Starting a Corporation

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This page last updated on 07/08/2017.

Copyright 2001-2017 by Russ Meyer


I recently formed an "S" corporation here in Texas where I live.  I had never done anything like that before and found the task quite daunting.  My schooling had been in science and technology subjects, not business.  It took months of research and effort to ferret out what had to be done.  I thought making a web page relating my experiences might be useful for some people.  Many of my friends showed a lot of interest in starting their own business but were put off by all the unknown factors involved.  It really isn't all that hard once you know what to do.  It's just hideously difficult to sort out the arcane sequence of steps required.  The information is out there, it's just shotgun scattered all over the place in countless government documents, etc.  I almost wonder if it's some kind of weird conspiracy on the part of attorneys to keep the ignorant masses coming to their door.  Anyway, after putting all that effort into researching the task, I wanted to write everything down in one place.  A map for fellow travelers who may someday pass this way.

The steps below are only valid for Texas.  Although most states follow a uniform method for forming corporations, there can be state to state variations.  If you don't live in Texas, you probably should take a close look at your state specific requirements.

When you form a business the government cares.  Know why?  In a word, taxes!  Big surprise there, huh?  Every level of government wants a cut of your profits.  I'm being a little crass here, government agencies also want to know about your business for public safety reasons too.  Some businesses are regulated for environmental or safety reasons...like fireworks, munitions, nuclear waste disposal, etc...but it's mostly for taxes!  There are four levels of government that are going to want their cut:  federal, state, county, and city.  There are things you have to do to notify each of these entities that a new taxable business exists.  Bad legal things will happen to you if you fail to do this.  Once your business is going, you have to file paperwork with each of these levels of government to accomplish payment of taxes.  All government levels appear to work mostly independent of each other, and have different paperwork requirements.  Once you figure out what you need to do and when you need to do it, it's just a matter of turning the monkey crank.

I highly recommend the book "How to Form a Corporation, LLC, or Partnership in Texas" by Dean Brown.  It provides a good general reference to get you started.  It will help you get past the basic steps, but there are a lot of things you have to do at the state and county level that are left out.  This is especially true if the corporation will have employees, and indeed it shall since the state of Texas requires at least two officers; a president and secretary.  Both of these positions may be held by the same person.  In other words, you're guaranteed to have at least one employee...you!

Declaring the Corporation

  • Federal
    • File Form SS-4, "Application for Employer Identification Number," with the IRS to obtain an Employer Identification Number (EIN).  In this form you indicate that you are starting a new business and that the business is a corporation.  Check the box indicating that you plan to organize as an S-corporation.  Note that you'll have to then file Form 2553 within 3 months as described further down.
       
  • State
    • File Form 201, "Articles of Incorporation," with the Secretary of State.  Cost to file is $300.
       
    • It is possible to have one name for your corporation, and conduct business using a different name.  This allows you to have one company structure with multiple "store front" business names.  For example, your corporation could be named Cloverleaf Enterprises, Inc.  It could then do business as both Cloverleaf Software and Franklin Photography Services.  It's really all just Cloverleaf Enterprises though.  If you are going to do business under a name other than the one cited in your Articles of Incorporation, you must file Form 503, "Assumed Name Certificate," with the Secretary of State.  You have to do this for each assumed name.  Cost per filing is $25.
       
  • County
    • Go to the county courthouse and file a "Doing Business As" (DBA) form with the county clerk.  The DBA form really serves two purposes:
      1. It notifies the county and city that a new taxable business exists within its confines.
      2. It allows you to declare an assumed name for your business on the county level.

      If you filed an Assumed Name Certificate with the Secretary of State, you should use the same alias when filing the DBA with the county clerk.  For example, you file the DBA as Cloverleaf Enterprises, Inc. and indicate that you're doing business as Cloverleaf Software...same as on the Assumed Name Certificate.

      Note that even if you are not filing an assumed name, you still have to file a DBA form.  It's the only way the county gets the word that your business exists.  Each county is allowed to develop its own DBA form as long as certain state required information is collected.  The form has to be notarized, but they can do it right there on the spot for you.  Cost to file is about $10.
       

  • City
    • Nothing to do here.  At least that was the case for me.  What I was selling was not regulated and I was working out of my home.  The city extracts revenue from businesses using property taxes.  Since I was working out of my home, I did not have to pay taxes on a separate commercial property.  There are regulations that have to be met to qualify for working out of your home.  My local Chamber of Commerce publishes a handy guide to help determine if the use of your home is permissible or not.  In my case it was.

Federal Tax Responsibilities

  • One Time Stuff
    • File Form 2553, "Election by a Small Business Corporation," with the IRS to elect S-Corporation tax status.  You'll need your EIN to complete this step.  Also note the following nuances:
      • The tax year for an S-Corporation must end on December 31st.
      • You must list all shareholders of the corporation on the form.  Record their names, addresses, and the number of shares owned.  There's a tricky twist regarding the number of shares.  If the state you live in is a "community property" state, each spouse must be listed on the form as owning half the shares.  For example, if the husband bought 2,000 shares of stock, then both he and his wife will be listed on the form as owning 1,000 shares.  This is true even if the wife has had no dealings whatsoever with the corporation.  It's just the way the form is filled out in community property states.
      • There are nine community property states:  Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
         
    • Each employee must complete federal Forms I-9 and W-4.  All you have to do is retain both completed forms in company files.  The number of exemptions claimed on the W-4 determines the quarterly employer income tax withholding.  You'll need that data later when the company files form 941 (see below).
       
  • Quarterly Stuff  (due by the last day of April, July, October, and January)

State Tax Responsibilities

The two major taxes on a business in Texas are the sales tax and the franchise tax.  There are a smattering of other taxes too, but these involve special industries like oil production, insurance, sulphur production, etc.  A synopsis of these taxes is available here.  The information below only describes what needs to be done to get set up to pay sales and franchise taxes.

  • One Time Stuff
    • File form AP-201, "Texas Application for Sales and Use Tax Permit," with the state comptroller's office.  You have to file this form if you plan to sell anything in Texas.  Filing the form is free.

      You really need to have your federal Employer Identification Number (EIN) to file the form.  If you don't have one, you can still file the form, but you'll only receive a temporary sales tax ID number.  When you finally get your EIN, you'll have to contact the comptroller's office again to let them know.  They will then issue you a permanent sales tax ID number.  Just try to have your EIN when you file AP-201; it will save you some hassle.

      After you file the form, the comptroller's office will give you a Texas state tax ID number.  You're supposed to use this number when you file taxes with the comptroller's office.  They will also tell you how often you must file sales tax returns.  (More on this below.)
       
    • File form C-1, "Status Report," with the Texas Workforce Commission to register your company as "Subject Employer" and receive an account number.  This is so you can pay Texas state unemployment taxes.  You can also register on-line in lieu of filing form C-1.  Note that you are not permitted to register your company until after you start paying wages.
       
  • Quarterly Stuff
    • File wage reporting forms with the Texas Workforce Commission.  You can do this by filing form C-3 (the state will mail one to you) or do it on-line.
       
  • Annual Stuff
    • For some reason, it took me a while to comprehend this, but...there is no state income tax on corporations.  Thank goodness!  I'm sure the state will eventually discover this grievous oversight and plug the hole with a generous income tax, but for now you can whistle past that graveyard!
       
    • File Texas Franchise tax reports.  Texas levies a franchise tax on corporations for the privilege of doing business in Texas.  You have to file a tax report and a "public information report" (PIR) once per year.

      The first annual tax report is due 1 year and 89 days after the "beginning date" of the corporation.  Apparently, the beginning date is considered to be the date your Articles of Incorporation were processed by the Secretary of State.  In subsequent years the corporation is required to file the annual report by May 15th.

      At the moment, the taxes are computed as 0.25% of the net worth of the Corporation OR 4.5% of the taxable income reported to the IRS on form 1120S, whichever is greater (of course!).  Since I don't expect to be making a whole lot of money the first few years, I am sure 0.25% of the company net worth will result in the the larger number.  The good thing here is that if the amount owed is less than $100, you don't have to pay.  You just file a report stating you owe no franchise tax.  To file $100 or more in taxes, the net worth of the company would have to be at least $40,000 or it would have to make at least $2222 per year.  I don't expect either of these things to happen to my company anytime soon!

      When you file the annual tax report, you also have to file the PIR.  It simply documents the names of the corporation directors and officers.  It also describes the companies that may be owned by your corporation and the company that may, in fact, own your corporation.  In theory, because you are starting the company yourself, you won't have to mess with any of these "owing" or "owned" clauses in your annual PIR.

      The State is supposed to mail pre-printed report forms to you just prior to the due date.  In theory, you don't have to do anything until you get the form in the mail.  Fill out the reports and send them back.  Be advised that even if the state goofs and doesn't send you the form, you are still required to send in the reports.  You'd do well to mark the due date on your calendar and keep track of it yourself.
       
    • File a sales tax return with the state comptroller.  The comptroller's office will send you pre-printed forms well in advance of the tax due date.  Just fill them out and send them in along with a check for your taxes.

      How often you file a sales tax return depends on how much revenue your company generates.  Since my company was just starting out, I expected less than $250 revenue every quarter.  Because I wasn't expecting to make much, the state allowed me to file a sales tax return annually.  If you make a moderate amount of money, you'll have to file quarterly.  If you make a lot of money, you'll have to file monthly.  All this is described here.  Annual sales tax returns are required to be filed with the comptroller's office by January 20th.  You are required to keep sales tax records for 4 years.

      What's referred to as "sales tax" in Texas is really a conglomeration of a number of different sales taxes made up of the following items:
      1. State sales tax - fixed at 6.25%
      2. City sales tax - varies between 0.25% and 2% depending on location
      3. County sales tax - varies between 0.25% and 1% depending on location
      4. Metropolitan Transit Authority (MTA) sales tax - varies between 0.25% and 1% depending on location
      5. Special Purpose Districts sales tax - varies between 0.125% and 1% depending on location

      Note that the sales tax rate is not uniform across Texas.  It depends on where your business is located.  To determine how much sales tax you should collect, enter your business location here.  The sales tax rate is updated quarterly, so you should check occasionally to see if your tax rate has changed.  Some general information on collecting sales tax can be found here.

      One other thing worth mentioning.  The MTA tax is really screwy.  There are eight "transit areas" defined in Texas.  These are generally around major metropolitan areas and include the main city, like Dallas, and a few surrounding satellite cities, like Plano, Addison, Garland, etc.  Each transit area sets its own MTA tax rate.  Now here's the screwy part:  sometimes you have to collect this tax and sometimes you don't.  There are a couple of rules you can use to determine whether or not you should collect the tax.  The rules go like this:
       

      1. Transit sales tax is due when you are located in a transit area and ship an item to a customer in that transit area.  You must collect the tax from the customer.
      2. Transit sales tax is not due if you ship an item to an address outside any transit area.

      In practice, I think most people just collect the MTA tax whenever they collect sales tax of any kind.  It's just easier that way rather than having to make some complicated computation depending on where the customer is located.  Sure, some customers get dinged with more sales tax than they should, but it only adds, at most, 1% to the bill.  More information on MTA taxes can be found here.

County Tax Responsibilities

There's not really anything to do here.  The county requires that you file a DBA.  In that DBA filing is your corporate identification number assigned to you by the Secretary of State.  The state collects sales and income taxes.  It then rebates some of that tax money to the county in which your DBA was registered.  The county collects taxes from you indirectly through the agency of the state.

City Tax Reponsibilities

The city gets it's cut through commercial property taxes and from tax money rebated from the county.  If you are working out of your home as I am, the city won't be collecting any property taxes over and above what you're already paying on your home.  The tax money the city gets from the county is a slice of the sales and income tax collected by the state on the county's behalf.

Tax Responsibilities as an S-Corporation Shareholder

  • If you expect to owe federal taxes of $1000 or more then you have to make estimated tax payments.  This is discussed in Federal Publication 505.  You'll use form 1040-ES to figure and pay your estimated tax.
     
  • File schedule E with your 1040 tax return documenting the profits or losses passed through from corporate operations

The Sequence of Steps

Here is exactly what I did to start my own incorporated business in Texas:

  1. Pick a corporate name.  States frequently have restrictions on how corporate names are formed. 
  2. Call the Secretary of State to verify the availability of your corporate name.  In Texas, you call the Secretary of State, Statutory Filings Division, Corporations Section at (512) 463-5555.  These queries are free.
  3. File Form 201, "Articles of Incorporation," with the Secretary of State.  Cost $300.
  4. Go to your local county courthouse.  Fill out and file a "Doing Business As" form to notify the county and city of your new business.  You are required to file this form, even if you are not assuming an alias.  You'll need your incorporation papers from the state to accomplish this, so you'll have to wait until you have those in hand.  Cost $10.
  5. File Form 503, "Assumed Name Certificate," with the Secretary of State.  Cost $25.
  6. Obtain a corporate kit containing a corporate record book, corporate seal, and blank stock certificates.  Typical cost $60-$110.
  7. Hold an "organizational meeting" to assign corporate officers and issue the initial shares of stock.  Texas state law requires a corporation to have at least two officers; a president and secretary.  The good part is that the president and secretary can be the same person.  All officers qualify as employees of the company so by default, the company will have a minimum of one employee.  Directors are not considered employees.  All this according to Federal Publication 15-A, "Employer's Supplemental Tax Guide."
  8. File form SS-4 with the IRS to obtain an Employer Identification Number (EIN).  To file the form, you must state how many employees your company.  It's free.
  9. Go get a commercial checking account at a bank somewhere.  These are frequently non-interest bearing accounts.  Banks typically charge a monthly service fee and impose limits on account activity.  Some banks have better rates, so it pays to shop around.  Wells Fargo seems to have decent rates; you might check them out.  Take a look at BankOne too.
  10. Organize your corporate records book
  11. File form AP-201, "Texas Application for Sales and Use Tax Permit," with the state comptroller's office.
  12. File form 2553 with the IRS to obtain S-Corp tax status.  You'll need your EIN to complete this step.
  13. After you cut your first paycheck for an employee, file form C-1, "Status Report," with the Texas Workforce Commission to register your company as "Subject Employer."  You will receive an account number so you can pay Texas state unemployment taxes.  You can also register on-line in lieu of filing form C-1.
  14. Start regular business duties.  Be sure to pay your taxes, otherwise bad, bad things will begin happening to you and your company...they know where you live!  Check out this handy table which summarizes your tax responsibilities.