Q. I have heard about this new margin tax. Who is subject to it and how much is it?
A: The margin tax is imposed on all business except (i) sole proprietorships (ii) general partnerships –“the direct ownership of which is entirely composed of natural persons” and (iii) certain passive entities. Therefore, corporations, limited partnerships, certain general partnership, limited liability companies, business trusts and professional association are subject to the margin tax. Taxable entities that have $300,000 or less in gross revenue in a year or whose margin tax liability is less than $1,000, are exempt for that year. In a nutshell, the calculation of the new margin tax is based on a taxable entity’s gross receipts after deduction for either compensation or cost of goods sold. The tax rate applied to the Texas portion of the tax base is 1% for all taxpayers except for a narrowly defined group of retail and wholesale businesses which pay a .5% rate. Be advised, an entity may be obligated to pay a margin tax even if it is reporting a loss for federal income tax purposes and has a negative cash flow.
As you can read, the margin tax is quite complex and for further discussion and examination, consult a qualified attorney or tax advisor. This tax is new and has many nuances that need to be dissected for your business application.
Q. I set up a corporation years ago and not sure if I should continue to operate my business as a Texas corporation. What are the advantages of operating a business as a corporation?
A: Generally, a corporation has limited liability of shareholders, centralized management, flexibility in capital structure and status as a separate legal entity. With all advantages, there are disadvantages. Those include the expense of formation and maintenance, statutorily required formalities and tax treatment (i.e. double taxation for the c-corporation and restriction on the s-corporation).
Limited liability is one of the most important advantages of doing business as a corporation. In corporate law, it is fundamental that shareholders, officers, and directors are ordinarily protected from personal liability arising from the activities of the corporation. Generally6, shareholders of a corporation will not be personally liable for debts and obligations of the corporation in excess of the shareholder’s investment in the corporation. In limited circumstances, courts will pierce the corporate veil.
I always recommend that my clients review their business the previous year to ensure that the legal entity set up to govern the business is the most efficient and applicable. Moreover, it is beneficial to review the tax consequences the entity faces each year in an effort to limit those liabilities. As always, it is best to work with a qualified corporate attorney and accountant.
Q. Now that I set up a corporation, I want to dissolve it and be a sole proprietorship so as to avoid any margin tax. How can I do this?
A. Obviously, this is a complex question that depends on many circumstances specific to your business. However, generally, a Texas corporation can dissolve its status by obtaining corporate approval and filing a certificate of good standing (from the Texas Comptroller’s office) and Articles of Dissolution with the Texas Secretary of State. The Secretary of State website, http://www.sos.state.tx.us, sets forth the specific procedure to follow as well as the latest filing fees (currently the fee is $40). Finally, you must note that the corporation has limited survival after termination for a limited period to (i) prosecute and defend its name; (ii) permit survival of existing claim; (iii) hold title to and liquidate assets; (iv) apply or distribute assets; and (v) settle unresolved affairs, not related to purpose for which corporation was formed.
Once the entity is dissolved, the corporation will receive a certificate of termination acknowledging when the corporation has been dissolved by the Secretary of State. Depending on the type of business you run, you may want to wait until your corporation is dissolved before operating a sole proprietorship. If you want to operate under an assumed name, you should also file the appropriate assumed name certificate (also known as a DBA “doing business as” form) with the county where you operate the business.
Editor's note: The information in this column is not intended as legal advice but to provide a general understanding of the law. Readers with legal problems, including those whose questions are addressed here, should consult attorneys for advice on their particular circumstances.
