This section discusses the aspects of the law that specifically apply to corporations.

A corporation has been judicially defined as an artificial being, invisible, intangible, and existing only in contemplation of law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. As defined by another court, "a corporation is a legal entity or artificial person entirely distinct from its members or stockholders transacts its business by and through its officers or agents; and their acts are the acts of this legal entity or artificial person as distinguished from the acts of the persons who compose its membership."

A corporation is not created and does not exist as such prior to the date its Charter is granted. A Charter is granted by the Secretary of State at such time as it is approved and filed in the office of the Secretary of State. Evidence of this action is sent to the corporation by the Secretary of State in the form of a copy of the Charter bearing the certificate of the Secretary of State that the Charter has been filed. Some corporations are chartered by authorities other than the Secretary of State. For example, charters for State Banks are issued by the Banking Commission, charters for some insurance companies are issued by the Insurance Commission, and charters for Federal Banks and Federal Savings and Loan Associations are granted by agencies of the Federal government.

Corporations chartered under the laws of another state may legally do business in Texas and become employing units under the Texas law even though they have not obtained a "permit to do business" or a "certificate of authorization to do business." Foreign corporations become employing units when they first have one or more persons employed in service in Texas.An alien corporation is any company that is incorporated outside the United States, but operates within the USA.

An alien corporation is any company that is incorporated outside the United States, but operates within the USA.

If the amount of taxes due the Commission will not be altered by such a ruling, the Commission will recognize a corporation as being in existence for a short period of time prior to the date a charter is obtained if the business is conducted as though the corporation had been formed. If there is an extended period of operation prior to the date the charter is obtained, the Commission may hold that the business during that period was being conducted by the owners of the corporation rather than the corporation itself.

Statutes require directors of a corporation to "cause a record to be kept of all stock subscribed and transferred, and of all business transactions." This general provision of the statutes would require that there be stock records and recorded minutes of directors' meetings. There is no statutory requirement that there be a written record of the meetings of stockholders. A corporation may or may not have bylaws, according to the decision of the directors.

Forfeiture of a corporation's charter means that the corporation has lost some rights, but does not automatically result in dissolution of the corporation.

A charter may be forfeited by action of the Secretary of State for:

1. Failure to pay annual franchise tax after one year of nonpayment, or
2. Failure by the stock subscribers to pay for capital stock within two years from date charter was granted.

The charter may be reinstated upon correction of the deficiency.

A charter may be forfeited and/or dissolved by a suit brought by the Attorney General because of fraud or some other statutory reason. Suit by the Attorney General for collection of franchise tax does not necessarily result in forfeiture of charter. A corporation whose charter has been forfeited remains a corporation. It can neither bring nor defend a suit, except one brought to forfeit charter. It remains liable for debts incurred prior to forfeiture. The Commission will sue the corporation for taxes incurred prior to forfeiture of charter; but the stockholders will be joined in the suit if assets were distributed to stockholders in fraud of creditors.

A foreign corporation, i.e., a corporation chartered under the laws of another state or a foreign country, which operates a business in Texas without a permit to do business issued by the Secretary of State is not operating illegally. It has the disadvantage that it can neither bring nor defend a lawsuit. The corporation may be sued for corporate debts.

If the corporation whose right to do business has been forfeited takes the necessary action to promptly remedy the defect causing the forfeiture, no status change in the identity of the employing unit is recorded insofar as Commission practice is concerned. Also, no change will ordinarily be recorded where employment has ceased after the corporate right to do business forfeiture date.

However, debts knowingly created by the knowledgeable officers and directors during any period subsequent to the forfeiture of the corporation's right to do business (because of failure to pay franchise taxes) becomes the personal liability of these individuals as if they were partners. This liability exists regardless of whether or not these officials received any corporate assets or whether the right to do business is later reinstated by payment of corporate franchise taxes. Field assignments with specific instructions as to how to proceed with the status and collection aspects of these accounts will be made in instances where officers and directors are believed to have incurred personal liability.

A corporation may be dissolved by:

Whoever operates the business subsequent to dissolution of a corporation is a new employing unit. The Commission recognizes no exception to this rule.

The Texas Professional Corporation Act (Art. 1528e, V.A.C.S.) became effective January 1, 1970, and permits architects, attorneys, C.P.A.'s, dentists, public accountants and veterinarians (and other such licensed professional people) to incorporate their professions or businesses as a professional corporation. The Act is not applicable to physicians, surgeons, or doctors of medicine.

Pertinent provisions are:

Comment: For purposes of administering the TUCA, professional corporations are no different from business corporations. Corporate officers who perform service for remuneration are in employment.

The stockholders of some small corporations may, under certain conditions not pertinent to the TUCA, elect under 26 U.S.C.A., Sections 1371-1378, to be taxed at individual income tax rates on their proportionate part of the corporations' net profit. The corporation, as such, does not pay income tax.

The stockholders are required to pay income tax based on the corporate profits whether or not the profit is distributed to them as dividends.

The salaries of corporate officers are deductible in computing the corporation's net profit subject to tax.

An election to be a Subchapter S Corporation does not convert the corporation to a partnership. The stockholders do not become partners.

A stockholder may be an officer. A stockholder and/or officer may be in employment. Whether or not a stockholder/officer is in employment depends on application of the "services, control and remuneration" test as defined in Subsection 201.041 in the Act. However, services must be regular and substantial, rather than occasional and negligible (Kenyon Case). The work performed must be for remuneration rather than gratuitous.

Profits distributed in the form of dividends to stockholders or money withdrawn as advances against future dividends do not constitute taxable wages. Salaries paid to corporate officers are taxable wages and the tax is due from the corporation.

When a Subchapter S Corporation distributes its profits to stockholders in the form of dividends, the dividends are not taxable under the TUC Act for the same reason that they are not taxable when paid by any other corporation. Dividends do not represent remuneration for services performed.

In some instances, stockholder-officers are not paid salaries and receive only dividends or advances against dividends. In this event, the stockholder-officers are considered to be employees under FUTA which may make the corporation liable under FUTA and Section 201.025 of the Act even though the remuneration they receive may not be taxable under the TUC Act. See Commission Decision of March 25, 1971, in the Airport Florist, Inc. Case.

The meaning of the statement that the corporation is liable under FUTA is that, under the Federal Unemployment Tax Act, it is specifically stated that officers of a corporation are employees with no distinction being made as to whether or not they receive remuneration for their services. However, the Internal Revenue Service does not treat them as employees in determining whether or not their employer is a liable employer under FUTA. They apparently disregard the specific wording of the statement in FUTA because of some adverse court rulings. For this reason the Manual does not say that the corporation is liable under FUTA when a stockholder is likewise an officer of the corporation but instead says that the circumstances may make the corporation liable under FUTA. In the event that such a ruling is made, the fact that the corporation is subject under FUTA would automatically make it subject to the TUC Act because of the provisions of our Section 201.025. Even so, advances and dividends would still not be taxable but by being subject the corporation would be required to pay tax on other ordinary employees.

A Subchapter S Corporation is not required to distribute its profits as dividends to its stockholders even though the stockholders are required to pay income taxes on their proportionate part of the corporation's profit. As a matter of practice, Subchapter S Corporations usually do distribute all or part of their profits in the form of dividends. Quite often, however, profits are not determined until the end of a fiscal year and the amount of the dividend is not known during the course of the year. In this situation it is a rather common practice for the corporation to advance money to the stockholders. These advances are, technically, merely loans which are deducted from each stockholder's dividend when the dividend is determined and paid. TWC takes the position that the loans or advances are in the same category as dividends and that we are not authorized to treat the advances as salaries even though the stockholder may be an officer or other employee of the corporation.

For Federal Ruling with respect to Subchapter S Corporations, see Revenue Ruling 73-361, Tax Supplement 148-74, and Tax Supplement 156-74.