FIRST THINGS FIRST: What to Do After You Form an Entity

11 Oct FIRST THINGS FIRST: What to Do After You Form an Entity

Posted at 16:52h in Articles by Kieran B. Wheeler

First Things First

What to Do After You Form an Entity

Kieran B. Wheeler

Attorney

A Note on Wording: New business owners typically say that they are the owners of a “company”. The word “company”, however, can be confusing because it is generally used to refer only to a limited liability company, or LLC. Texas permits businesses to be structured in many different ways, including corporations, partnerships (LPs, LLPS, etc.), and limited liability companies, among others. To avoid confusion, this article will use the word “entity” to refer to a business, in order to cover all types of business structures.

Congratulations on forming a new entity! Whether you have started many businesses in the past, or whether this is your first business, there are a number of key actions that need to be taken to ensure that your entity is successfully and legally operated. Our firm can assist you in the structure and creation of your entity, but filing a Certificate of Formation with the Secretary of State is only the first of many steps that need to be taken to complete your new entity. Some of these steps will vary based on the exact type of business that you want to run, but most new entities will need to go through each step outlined in this article.

Please note that this guide is intended only for new for-profit entities that are properly formed and registered to do business in the State of Texas. The requirements for non-profit entities, and entities that are formed in a state other than Texas, may be quite different. If you have any questions about forming your entity, or about the requirements that may apply to your entity, please contact us or the applicable agency directly.

Finally, this article is intended to cover only the minimum legal requirements applicable to your entity. Many owners take additional steps to govern their entities or to protect their ownership interests, such as putting an operating agreement in place (e.g. Bylaws, Limited Liability Company Agreements, and/or Partnership Agreements), setting restrictions on the transferability of ownership interests of the entity (through Shareholders’ Agreements, Buy-Sell Agreements, or similar restrictive documents), or setting restrictions on the actions owners can take outside of the entity (including noncompetition, non-solicitation, confidentiality, and other restrictions). The structure and benefit of these actions are highly dependent on the specific circumstances of the entity in question. If you have any questions about, or interest in, these additional steps, please contact us.

1. Issue Ownership Interests

The Certificate of Formation of an entity will list the governing persons of that entity – such as the directors, managers, or general partners – but in most cases it does not list the owners of the entity. A member-managed limited liability company is the only type of entity whose Certificate of Formation lists the owners, but even in this instance it does not list the exact ownership that each member may have in the entity.

Before taking any additional steps regarding the structure or operations of the entity, the initial members, shareholders, or partners of the entity (as applicable) on the date that the entity was formed should be issued their respective ownership interests. This is typically accomplished by having the initial governing persons of the entity authorize and issue shares (for a corporation), membership interests (for a limited liability company), or partnership interests (for a general or limited partnership). If the governing documents of the entity require that ownership interests be certificated, then the officers or governing persons of the entity should sign and issue paper certificates to each owner representing his, her, or its respective ownership of the entity.

2. Obtain a Federal Tax ID Number

An entity’s Federal tax ID number (TIN) is sometimes also referred to as its Employer Identification Number (EIN). An entity’s TIN is used by the Internal Revenue Service (IRS) and other Federal agencies for tracking and tax-paying purposes. Each new entity is generally required to secure its own TIN. Some entities, such as single-member limited liability companies, are not required to obtain their own TIN and have the option to use the social security number of their sole member as their TIN, but this is not common. If an entity is involved in certain activities (such as paying wages to employees), the IRS requires that entity to obtain its own TIN, even if it would not otherwise be required to secure one. The activities that make a new TIN mandatory can be found HERE.

A TIN can be obtained by submitting Form SS-4 to the IRS. The principal officer, general partner, or owner of the entity must sign the Form SS-4, and must list his or her social security number or individual taxpayer identification number on the form. (Owners or officers of the entity that are entities themselves cannot be listed on the Form SS-4 as the responsible party.) Form SS-4 is available HERE, and can be filed by mail or by fax. Form SS-4 can also be filed online, through the IRS’s website HERE.

3. Pick an Industrial Classification Code(s)

- Pick a North American Industrial Classification System (NAICS) Code

An entity’s NAICS code is a shorthand way of describing the type of business that entity conducts. The NAICS code is self-assigned, and each entity determines which NAICS code best describes its business. An entity can change the NAICS code that it uses at any time, based on changes to its business. Certain government agencies (such as the Texas Comptroller) require entities to report their NAICS code as part of the entity’s dealings with that agency.

An entity can determine which NAICS code it should use by visiting the U.S. Census Bureau’s website HERE and searching the NAICS by typing in the keyword(s) that best describes its business.

- (Optional) Pick a Standard Industrial Classification (SIC) Code

The SIC coding system is the older version of the NAICS coding system. The NAICS officially replaced the SIC in 1997. However, a number of businesses and industries still use SIC codes; sometimes in addition to NAICS codes, and sometimes instead of NAICS codes. The SIC and NAICS code categories do not perfectly overlap, and two entities with the same NAICS code may have different SIC codes (or vice versa). Similar to the NAICS code, the SIC code is self-assigned and can be changed by an entity at any time. An entity can determine which SIC code it should use by visiting the U.S. Department of Labor’s website HERE and searching the SIC by typing in the keyword(s) that best describes its business.

4. Obtain Texas Identification Numbers

Within a few days after an entity’s Certificate of Formation is filed, the Texas Comptroller will send it a notification letter with the subject line “Now that you’re a registered Texas entity…” This letter contains three important numbers: (1) the Texas taxpayer number, (2) the Secretary of State’s file number, and (3) the Texas Comptroller’s WebFile number.

An entity’s Secretary of State file number is also listed on its Certificate of Formation. If the Texas taxpayer number or file number is ever forgotten, they can be found by visiting the Texas Comptroller’s website HERE, and searching for the entity by name. After the system locates the entity, click the “Details” link to view the publicly available information about the entity, including its Texas taxpayer number and Secretary of State file number.

If an entity misplaces its WebFile number, it will need to contact the Texas Comptroller at (800) 442-3453, or webfile.help@cpa.texas.gov. The Texas Comptroller will ask specific information about the entity’s prior franchise tax filings, such as its gross income or total amount of franchise tax paid for prior years, in order to verify that the person contacting the Texas Comptroller is an authorized agent of the entity.

5. Register with the Texas Comptroller’s WebFile System

The original WebFile number that that is issued by the Texas Comptroller (beginning with the letters “FQ”, followed by six digits) is a temporary number. Each entity must to register with the Texas Comptroller’s WebFile system in order to receive its permanent WebFile number, and to file its taxes online. WebFile account registration is available HERE.

6. Complete the Texas Franchise Tax Accountability Questionnaire

Within 30 days after an entity is formed, its owners must complete a Franchise Tax Accountability Questionnaire. If the entity is a corporation, limited liability company, limited partnership, or a professional association, this questionnaire must be filed online. The online questionnaire can be accessed HERE.

Other entities, such as partnerships or associations, must submit the questionnaire to the Texas Comptroller by mail. A copy of the questionnaire for filing by mail can be found at the Texas Comptroller’s website HERE. (Note: click on the link for the current tax year, click on “Questionnaires for Franchise Tax Accountability,” and select the form that applies to the entity.)

7. Obtain a Texas Sales Tax Permit

If an entity will sell or lease any physical goods in Texas, or provide any taxable services in Texas, the entity will need to apply for a sales tax permit from the Texas Comptroller. The application is online, and is available HERE. The list of services that are taxable in Texas is available HERE. After the entity obtains its sales tax permit, it will be responsible for collecting sales tax on all taxable transactions, and remitting the amounts collected to the Texas Comptroller.

If you have any questions or concerns about whether your business or the services you will provide are taxable, contact us or the Texas Comptroller for assistance.

8. Obtain the Appropriate Licenses

Most new businesses do not require a specific license in order to operate. However, there are a number of industries (such as plumbing, cosmetology, boiler safety, etc.) that require a specific license. In most cases, both the individual authorized to perform the specific services, and the entity through which the services are performed, must be licensed. The Texas Department of Licensing and Regulation (TDLR) is the central regulatory authority for most regulated businesses in Texas, and the specific licensing requirements are available through the TDLR’s website HERE.

Other industries, such as realtors, doctors, accountants, and attorneys, are regulated by separate boards that are independent of the TDLR, and that have their own requirements. If you have any questions about which regulatory authority may have jurisdiction over your business, and whether you (or your entity) may be required to obtain a license to conduct your intended business, please contact us or the TDLR.

ABOUT THE AUTHOR: Kieran B. Wheeler is a Shareholder at Rapp & Krock, PC in the Business Transactions group advising clients on corporate governance matters as well as mergers and acquisitions and other business transactions.

DISCLAIMER

Rapp & Krock, PC presents the information in this article for general education purposes only. Although this article discusses legal issues, it is not legal advice. The law and the content of any linked website may have changed since this article was written, and Rapp & Krock, PC makes no warranty or guarantee about the continuing accuracy of the information presented. Use of this article does not create an attorney-client relationship, and Rapp & Krock, PC does not represent you unless and until we are expressly retained in writing.