Corporations

Corporations are independent legal entities, wholly separate from the owners and employees who control them. When Texas law describes a “person” that definition almost always includes corporations. Owners of corporations are called shareholders and they an elected board of directors manages the operations of the company. The board of directors hires the corporate officers (i.e. Chief Executive Officer, Chief Operating Officer, etc.) to handle the day-to-day affairs of the business. In Texas corporations must have at least one director. Additionally, corporations must have a president and secretary. However, Texas law allows a single person to hold all three positions of director, president, and secretary.

As mentioned above, a corporation is a legal person with the characteristics of limited liability, centralization of management, perpetual duration, and ease of transferability of ownership interests. Assuming corporate formalities are maintained and the corporate form is not abused, the corporation provides a powerful shield from liability for its shareholders. Those corporate formalities include: 1) maintaining a registered agent and office in Texas; 2) creation of bylaws; 3) issuance of stock certificates; 4) holding annual shareholders and directors meetings; 5) documenting meetings (including important decisions of the directors); and 6) filing a separate tax return for the corporation. Additionally, owners who maintain operational control of corporations must take care not to use the corporation for personal expenses or otherwise abuse the corporation. If so, the owners could be subject to a process called “piercing the corporate veil.” This would allow creditors to ignore the liability protections of the corporation and go after the owners’ personal assets.

Despite the protective benefits of corporations, they require many formalities to maintain the corporate structure. In addition, corporations are subject to corporate income taxes (i.e. double tax). This means the profits of the company are taxed at the company level. Then, if any of those profits are distributed to shareholders in the form of dividends, the individual shareholders are taxed on the dividends.

C Corporation

A “C” corporation is the traditional corporate form of business. All of the Fortune 100 companies are set up as C Corporations.

S Corporation

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. Conversion to an “S” corporation makes the corporation a “pass-through” organization for federal tax purposes. However, electing to become an “S” corporation imposes limitations on the company. Specifically, the company is limited to one class of stock, cannot have more than 100 shareholders, and there are limitations on who can become shareholders.

Non-profit Corporation

Non-profit corporations are similar to their for-profit counterparts with the formalities of the entity (i.e. annual meetings, separate tax filing, etc.). However, non-profit corporations are formed for certain charitable, civic, religious, or other social purposes. Non-profits may file for tax exempt status with the IRS (think 501(c)(3)). This filing is completely separate from the filing with the Secretary of State. As a result, non-profits cannot style themselves as tax-exempt unless the IRS grants them that status.