A C-corporation (C-corp) is a legal business entity that provides its owners – commonly known as shareholders – with limited liability protection. This entity type is separately from its owners. A corporation itself is taxed on its profits, and shareholders are taxed again when they receive dividends –not as a general matter of course on their personal tax returns, as is the case with most partnerships and LLCs.
Many people who form businesses choose a C-corp structure because of the benefits it offers. Larger companies or those seeking significant investments may be particularly well suited to this legal structure.
Forming a C-corporation
Forming a C-corp in Texas requires several steps. First, an entrepreneur must file a Certificate of Formation with the Texas Secretary of State outlining foundational information about its operations. The corporation’s name must include a designator like “Inc.,” “Corporation,” or “Company” to indicate its status as a corporation in Texas.
After formation, those forming a corporation must adopt by-laws, which establish the rules for how the business will be governed. The C-corp must also issue stock to its shareholders, hold initial meetings for the board of directors and maintain thorough records of these proceedings.
Taxation and compliance
In Texas, C-corporations are subject to both federal and state taxes. At the federal level, a C-corp must pay corporate income tax on its profits, currently set at a flat rate of 21%. When profits are distributed to shareholders in the form of dividends, shareholders are taxed again on this income at their individual rates, resulting in the double taxation characteristic of C-corps.
At the state level, Texas does not impose a corporate income tax but does require C-corps to pay a franchise tax. The franchise tax is calculated based on a corporation’s revenue and is typically a small percentage of that revenue. However, C-corps with revenues below a certain threshold may be exempt from paying the franchise tax.
A C-corporation in Texas offers businesses limited liability protection, access to capital through stock issuance and perpetual existence, but it isn’t the best structures for all businesses. For example, some larger enterprises may benefit from S-corp formation. Getting experienced legal guidance before moving forward with incorporation, therefore, is generally wise.
