Are you looking to start a business in the Lone Star State? Forming an LLC in Texas can be a great choice for entrepreneurs, offering numerous advantages such as limited liability protection, tax flexibility, and a business-friendly environment. In this comprehensive guide, we'll walk you through the process of starting an LLC in Texas and provide tips for success along the way.
Key takeaways
- Forming an LLC in Texas provides numerous advantages, such as liability protection and tax flexibility.
- To form a Texas LLC, it is necessary to select a unique name, file documents with the Secretary of State, appoint a registered agent, and obtain an EIN.
- To maintain your Texas LLC, you must stay compliant with annual filings and fees while obtaining licenses/permits and managing finances/insurance.
Forming an LLC business entity in Texas is a great way to set up your startup company or formalize an already existing small business or sole proprietorship. Limited liability companies provide a variety of essential benefits, but it is also crucial to understand the drawbacks and the requirements involved in setting one up. Our guide helps you understand the process of how to start an LLC in Texas and walks you through all of the decisions involved in formalizing your individual or business entity into an LLC entity. Our Texas FAQs answer the most common questions about starting an LLC in Texas. We will go into the details of what needs to be done to start a Texas LLC, but here is a quick checklist of what you need to do to start an LLC in Texas.
- Name your LLC
- File a certificate of formation
- Choose a registered agent
- Create your operating agreement
- Get an EIN
- Apply for business licenses
- Apply for a tax permit
- Open a business bank account
- Get business insurance
- Pay sales tax
- File your annual report
Understanding Texas LLCs
An LLC is a hybrid legal business entity that combines the characteristics of a corporation with those of a partnership or sole proprietorship. It has become increasingly popular among entrepreneurs, both individual and business entities, due to its flexibility and the benefits it offers. Let's turn our attention to the fundamentals of a Texas LLC, exploring its structure and the merits of selecting this business entity in the state.
Texas law offers robust asset protection to LLCs, making it an attractive option for business owners. Forming an LLC in Texas provides legitimacy and essential liability protection, safeguarding personal assets from creditors. Additionally, the process of establishing an LLC in Texas is relatively simple compared to forming a corporation.
What is a Texas LLC?
A Texas LLC is a business structure that provides limited liability protection and flexible management options, combining the advantages of both a corporation and a partnership. This means that owners, known as members, are shielded from personal liability for the company's debts and liabilities. The management structure of a Texas LLC can either be member-managed, where all members participate in the day-to-day operations of the business, or manager-managed, where only designated managers handle the daily operations.
As you establish a Texas LLC, prioritizing a distinctive and memorable name that adheres to Texas naming requirements is key. Additionally, a Texas LLC operating agreement is essential for outlining the operational and financial practices of the LLC, memorializing the liability agreement between the LLC and its members, and providing procedures to address any disagreements between members.
A Texas LLC offers a variety of tax and legal benefits, including:
- Limited liability protection
- Various management options
- The possibility of selecting from different types of LLCs, such as single-member LLCs, multiple-member LLCs, and professional limited liability companies (PLLCs).
Why choose an LLC in Texas?
Forming an LLC in Texas comes with numerous advantages, including limited liability protection, tax flexibility, and a business-friendly environment. Texas LLCs are not subject to federal income tax at the entity level, which can be advantageous for business owners. By establishing a Texas LLC, you can safeguard your personal assets, including homes, cars, and bank accounts, from business debts and liabilities.
Moreover, Texas offers a supportive business atmosphere with straightforward administrative processes and a relatively low filing fee for LLC formation. The state offers a range of resources, including comprehensive guides and template forms. This makes it easy to manage the paperwork.
Overall, forming an LLC in Texas can help your business thrive in a competitive market and enjoy the benefits of a business-friendly environment.
How to start an LLC in Texas
An LLC is a limited liability company. It is a formally filed business entity that establishes your business as your own registered agent of a designated entity in the state of Texas. It is similar to a corporation but with a less formal structure and more tax flexibility. It is easier to set up than a corporation but is slightly more complex than just owning a sole proprietorship.
If you already own a sole proprietorship business or are part of a partnership business entity, there are benefits to filing an LLC for your company in Texas. If you are just starting your business, beginning it as an LLC will save you time and money later and get you off on the right foot.
Types of LLCs
There are many types of LLCs to choose from. If you will be the only owner, your LLC will be a single-member LLC. The benefits and drawbacks of this are the same—the management of the company is completely on you, which can be a blessing or a curse. You don't need anyone's permission to do anything, but you also have no one to share the burden and the work. If there will be more than one owner, then your LLC will be a multiple-member LLC. Having more hands on deck can make things easier but can also lead to conflict.
If the members of the LLC also manage it, then your LLC is a member-managed LLC. Doing so allows you to be very hands-on and maintain control, but it can be time-consuming, and if you are trying to run more than one business, it can be impossible to do it yourself. If you decide you will hire employees and have employees manage the LLC, then it is a manager-managed LLC. A manager-managed LLC can also permit only some members to be involved in the day-to-day operations of the business. This frees up your time but also places your trust in someone who is not an owner.
Another option is a series LLC. This is an organization where there is an umbrella company and then a series of spinoff LLCs within it. Each series LLC is managed separately and has its own members, assets, and records. A series LLC is like a subsidiary of a corporation. This can be useful if you want to run several unrelated businesses.
Take some time to consider the type of LLC that is best for your own business.
Starting a Texas LLC: benefits
Starting an LLC in Texas designates your business as a separate legal entity. It's called a limited liability company because it actually limits your own personal and has limited liability company protection. Personal asset protection keeps your own affairs separate from those of the LLC. The LLC is responsible for its own creditors and for its own debt. By creating this legal entity, you separate it from your personal finances, protecting your personal assets from the LLC's financial liabilities. So, if your business goes bankrupt, your personal finances will not be at risk of loss or seizure.
LLCs are relatively simple to form, and you can complete the formation and legal documents yourself if you wish. But if you have questions or want some help, an attorney can assist you and ensure that you meet all state requirements.
Once you form an LLC and pay for business expenses through the company, you have the peace of mind of knowing that those expenses may not be scrutinized as heavily by the Internal Revenue Service (IRS) as if you were a sole proprietorship and paying things out of your personal bank account. With an LLC, you clearly delineate business income and personal assets.
The LLC owners (called members) can manage the LLC themselves or hire managers to do so for them. Members can be individuals, trusts, corporations, or partnerships, and there is no limit on the number of members.
Taxation
Another benefit of an LLC business entity is that it also provides for what is called pass-through taxation. Your LLC does not need to file a federal tax return for itself. Instead, you report the income the LLC earns and pay taxes on your own personal tax return. This makes it easy to run the business and pay taxes.
You also have the option to be taxed as a corporation if that is more beneficial for your company. Corporations must choose one of two tax structures: S corporation or C corporation taxation. Most small businesses prefer S corp tax status.
Your CPA, business accountant, or tax professional can help you decide if electing corporation taxation status would be beneficial for you or if you should report the LLC income on your personal tax return and be taxed at your personal rate for federal taxes.
It is important to note that in addition to federal taxes, LLCs in Texas must also pay taxes and the annual state franchise tax. Work with a tax professional who can calculate the taxes your LLC owes to the state of Texas and the IRS.
Starting an LLC in Texas: drawbacks
When you start an LLC, you should consider not only the benefits but the drawbacks. Forming an LLC is more expensive and complex than just setting up a sole proprietorship or partnership to transact business. There is paperwork that must be completed and filed correctly.
Additionally, it is more difficult to transfer ownership of an LLC than it is with a corporation. Usually, all members must agree if one member wishes to sell their interest. With a corporation, shares can simply be sold, and the transfer is more straightforward.
Once you form an LLC, you are subject to required annual filings by the state of Texas, and you must keep separate books for your LLC. In short, it can add a layer of complication to your life. It takes more time and ultimately costs more since you may need the help of an accountant or pay more to have your taxes prepared.
To fully realize your LLC's limited liability aspect, you must keep your business and personal finances separate. If you commingle them by depositing business checks in a personal account or paying for personal expenses from your LLC bank account, creditors may be able to "pierce the corporate veil" and access your personal assets to fulfill company business debts elsewhere. If you make a mistake and combine assets, you could expose yourself to personal liability, so you must use care and caution when operating your LLC to prevent this.
Do you need an LLC in Texas?
An LLC provides significant benefits but also has some drawbacks. If you aren't sure if an LLC is for you, talk with your tax professional to understand the impact on your taxes and speak with business owners in your community to get a feel for how easy or complex they have found an LLC to be. Consider how an LLC might benefit you but also how it might complicate things.
Who can start an LLC in Texas?
Any person or business can form an LLC in Texas. You might have a sole proprietorship already or are about to open a sole proprietorship business. In either of those situations, you can file for an LLC. Partnerships can also form as LLCs, and there is no limit on the number of partners.
To submit a Texas LLC application, your business' principal business office must be located within the state of Texas. Follow the steps listed in this article to form and file your LLC application if you are in this situation.
If your principal business office is located in another state, then you are what is called a foreign limited liability company. If you want to expand your business into Texas and operate within the state, then your foreign LLC must file an Application for Registration of a Foreign Limited Liability Company with the Texas Secretary of State.
Texas LLC name requirements
The name of your LLC is important. You want to be sure your business name is memorable and helps people understand what you do. However, there are rules and regulations about what your name can be.
You must include your chosen LLC name in your articles of organization when you are registering your LLC with the state. The name you select must comply with Texas naming requirements. The following are the most critical requirements to keep in mind:
- Your business name must include the words limited company, limited liability company, LLC, or L.L.C.
- Your name must be different from any existing business name in the state and cannot be a name that is deceptively similar to another already registered business. You can do a search on the Secretary of State's website to determine if a particular business name is in use.
- The business name cannot contain words used to name a government agency (i.e., State Department, CIA, FBI, Treasury, etc.) or mention a lotto or lottery
- The name cannot be offensive
- Do not use a name that implies you are something you are not. For example, you should not refer to your business as engineers, college, architects, etc., unless you truly are
- Certain restricted words (bank, lawyer, attorney, credit union, etc.) may require additional documentation and licensing paperwork, even if you are operating the type of profession indicated
Additional considerations:
- URL availability. Even if you don't think you'll need a website for your company, you should reserve the option of having one in the future by buying your domain name now. Before finalizing your LLC name, it's a good idea to check if the URL is available. It is always simplest if your LLC's name and the name in the URL are similar so that people can easily find you online.
- Reserve your name. If you aren't ready to register your LLC yet but are concerned your name might be taken by someone else, you can reserve it for a small fee by filing an Application for Reservation or Renewal of Reservation of an Entity Name with the Texas Secretary of State. In Texas, names may be reserved for up to 120 days by paying the $40 filing fee and submitting the proper form to the state authority. This gives you time to decide if you really want that name and protects it from someone else using it while giving you some time to file your formation papers.
It's important to note that you don't have to use your LLC's registered name when conducting business. You can file a doing business as (DBA) Assumed Name Certificate with the county clerk and Texas Secretary of State and pay a $25 filing fee. This permits you to operate under another name and can be helpful if your LLC's name is long, confusing, or if you want to branch out and try to offer some additional services or products that don't clearly fit under your LLC's name.
The DBA filing alerts the government and the public as to who is doing business with that name and who is legally responsible for the business.
Texas LLC application
There are several steps involved in setting up your LLC in Texas and submitting a Texas LLC application. Here's how to get started:
1. File a certificate of formation
The certificate of formation (commonly called articles of organization in other states) is a document that officially establishes your LLC by laying out basic information about it. Completing this document is the first step of starting an LLC in Texas.
Prepare a certificate of formation and file it with the Texas Secretary of State to register your Texas LLC properly. Though it sounds like a big job, that simply means filling out a relatively simple online form and submitting it. You can also send it by mail.
To prepare your certificate of formation, you'll need the following information:
- Your LLC name (including the designation)
- The name and address of your registered agent
- The purpose of the LLC. This can be a short, general statement.
- The LLC's duration or time period over which the LLC will exist. In most cases, LLCs are perpetual, meaning the duration is indefinite. A perpetual LLC can be dissolved voluntarily or involuntarily. If your LLC exists for a purpose that will end at a specified date, you will specify that date here.
- The LLC business structure for management: Will managers or members manage the LLC?
- If the LLC is member-managed, the name and address of each initial member
- If the LLC is manager-managed, the name and address of each initial manager
- The name and address of the LLC's organizer
- The effective date of the certificate
- The signature of the person starting the LLC
You can file your certificate of formation with the Texas Secretary of State by mail, in person, or online. The mailing address is:
Texas Secretary of State
P.O. Box 13697
Austin, Texas 78711-3697
The mailing address used for hand delivery of a certificate of formation is:
James Earl Rudder Office Building
1019 Brazos
Austin, Texas 78701
To submit a certificate of formation via online filing, you must use the SOSUpload System, available through the Secretary of State's website.
The fee for filing is $300.
Once you file your certificate of formation, the secretary of state will review the filing. If the certificate of formation is approved, the LLC becomes a legal business entity.
2. Choose a registered agent
Texas requires you to appoint a registered agent for your LLC business entity. Your LLC business entity's registered agent is the person or entity authorized to receive service of process and other official legal documents and notices on behalf of your LLC business entities. You must name your registered agent in your certificate of formation.
A registered agent can be a person (including yourself or an employee of your LLC) or an entity that offers a registered agent service. They must meet the following criteria to be their own registered agent:
- Entities (or companies) must provide registered agent services
- The agent must have a physical address in Texas (it cannot be a P.O. Box or virtual address)
- The agent must be on-site and available to accept documents during regular business hours
Chaudhry points out that "certain notices cannot be mailed and are time-sensitive. If you fail to respond to these, it can have adverse effects on you, such as your right to conduct business being forfeited, or a judgment can be taken against you." Her advice is to always hire a registered agent. Caution should be used when using a member's home address as the registered agent address because the address is publicly available.
3. Create an LLC operating agreement
A Texas LLC operating agreement is a document that outlines the way your LLC will conduct business.
An LLC operating agreement constitutes a fundamental document for the operating agreement with your Texas LLC. It serves several purposes:
- Outlining the operational and financial practices of your LLC
- Memorializing the liability agreement between the LLC and its members
- Providing procedures to address any disagreements between members
The state of Texas does not require a Texas LLC operating agreement, and you don't need to file it, but you should create one. All Texas LLCs should have operating agreements.
This document is the playbook for your LLC and lays out how you're going to conduct business. Chaudhry explains that it “sets the rules and operations of your business. It sets out what happens in the event of common occurrences like fights between partners, who has the right of ownership, and the right to remove partners and other rogue agents."
An LLC operating agreement should contain:
- LLC's name and principal address
- Duration of the LLC
- Name and address of the registered agent
- Information about the certificate of formation
- Purpose of the business
- LLC members and their contributions
- The way profits and losses will be divided
- Procedure for admitting new members, as well as outgoing members
- Management of the LLC
- Indemnification and liability clauses
- The voting rules among members
- The management structure
- Responsibilities of managers and members
- When meetings will be held
- How to add new members
- How the LLC can be closed down
You will find yourself referring to your LLC operating agreement over and over as your business grows, so it is crucial that it be robust and straightforward. The agreement should also be reviewed regularly by all members to see if it should be amended or updated.
4. Get an EIN
Once an LLC has been formed with the Texas Secretary of State, you must obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). You can apply for and obtain it the same day on the IRS website. There is no filing fee, and EINs are free. The Employer Identification Number also functions as your business's federal tax identification number, much like your Social Security number does for you personally.
If you are a single-member LLC with no employees and do not elect a corporation tax status, then you are not required to obtain an EIN. Your Social Security number is your federal tax identifier. If you think you might hire employees in the future or elect corporation tax status, it makes sense to apply for and get an EIN now to use on all of your business and legal documents from the very start.
Once you have the EIN, you can open bank accounts for your business bank account because most banks require this.
Once your Texas LLC is up and running, it's crucial to ensure its longevity and success by:
- Staying compliant with annual filings
- Obtaining necessary licenses and permits
- Managing finances
- Navigating through the various aspects of maintaining your Texas LLC, including annual filings and fees, business banking, and insurance.
5. Apply for business licenses
Depending on the type and location of your business, you may need to obtain additional licenses and permits to operate your Texas LLC. These requirements can vary by state, industry, and local jurisdiction. To find out which licenses and permits are required for your business, refer to the Texas Economic Development website and the Texas Department of Licensing and Regulation.
Additionally, don't forget to check local and federal licensing requirements for your specific industry. By obtaining all the necessary licenses and permits, you'll ensure that your LLC complies with all applicable regulations and avoids potential legal issues.
Texas LLC taxation
Comprehending the tax obligations of your Texas LLC is crucial to maintain compliance and avert potential penalties. In this segment, we will address the state and federal tax requirements for your Texas LLC, including the need to pay federal income tax and the array of taxation options at your disposal.
State taxes
Texas LLCs are subject to certain state taxes, such as the franchise tax and sales tax. The franchise tax is an annual tax based on the assets of your LLC, and companies that do not meet a certain threshold are not required to pay this tax.
Pay sales tax
If your business sells taxable goods and services, you must collect the Texas state sales tax of 6.25%. Counties and cities may also charge their own sales tax in addition to this. Whether you file sales tax quarterly or monthly is determined by the amount of your revenue.
It is important that you work with your business accountant to keep accurate records and file and pay sales tax as required.
Federal taxes
At the federal level, LLCs have various tax options available. By default, single-member LLCs are treated as disregarded entities for tax purposes, while multi-member LLCs are taxed as partnerships. However, LLCs can also elect to be taxed as either a C corporation or an S corporation by submitting the appropriate forms to the Internal Revenue Service (IRS).
Each taxation option has its advantages and disadvantages, and it's essential to consult with a tax professional to determine the best choice for your Texas LLC. By understanding federal tax requirements and selecting the most suitable taxation option, you'll ensure your LLC remains compliant and can reap the benefits of a favorable tax structure.
Open a business bank account
Opening a business bank account is a crucial step for your LLC because it clearly separates your personal finances from those of the LLC and helps you maintain that important separation between personal assets and business assets as you move forward with your business. Your cash business assets will be held only in this account. It also makes it simpler to handle the accounting process for your business. A debit card for the account is also useful to obtain.
You will also likely want to open a business credit card so that you can easily make purchases for your LLC. A business credit card may be available through the bank where you've opened your business bank account.
Obtain business insurance
Talk with an insurance agent about obtaining business insurance for your LLC. This type of insurance protects your business from claims of damage or injury caused by your business, your employees, or your products.
Texas does not require you to carry workers' compensation insurance for your business entity's employees, but if your business contracts with the government, then you must carry it for employees working on those specific projects.
File annual reports
To remain in good standing, your LLC must file an annual franchise report by May 15 of each year. You can file your annual report online with the Texas comptroller.
Chaudhry says that not realizing you are required to do this or forgetting to file it is one of the most common mistakes people make when setting up and running an existing business as an LLC in Texas. Failure to file and pay federal income tax, he says, "leads to the forfeiture of their right to conduct business." You don't want to find yourself in that position, so be certain to file your franchise tax every year in Texas!
Cost of starting an LLC in Texas
Forming an LLC in Texas comes with various costs, ranging from $40 to $500, excluding other related expenses such as reserving a business name or purchasing business licenses or permits. Government filing fees for forming an LLC in Texas typically range from $35 to $500, depending on the county.
In addition to the franchise tax and the initial filing fees, there may be additional costs if you wish to reserve the LLC name or apply for business licenses. The franchise tax in Texas is charged at a rate of 0.75% of gross receipts and applies to LLCs unless they qualify for an exemption. Comparatively, states like Wyoming and Nevada do not have a franchise tax.
By understanding the costs of forming an LLC in Texas, you can budget accordingly and prevent any unexpected expenses down the line. Here is a quick look at some of the basic fees for starting an LLC in Texas. You can get more information about these fees and more from the Texas Secretary of State.
- Certificate of formation $300
- Change registered agent $15
- Name reservation $40
- Assumed Name Certificate (DBA) $25
- Abandonment of Assumed Name $10
- Transfer name reservation $15
For more information on the fees associated with getting an LLC visit the Texas Secretary of State.
Expanding your Texas LLC
As your business grows, you may wish to expand your Texas LLC to do business in other states. We will discuss the avenues for expanding your Texas LLC in this segment, which includes registering a foreign LLC and conducting business across different states.
Registering a foreign LLC in Texas
If your LLC is registered in another state and you wish to conduct business in Texas, you'll need to register as a foreign LLC in Texas. To do this, you'll need to submit an Application for Registration of a Foreign Limited Liability Company to the Texas Secretary of State, along with the required filing fee of $750.
It's important to note that registering a foreign LLC in Texas requires additional documentation, such as a certificate of good standing from your LLC's home state and any necessary licenses or permits for your specific industry. By registering your foreign LLC in Texas, you'll ensure that your business remains compliant with state regulations and can enjoy the benefits of operating in multiple states.
Doing business in other states
When expanding your Texas LLC to do business in other states, you'll need to follow a similar process as registering a foreign LLC in Texas. You'll need to register as a foreign LLC in each state where you plan to conduct business, submit the appropriate documentation, and pay any required filing fees.
Additionally, you may need to obtain any necessary licenses, permits, or insurance coverage specific to the state and industry in which you'll be operating. By staying informed about the requirements for doing business in other states and registering your LLC accordingly, your Texas LLC can successfully expand its operations and tap into new markets.
Networking and local resources
Connecting with local business groups and participating in online forums can help you stay updated on Texas business regulations and trends, as well as provide valuable networking opportunities. Some options for networking and staying connected include:
- Joining industry-specific networking groups, such as the Texas Business Network on Facebook or the American Subcontractors Association
- Participating in local business groups and organizations
- Attending industry conferences and events
- Engaging in online forums and discussion boards
These activities can help you connect with other professionals in your industry, exchange ideas, and stay informed about the latest developments in Texas business.
Additionally, take advantage of local resources for Texas LLCs, such as:
- The Texas Secretary of State website
- The Small Business Development Center
- Local chambers of commerce
- The CBAR program by Texas RioGrande Legal Aid
Utilizing these resources can help you stay informed, compliant, and successful in your business endeavors.
Staying informed and compliant
Remaining informed and compliant with state and federal regulations is essential for the success of your Texas LLC. Keeping up to date with changes in regulations and requirements, as well as staying informed about industry trends, can help your LLC maintain its competitive edge and avoid potential legal issues.
Some common mistakes that Texas LLCs make in terms of compliance include:
- Not staying up to date with their obligations
- Not consulting with an attorney for specific legal questions
- Not understanding the requirements for nonprofit or series LLCs
By staying informed, consulting with professionals when necessary, and adhering to all applicable regulations, your Texas LLC can thrive and continue to grow.
Summary
Forming and maintaining a Texas LLC can provide numerous benefits for entrepreneurs, such as limited liability protection, tax flexibility, and a business-friendly environment. By following the steps outlined in this guide, staying informed about state and federal regulations, and utilizing local resources and networking opportunities, you can maximize the success of your Texas LLC and enjoy the advantages of doing business in the Lone Star State.
FAQs
How much does an LLC cost in Texas?
The basic cost to form an LLC in Texas is $300. If you opt to hire a professional service or attorney, additional fees may apply. For foreign LLCs, the cost increases to $750, and there are also optional fees associated with obtaining a certified copy of the filing document and/or hiring an outside registered agent.
Is LLC worth it in Texas?
Forming an LLC in Texas provides numerous advantages, such as economic strength, asset protection, tax benefits, and flexibility, making it a wise choice for businesses located in the state.
How long does an LLC take to process in Texas?
In Texas, LLC formation typically takes four to six weeks to process.
What are the main benefits of forming an LLC in Texas?
Forming an LLC in Texas provides limited liability protection, tax flexibility, and a business-friendly environment for entrepreneurs, offering many legal and tax advantages.
What is the filing fee for registering an LLC in Texas?
The filing fee for registering an LLC in Texas is $300, making it an affordable option for businesses seeking to limit their liability.
How to close an LLC in Texas
If you make the difficult decision to end your business and decide to close your LLC, you must take the following steps with the state of Texas:
- Wind up your business, including paying your outstanding bills, notifying creditors, and selling your company assets
- Complete a certificate of termination and submit it to the Texas Secretary of State
- Include a certificate of account status for dissolution/termination from the Texas comptroller
- Pay the $40 fee
Once you take those steps, your LLC is officially closed.
Creating an LLC in Texas is a way to protect yourself and set your business up for success. The filing fees are minimal, and establishing your business as a fully formed LLC provides legitimacy and gives you crucial liability protection that keeps your personal assets safe from creditors.
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