To take advantage of the corporate form of doing business, owners must follow certain corporate responsibilities. The failure of owners to comply with Texas law can result in individual liability to the directors or shareholders if the "corporate veil is pierced." For this reason, it is important to keep timely and accurate corporate records and follow corporate formalities.
One of the principal advantages of a corporation is to limit or reduce personal liability for corporate bills and debts. In some situations the officers, directors, and shareholders may be held personally liable for the debts of the corporation regardless of the corporate form. Disregarding corporate formalities or commingle personal interests with the corporation’s assets or interests, can open the door for a claimant to "pierce the corporate veil" and hold an owner personally liable for the corporation’s debts.
An owner should carefully read and review the corporation's articles of incorporation and bylaws. If the corporation will engage in retail or rental business, or perform taxable services, depending on the type of business conducted, it may be required to obtain a sales tax permit from the controller of public accounts for each place of business within the state. Depending on its business, the corporation may have to obtain a state license or pay fees or occupational taxes.
The corporation should apply to the Internal Revenue Service for an employer identification number. The corporation must collect funds for FICA (social security) and withholding taxes and pay them to the IRS as required by the Internal Revenue Code, or the persons who are responsible for the withholding and deposits will be held personally liable for them. This liability is separate and distinct from the liability imposed upon the employer-corporation and is not dischargeable in bankruptcy.
Corporations must pay a margins tax for the privilege of doing business in Texas. If a corporation does not pay its annual margins tax, it will be subject to penalties and interest, and can have its charter to do business in the state forfeited for such nonpayment.
The corporation must at all times do business under the corporate name exactly as it is set forth in the articles of incorporation and not deviate from this name unless an appropriate assumed name certificate has been filed. For this reason, all letterhead, invoices and stationery should reflect the full, correct corporate name. If the corporation will operate or transact business under, any name other than its exact corporate name, then it must file an assumed name certificate with both the secretary of state and the county clerk’s office of the county of its registered office.
The owners may, depending on their tax objectives, want to consider electing subchapter S corporation status with the IRS so that the corporation may be taxed as a partnership rather than as a corporation.
The corporation's management must be sure appropriate corporate formalities are observed regarding the salaries and bonuses paid to its corporate officers. The payments must be approved by the board of directors and be reasonable compensation. The IRS can disallow deductions to the extent the payments are greater than "reasonable compensation", taking into account the officer's efforts and contributions to the corporation. All bonuses to employees who are also shareholders or directors should be authorized by a written board of director's resolution. If this practice is not observed, it can invite IRS scrutiny. For example, the IRS could claim that the payment was a dividend, with attendant adverse tax consequences to the corporation.
All corporations should hold an annual shareholders’ and directors’ meetings. At these meetings, the business activities that have occurred during the previous year should be reviewed and discussed.
Although a corporation can engage in a broad range of businesses, it cannot legally be in the banking, trust company, building and loan associations, insurance, railroad, cemetery, abstract and title, and other businesses that require a special license. To incorporate a professional practice, such as a medical or dentistry practice, the corporation must be formed under the correct professional incorporation act.
All persons signing for the corporation must show that they are acting in their corporate, not individual capacity, to avoid potential claims of personal liability for their actions. For the same reason, all corporate bank and checking accounts must be in the corporate name and authorized by an appropriate corporate resolution.
All significant corporate transactions should be approved by the board of directors and evidenced by a properly prepared and adopted corporate resolution kept in the corporate minute book. These transactions include all significant corporate transactions and contracts, such as employment contracts, buy-sell agreements, profit sharing and pension plans, trust agreements, loans, leases, and major purchases as well as important decisions that could affect the capital structure or finances of the corporation.
The board of directors should adopt resolutions authorizing the issuance of all shares, and no shares should be issued until the corporation has received appropriate consideration. The owners can agree to impose restrictions on the transferability of the shares of stock to prevent third parties from becoming owners, in cases such as transfers, death, divorce, disability, or withdrawal. This requires the preparation and approval of an appropriate shareholder buy-sell agreement.
The corporation's board of directors are responsible for making the policies of the corporation and delegating the carrying out of the policies to the corporate officers. The corporation's officers are responsible for paying salaries, carrying out corporate policy, and the day-to-day management and operation of the corporation, including the payment of payroll taxes. If these are not paid, the officers and directors may be held personally liable and could be subject to criminal penalties. The board can remove the officers at any time, but directors may be removed only by the shareholders pursuant to the procedures allowed by law.
For more information, please see the accompanying articles: Choice of Entity, Texas Limited Liability Companies-Formation and Advantages, Benefits of a Limited Partnership, Registered Limited Liability Partnerships and Limited Liability Companies, Conversion of a Corporation to a Limited Partnership
THIS INFORMATIONAL MEMORANDA FROM THE LAW OFFICES OF THOMAS D. SOLOMON, P.C. is provided as a courtesy to our friends and clients to provide them with items of interest in the corporate area. It is not and is not intended to be an exhaustive treatment of its subject matter, but rather an overview of some of the pertinent elements of such subject. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have any questions, please call us.
