Corporations. Most people are familiar with big corporations that make products or provide services we all regularly use, such as Ford and American Airlines. However, the corporate business structure is also available to individuals.
In Texas, a corporation is created by filing a Certificate of Formation with the Texas Secretary of State and paying the required fee. A Certificate of Formation “form” is available on the Secretary of State website and the form & fee can be submitted online through SOSDirect.
A corporation is considered “a legal person” or also referred to as an “entity.” Key features of a corporation are limited liability of the owner(s), centralized & defined management, perpetual duration and the ability to transfer ownership interests. The owners of a corporation are called “shareholders.” A corporation may have many shareholders or only one. The persons who manage the business and affairs of a corporation are called “directors” and “officers.”
A corporation must follow specific “corporate formalities.” After filing a Certificate of Formation, a corporation must prepare and operate pursuant to its “bylaws.” The bylaws are not filed with the Secretary of State, but financial institutions may request a copy of the bylaws to open a corporate bank account. Continued operation under a corporation’s bylaws includes issuance of shares, annual meetings and keeping records of the meetings, which are called “minutes.” A corporation must also maintain a bank account in its name, as well as carefully track business expenses and payments. A corporate bank account should not be used to pay for personal expenses. The Texas Comptroller requires corporations to file an annual report statement to keep the corporation in “good standing” with the Texas Secretary of State. Failure to file the annual report timely could result in forfeiture and termination of the corporate status.
It is very important to the ongoing protection from potential liability both to the corporation and its shareholders, directors and officers to comply with the corporate formalities. Failure to do so could expose shareholders, directors and officers to personal liability.