The Limited Liability Company (LLC) is a popular business structure for many entrepreneurs in the state of Texas. The LLC provides personal liability protection and has the potential to save money on taxes. With our guide, you can learn how to form an LLC in Texas without an attorney.
Unlike a sole proprietorship or partnership where the small business owner can be personally liable for lawsuits against the business, the LLC is a separate legal structure, protecting personal asset protection for the business owners.
Besides the liability protection, the Limited Liability Company provides several other benefits over the sole proprietorship, partnership, and corporation because of the multiple tax options, ease of administration, and management flexibility.
Steps to Form a Texas LLC
Let’s break down the steps to complete the Texas LLC formation process.
Total Time: 10 minutes
Step 1: Choose a Name for the LLC
The first step in forming a Texas Limited Liability Company is to make sure the name you want is available.
It’s critical to do a name search before registering an LLC name, as the name of each LLC must be distinguishable from other entity names registered in the state of Texas. The Texas Secretary of State makes it easy to search and verify if your LLC name is available. Here is more information on how to do a Texas LLC name search.
In addition to the name being unique, the entity designator (identifier used at the end of the business name) must be either:
– Limited Liability Company
– Limited Company
A comma may be used after the business name and before the designator. “Cowboy Cleaners LLC” and “Cowboy Cleaners, LLC” are both acceptable.
Other naming guidelines include restrictions on using terms such as insurance, bail bonds, surety, bank, trust, engineer, architect, interior design, college, university, veteran, Olympic and others, unless the business is registered with the state to provide those services.
If you plan to use a different name from the legal name that you register (perhaps you want to run multiple businesses under the LLC), you can use an assumed name (sometimes referred to as a fictitious business name, trade name, DBA, or Doing Business As name). To register the name, file an Assumed Name Certificate with the county clerk in the county where the LLC is located.
If there is an LLC name you want, but you are not ready to register the LLC, you can file the Name Reservation Form (Form 501). The name reservation will hold a name for up to 120 days, and cost $40 to file.
Before settling on an LLC name, you may want to do a domain name search to match your business name.
Step 2: Appoint a Texas Registered Agent
Every LLC in Texas is required to have a Registered Agent. A Registered Agent will act as a central point of contact to receive legal documents, tax notices, summons, subpoenas, etc., on behalf of the LLC.
The basic requirements to be a Registered Agent in Texas include:
– The agent must be a Texas resident at least 18 years of age or a commercial Registered Agent service with a registered office in the state.
– The agent must have a physical address in the state (PO Boxes aren’t allowed).
– The agent must generally be available during normal business hours at the address provided to receive service of process.
Learn more about the requirements for a Registered Agent in Texas
Any individual meeting the requirements can be the agent; however, the agent’s name and address become public record, and with that comes a loss of privacy. This is more important for some entrepreneurs, especially when doing business from home or still employed. Hiring a company like Northwest Registered Agent to be the Registered Agent will reduce unwanted phone calls and mailings.
Step 3: File the Texas Certificate of Formation
The paperwork to officially create an LLC in Texas is called the Certificate of Formation (called the Articles of Organization in many states). To submit the paperwork, either file online through SOSDirect, which is the Secretary of State’s website to file online, or download the Texas LLC Certificate of Formation (Form 205).
When filling out the Certificate of Organization, a few sections and terms can be confusing. Let’s go over a few of these sections to help get your LLC started right.
Governing Authority – This article asks if the LLC is Member-Managed or Manager-Managed.
– Manager-Managed LLCs are hired by the members to run the LLC, similar to a CEO of a corporation. This is generally used when there are passive members in the LLC, and the members do not actively manage or operate in the affairs of the business.
– Member-Managed LLCs have an active involvement in the management and have the authority to act on behalf of the LLC.
Most LLCs are member-managed.
Purpose – This article asks for some basic information about what the business does. Sticking with the standard language “The purpose for which the company is formed is for the transaction of any and all lawful purposes for which a limited liability company may be organized under the Texas Business Organizations Code.” keeps the business purpose open-ended and allows an LLC to operate in any type of business as long as it is legal.
Organizer Information – An LLC Organizer is someone involved with the formation of the Certificate of Formation. The Organizer may or may not become a member, such as a mentor, attorney, or accountant, but any of the LLC members can be listed as an organizer.
Effective Date – This is an optional section if you want the LLC to start on a later date, up to 90 days in the future. The main reason for delaying the LLC start date is when the filing is made close to the end of a calendar year, and the business isn’t going to have any activity until the start of the year. By delaying, you can eliminate the need to file a partial-year business tax return by delaying the start date until the following year.
Estimated Cost: 300 USD
Turnaround Time: It normally takes 2-3 business days when filing online or 7-10 business days when filing by mail for the state to process the LLC paperwork.
You don't have to form your LLC by yourself or pay an attorney!Forming an LLC is a little intimidating, especially when it’s your first time. Professional entity formation services help guide you to make sure it’s done right. Check out our reviews of popular LLC formation services to learn more.
You have a Texas LLC! Now what??
Once the LLC has been formed, there are a few additional steps to take care of. Below is a list of the most common tasks.
Prepare a Texas LLC Operating Agreement
The operating agreement is a document that governs the framework of an LLC. This document covers items like ownership rights, member responsibilities, how profits and losses are distributed, and more.
Most states do not require an LLC to have an operating agreement, but it is still worth considering. Without an operating agreement:
- The LLC could be subject to generic state rules that may be detrimental in the event of a lawsuit.
- Member’s personal liability protection may be diminished.
- Members may not fully understand their roles and responsibilities, which could lead to costly disputes in the future.
Related: Texas operating agreement template
Obtain an EIN
The EIN or Employer Identification Number (also called a Federal Employer Identification Number or FEIN) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies business entities for tax purposes. The EIN will be needed to hire employees, open a bank account, build business credit, register for business licenses and permits, file federal and state taxes, and more.
There is no cost for the EIN when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.
Related: How to Apply for an EIN
Elect the LLC’s Form of Federal Income Taxation
One of the significant benefits of the Limited Liability Company is the tax flexibility it provides. When applying for the Employer Identification Number, you will choose how the entity will be taxed for federal income tax purposes. While there are some limitations, an LLC may be classified for federal income tax purposes as a:
- Sole proprietorship
While this may sound confusing, this refers to how the LLC is taxed, not the legal structure.
Related: How can an LLC be taxed?
By default, the taxation of an LLC is called pass-through taxation, which means the profits or losses of the LLC flow through to the members.
Single-member LLCs will, by default, be taxed as a sole proprietorship. The members can also elect to change the taxation to a C-corporation or an S-corporation.
Multi-member LLCs will, by default, be taxed as a partnership. The members can also elect to change the taxation to a C-corporation or an S-corporation.
In general, the difference between being taxed as a corporation and being taxed as a sole proprietorship or partnership is that the profits and losses are passed to the member’s federal income tax returns based on their percentage of ownership. As a result, the owner will pay self-employment taxes on all business profits. As an alternative, electing to be taxed as a corporation allows the members to take a reasonable salary and then pay payroll taxes. Any remaining profits are distributed and aren’t subject to payroll taxes, resulting in potential tax savings.
Before electing how your LLC will be taxed, consider talking with an accountant to assess which one will be best for you. Some tax elections, such as the C corporation, may be detrimental for some people due to double taxation.
Open an LLC Bank Account
Opening a bank account for your LLC is important for liability protection as the account separates the business’s funds from the member’s personal funds.
Several documents will be needed to open a business bank account, such as:
- A banking resolution is a document that authorizes the members to open a business bank account on behalf of the LLC.
- Copies of the original LLC formation paperwork from the state showing the creation of the LLC.
- Driver’s licenses of the members.
- Occasionally, the bank will request a Texas Certificate of Good Standing to prove the LLC is active and in good standing with the state.
Apply for Business Licenses and Permits
Depending on what your business does and where it is located, there will likely be various business licenses and permits needed before starting the business. Some common registrations include:
- Business License – Some cities require businesses to obtain licensing before they can start.
- Professional License – Certain services such as barbershops, accountants, salons, and others must be licensed.
- Sales Tax Permit – In order to sell products and certain services and collect sales tax, registration with the Texas Department of Comptroller will be necessary.
Get Business Insurance
Even with the liability protection of the LLC, business insurance is important to protect the business. The most common types of insurance include:
General Liability Insurance – covers damages owed and medical expenses for accidents that happen at your place of business.
Business Property Insurance – replaces damaged, stolen, or lost business property. This includes your physical business location, equipment, supplies, and anything else you used to run your business.
Business Vehicle Insurance – covers company vehicles and may also include coverage for personal vehicles used for business-related activities. Many personal policies won’t cover your vehicle if there is an accident while being used for business purposes.
Workers Compensation Insurance – mandatory in most states if you have employees, this insurance covers medical expenses that occur because of an accident or injury that happens to one of your employees while they’re at work.
File the Annual Public Information Report
LLCs are required to file a public information report with the Texas Comptroller each year.
File the Annual Franchise Tax Report
All LLCs will need to file the Texas Franchise Tax Report by May 15th each year. The franchise tax isn’t a tax on a franchised business such as McDonald’s. Rather it is a tax on the privilege of doing business in the state. The tax is based on the gross sales of the business and paid to the Texas Comptroller of Public Accounts.
The first report is not due until after the first year of business. For example, an LLC created on January 1st, 2022 wouldn’t file until May 15th, 2023.
Common Questions To Starting An LLC In Texas
How much does it cost to start an LLC in Texas?
The state filing fee to start an LLC in Texas is $300.
Is there an annual report due for an LLC in Texas?
Each year, an annual Franchise Tax Report must be filed. A tax may be due depending on the gross sales of the business.
How long does it take to start an LLC in Texas?
LLCs formed online are processed within 2-3 business days or 7-10 business days when filing by mail.
Do I have to pay to hire a registered agent?
No. Anyone can act as a registered agent, provided they are at least 18 years old, reside in the state, and are generally available to receive documents during normal business hours.
If I have an LLC, is a business license required?
It’s sometimes thought that the LLC and business license are the same, but they aren’t. An LLC is referred to as the business entity, which is how the business is organized to conduct business. A business license is approval from a government entity to legally operate.
What is a Foreign Limited Liability Company?
A foreign LLC refers to an LLC that is physically operating in states outside of the state where it was formed. Physically operating means having a presence, such as having an office or employee in the state. The LLC will need to register as a foreign LLC in each state that the LLC plans to operate.
What is a Professional Limited Liability Company?
Businesses that require occupational licensing in Texas, such as accountants, architects, veterinarians, etc., will want to file for a Professional Limited Liability Company (PLLC) instead of an LLC. Filing for a PLLC is very similar to that of the LLC.