Texas Corporation's Right to Form a Subsidiary

By Terry Masters

Corporate law has been well settled in the United States for decades. Every state, including Texas, has enacted statutes that govern the conduct of corporations formed and operating within their state borders. Ninety percent of these statutes promulgate corporate legal tenets that are uniformly observed throughout the land. Texas law gives a corporation formed under its umbrella the same rights and privileges granted to corporate entities formed in other states, including the authority to hold an ownership interest in another entity as the parent of a subsidiary.

Corporate Powers

Subchapter B of the Texas Business Organizations Code details the status of a Texas corporation and its authority to act. By law, a Texas corporation is an independent legal entity with many of the same rights and responsibilities granted to an individual person. A Texas corporation can sue or be sued, hire people, borrow or lend money, enter into contracts and, most importantly, hold real and personal property in its own name. Specifically, Texas corporations have the right to "acquire, receive, own, hold, improve, use, and deal in and with property or an interest in property."

Nature of Corporate Ownership Interest

The Texas Business Organizations Code also establishes a corporate ownership interest, evidenced by holding shares of stock, as a personal property interest. Since a corporation can hold all types of personal property in its own name, it can own shares of stock in another corporation. Texas law recognizes a corporation's right to own security or ownership interest in another company, including stocks, bonds and interests in partnerships and limited liability companies. Since the law recognizes a corporation as a legal person, if an individual can own something, then a corporation can likely also own it unless specifically prohibited by law.

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Statutory Definition

The Texas business code does not explicitly state that a corporation has the right to form a subsidiary; instead, it grants the corporation the power to own interests in other companies and gives it standing to file a certificate of formation to form another entity. The formation of subsidiaries is clearly contemplated, however, as the term "parent" is specifically defined in the statute as an organization that "owns at least 50 percent of the outstanding ownership or membership interests of another organization." A subsidiary is likewise defined as an organization that is owned by another organization.

Formation

The Texas business code gives "any person having the capacity to contract" the right to file a certificate of formation to start a corporation. A Texas corporation is regarded as a legal person with the capacity to contract, so it has the right to set up a corporation by following the provisions of the law. Part of the formation process is authorizing shares of stock that represent ownership in the new corporation. The organizer – in this case the corporation – has the right to issue all or a majority of the authorized shares of the new corporation to itself, meeting the statutory definition of a parent-subsidiary relationship. The corporation also has the legal right to place restrictions in the certificate of formation that will enable it to maintain control of the subsidiary in the future.

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