Texas Corporation
Advantages and Disadvantages

Texas Corporation Advantages and Disadvantages

Should I form a Texas Corporation?

Starting a business involves risk, the risk that the business may either succeed or fail. The upside is hugh, financial freedom and time freedom; independence; unlimited earning potential. The downside is equally steep, potential financial ruin if you've staked everything you own on your business's ultimate success and thrown your career out the window. If you're running your business as a sole proprietorship or a general partnership, everything you own is on the line.

There's a lot that can go right and wrong in a business. A lot of it out of your control. But the extent of your personal financial liability for what goes wrong is one thing you can and should control.

The answer is to form an entity separate from yourself to run the business.

A corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.

Texas Corporation Advantages and Disadvantages

Advantages of a Corporation

  • Shareholders have limited liability for the corporation's debts or judgments against the corporations.
  • Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
  • Corporations can raise additional funds through the sale of stock.
  • A corporation may deduct the cost of benefits it provides to officers and employees.
  • Can elect S Corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.
  • A corporation pays 15% federal income tax on taxable income up to $50,000; 25% tax on income from $50,001 - $75,000; 34% tax on income from $75,001 - $100,000; 39% tax on income from $100,001 - $335,000; and 34% tax on income over $335,000.
  • A sole proprietor who filed a federal income tax return under the status of married, filing jointly, would pay 15% federal income tax on taxable income up to $35,800; 28% tax on income from $35,801 to 86,500; and 31% tax on income over $86,501.

Texas Corporation Advantages and Disadvantages

Disadvantages of a Corporation

  • The process of incorporation requires more time and money than other forms of organization.
  • Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
  • Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible form business income, thus this income can be taxed twice.

Texas Corporation Advantages and Disadvantages

Federal Tax Forms for Regular or "C" Corporations

  • Form 1120 or 1120-A: Corporation Income Tax Return
  • Form 1120-W Estimated Tax for Corporation
  • Form 8109-B Deposit Coupon
  • Form 4625 Depreciation

Texas' 2012 Business Tax Climate Ranks 9th

Texas ranks 9th nationally in the Tax State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property.

Tax Freedom Day Arrives on April 7 in Texas

Tax Freedom Day is the day when Americans finally have earned enough money to pay off their total tax bill for the year. In 2011, Texas taxpayers work until April 7 to pay their total tax bill, ranking it 25th highest in the nation. That's 5 days before national Tax Freedom Day (April 12).

Texas' State and Local Tax Burden Among Nation's Lowest

Texas' state and local tax burden is currently estimated at 7.9% of income (45th nationally), below the national average of 9.8%. Compared to the 1977 data, Texas had a tax burden of 7.9% (48th nationally), remaining relatively constant. Currently Texas taxpayers pay $3,197 per capita in state and local taxes.

Texas Levies No Personal Income Taxes

Texas levies no individual income taxes, joining six other states with the same policy.

Texas Levies a Gross Receipts Tax

Texas, in addition to collecting no personal income taxes, collects no corporate income taxes. However, the state recently instituted a gross receipts tax called the Texas Margins tax. It went into effect January 1, 2007. Texas joins Washington, Delaware, Michigan and Ohio as the only states that levy an economy-wide gross receipts tax.

Texas Sales and Excise Taxes

Texas levies a 6.25% general sales or use tax on consumers, slightly above the national median of 5.85%. In 2007 combined state and local general and selective sales tax collections were $1,624 per person, which ranks 14th highest nationally. Texas' gasoline tax stands at 20 cents per gallon, ranking 36th highest nationally. Texas' cigarette tax stands at $1.41 per pack of twenty and ranks 21st highest nationally. The sales tax was adopted in 1961, the gasoline tax in 1923 and the cigarette tax in 1931. 50-state table of sales, cigarette, gas, beer, wine, and spirits tax rates 50-State Table of State and Local General and Selective Sales Tax Collections Per Capita

Texas Property Taxes Comparatively High

Texas's local governments collected $1,404.76 per capita in property taxes during fiscal year 2006, which is the latest year the Census Bureau published state-by-state property tax collections. Texas is one of the 13 states that collect no state-level property taxes. Its per capita property tax collections in FY2006 rank 13th highest nationally.State property tax collections per capita by state

Federal Tax Burdens and Expenditures: Texas is a Donor State

Texas taxpayers receive less federal funding per dollar of federal taxes paid compared to the average state. Per dollar of Federal tax collected in 2005, Texas citizens received approximately $0.94 in the way of federal spending. This ranks the state 35th nationally and represents a slight decrease from 1995, when Texas received $0.95 per dollar of federal taxes paid (ranking them 37th nationally).

Reference - Tax Foundation

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