code Ann. §§ 11, 61(a)(7), 544.
Corporate Management
Corporate bylaws govern the management of the corporation. Most corporations are managed by one or more directors. Tex. Bus. Org. Code Ann. § 21.401(a)(2). However, Texas law allows shareholders to create shareholder agreements by which the shareholders and not directors manage the corporation. Every Texas corporation established after January 1, 2010, must follow the Texas Business Organizations Code (the TBOC), especially Title 1, Title 4 (excluding Chapter 153), and Title 8. Bylaws also determine how a board of directors is elected, what officers comprise the board, and what exactly is within their power of authority. Tex. Bus. Org. Code Ann. § 3.103.
The Texas Business Organizations Code further defines how shares of stocks are divided, and how they can be sold, particularly important since stock sales determine equity capital of the corporation.
S Corp vs. C Corp
The primary difference between these two types of corporations is the way they are taxed. By default, a corporation is classified as a C Corporation when it is formed. A C Corp tends to be larger, but certain businesses such as banks and insurance companies are not permitted to be C Corporations. With this type of corporation, shareholder pays taxes on the corporation’s profits. In addition, shareholders are responsible for paying personal income tax on income they earn from the corporation, potentially resulting in what is known as “double taxation.” In order to avoid the double taxation, shareholders may choose at any time to create an S corporation, which means that under Internal Rev. Code ann. §1361, tax liability will pass through to the shareholders. Another difference between an S Corp and a C Corp is that an S Corp tends to be smaller; it cannot have more than one hundred shareholders. An S Corp can also deduct stockholders’ salaries and provide benefits to stockholders, further reducing taxes. Internal Rev. Code Ann. §§ 401 et seq., 79, 105.
While on-line forms exist to create a corporation, those forms do not accurately reflect the complexity of the decisions required to create a corporation. Consulting a business attorney familiar not only with the necessary forms but also with their broader implications is the best way to create a strong corporation from the start.
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