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Initiating the formation of an LLC in Texas necessitates adherence to a series of crucial procedures and state-specific prerequisites. This all-encompassing manual will walk you through the simple steps involved in creating an LLC. Keep reading to acquaint yourself with the vital details concerning Texas LLC prerequisites, relevant charges, and the registration process for your emerging business venture.
How to Start an LLC in Texas State – Step-By-Step Guide
Step 1: Choose a Name for Your LLC
In Texas, nearly anyone with a valid business purpose can establish an LLC, except for certain regulated professions like doctors and veterinarians, who must create a professional entity such as a professional limited liability company or a professional corporation. The Texas Secretary of State offers a guide specifying permissible entity types based on the profession.
The first step involves selecting a unique business name that does not confuse the public with existing names in Texas. Names for Texas LLCs must conclude with “limited liability company” or “limited company.” Abbreviations like L.L.C., LLC, L.C., or LC are also acceptable.
Texas law prohibits the use of certain words in an LLC’s name, such as “bank,” “bank and trust,” “trust,” “trust company,” or “bail bonds.” Additionally, the name cannot imply a government affiliation. Words like “insurance” and “surety” can pose issues unless it’s evident that the business isn’t an insurance or surety agency, as these are regulated by the Texas Insurance Code.
If your Texas LLC’s name closely resembles that of another Texas business and could potentially cause confusion, you can resolve this by obtaining consent from the other company. For instance, if you wish to name your company Texas Super Bakery LLC, but there’s already a Texan Super Bakery LLC, the latter would need to grant consent using a Consent to Use of Similar Name Form (Form 509).
Name Availability Search & Reservation
To check if your chosen LLC name is available in Texas, visit the SOSDirect website or contact the Secretary of State at 512-463-5555, or use relay services locally by dialing 7-1-1 or emailing your name inquiry.
If you want to secure a name for your LLC for up to 120 days, you can file an Application for Reservation of an Entity Name (Form 501) along with a $40 filing fee. You can submit the form online, by mail, fax, or in person.
While not mandatory, name clearance and reservation offer peace of mind about your name choice. However, note that approval by the Secretary of State doesn’t guarantee compliance with trademark laws. It’s your responsibility to ensure your chosen name is legally sound, so consider consulting a business attorney if you have concerns.
Step 2: Choose a Registered Agent in Texas
Every LLC operating in Texas, whether it’s a Texas-based business or an out-of-state one operating in Texas, must have a registered agent. A registered agent can be an individual or a Texas-authorized organization responsible for receiving legal and official documents on behalf of your business.
If you choose an individual, they must meet these criteria:
- At least 18 years old
- A Texas resident with a physical address (not a P.O. box) in Texas
- Available during regular business hours to accept documents
Registered agents in Texas need to give their consent to serve in this capacity using Form 401-A: Acceptance of Appointment and Consent to Serve as Registered Agents (or a custom consent form containing the same information). This consent form doesn’t need to be submitted to the state but should be retained by the business along with other documents.
While a business entity can’t serve as its own registered agent, you or another LLC member can take on this role. However, relying on an LLC member may lead to occasional unavailability. Many businesses choose to use online legal services as their registered agent for a fee to ensure consistent document acceptance.
Step 3: Obtain Texas Business Permits
Depending on your business’s industry, you may require specific permits from Texas regulatory agencies. The Texas Business Permit Office offers a guide detailing the state licenses needed based on your business type. Additionally, local cities and counties have their own permitting prerequisites.
Any Texas business selling tangible personal property and certain services must request a sales and use tax permit from the Texas Comptroller. If your business operates under a trade name different from your LLC’s legal name, you must also file an Assumed Name Certificate (Form 503), commonly referred to as a fictitious business name. The filing fee for an assumed name is $25.
Step 4: File a Certificate of Formation
To establish your LLC in Texas, submit a certificate of formation to the state. This is similar to what other states call the articles of organization. You can file online through SOSDirect for quicker processing, mail it, fax it, or hand-deliver it to the Secretary of State’s Austin office.
Your Texas certificate of formation must include:
- LLC name
- Registered agent’s name and address
- Indication of member-managed or manager-managed LLC
- Names and addresses of LLC members (if it’s member-managed)
- Name, address, and signature of the person filling out the form (usually an LLC member or manager)
- Desired effective date for LLC registration
The filing fee for the certificate of formation is $300 for domestic LLCs (based in Texas) using Form 205 and $750 for foreign LLCs (formed in another state) using Form 304.
After submission, the Secretary of State will review and file the document, sending you a stamped copy within one to three business days. Once done, your LLC is authorized to conduct business in Texas, but you still need to address a few more requirements to maintain good standing with the state.
Step 5: Draft an LLC Operating Agreement
Although not mandatory in Texas, it’s crucial for LLC members to develop an operating agreement. This document serves as the foundation of your business.
The LLC operating agreement should include:
- Description of the LLC’s products or services
- Names and addresses of each member (and manager, if applicable)
- Financial contributions made by each member
- Ownership shares and how profits and losses are distributed
- Process for adding new members
- Manager election process for manager-managed LLCs
- Meeting Schedule
- Voting procedures for significant company decisions
- Dissolution guidelines
You do not need to file the operating agreement with the state; instead, keep it with your essential business records.
Step 6: Pay Taxes and File an Information Report
Texas LLCs must meet tax obligations by paying a franchise tax and submitting an annual public information report (PIR) by May 15 each year. For instance, if you established your LLC in December 2021, your first PIR and franchise taxes are due by May 15, 2022. The PIR contains details about your LLC’s members and any investors, ensuring up-to-date records with the secretary of state.
The good news is that most LLCs won’t owe the franchise tax. In 2022 and 2023, this tax only applies to businesses with annual gross revenue exceeding $1,230,000 (adjusted every two years). Retail and wholesale businesses meeting this threshold pay a 0.375% tax rate, while other business types pay a 0.75% tax rate. Even if no franchise tax is owed, you must still file a no-tax due form.
Typically, LLC members are subject to state income taxes on their share of profits, but Texas is among the nine states that do not impose state income tax, which is advantageous for businesses operating in the state.
Step 7: Follow Federal Requirements
Apart from meeting Texas state requirements, you must adhere to federal obligations.
LLCs with employees or those taxed as corporations federally must obtain an employer identification number (EIN), which functions as your business’s Social Security number for federal tax purposes.
While Texas doesn’t have a state income tax, LLC members should be ready to cover federal self-employment taxes at a rate of 15.3% to fulfill Social Security and Medicare responsibilities. If you have employees, you must also withhold federal Social Security and Medicare taxes from their wages and contribute the employer’s share of these taxes.
How to Start an LLC in Texas – Buyer’s Guide
Best LLC Formation Services
LLC formation services are offered by professionals or individuals to assist entrepreneurs and businesses in establishing a Limited Liability Company (LLC). These services generally involve handling paperwork filing with the state, offering advice on legal and regulatory obligations, and aiding in the LLC setup. They simplify the formation procedure, save time, and ensure adherence to state regulations.
ZenBusiness is an online service for LLC formation, catering to entrepreneurs and small business owners looking to initiate and expand their enterprises. They offer cost-effective and all-inclusive LLC formation packages, encompassing registered agent services, annual report submission, and additional features. ZenBusiness also provides ongoing assistance and resources to aid businesses in maintaining compliance and achieving success.
Swyft Filings is an LLC formation service known for quick and straightforward LLC formation. They provide various LLC services, such as incorporation, compliance, and registered agent services. Swyft Filings also offers personalized assistance to guide businesses through the LLC formation process and ensure compliance with state and federal regulations.
Tailor Brands is an online service for branding and design that assists businesses in establishing a polished and consistent brand identity. They present a range of branding packages encompassing logo design, business card design, and social media branding. Tailor Brands also supplies design tools and resources to aid businesses in crafting and personalizing their branded materials.
Texas LLC Filing Requirements
Before filing your Limited Liability Company (LLC) in Texas, it’s crucial to understand the specific steps and requirements. In Texas, you must adhere to the following unique requirements:
- Name with “LLC”: Texas mandates that your LLC name must include “Limited Liability Company” or “Limited Company.” You can abbreviate it as “L.L.C.,” “L.C.,” or “Ltd. Co.” Additionally, “Limited” and “Company” can be written as “Ltd.” and “Co.,” respectively.
- Unique Name: Your LLC’s name must be distinct from existing businesses in the state. It cannot closely resemble another business name. You can check name availability using the Texas Taxable Entity search engine. If available, you can reserve the name by filing Form 501, “Reservation or Renewal of Reservation of Name,” for a fee of $40, which holds the name for up to 120 days.
- Registered Agent: Every Texas LLC must have a registered agent. This agent can be an individual Texan (including LLC owners or employees) or a registered agent service authorized to operate in the state. The registered agent must agree to accept legal documents on behalf of your business in case of a lawsuit and must have a physical address within the state (not a P.O. box). Importantly, the LLC cannot serve as its own registered agent. The cost of a reputable agent typically ranges from $100 to $300 annually, so research thoroughly to ensure the agent’s services cover all necessary aspects.
Cost To Set Up an LLC in Texas
To create a Texas LLC, the filing fee is $300. If you use a service or attorney to assist with the filing, additional charges may apply.
Texas State Franchise Tax Fee
Most Texas LLCs are subject to an annual state franchise tax. You can calculate this tax and access related tax documents on the official Texas Comptroller website.
Once you’ve completed the necessary paperwork:
- You can file them online. “No tax due” forms must be submitted electronically
- Alternatively, mail the documents to P.O. Box 149348, Austin, Texas, 78714-9348
Correcting Texas LLC Filing Errors
In case of filing errors, you can rectify them by submitting a Certificate of Correction or Form 403 to the Texas Secretary of State. Specify the corrections needed, but please note there’s a $15 filing fee, and this process cannot be done online at present.
Read more: Cost to Start an LLC
Next Steps After LLC Formation
After establishing your Texas LLC, ensure smooth business operation with the following tasks:
- Bank Account: Use your EIN to open a dedicated business bank account. Keep business and personal funds separate.
- Permits and Licenses: Check local regulations for any necessary permits or licenses, such as health or building permits. Depending on your industry or profession, federal or state permits may also be required.
- Insurance: Consult an insurance agent to determine essential policies. Consider general liability insurance and, if you have employees, workers’ compensation insurance.
- Annual Report: File an annual report with the Texas State Comptroller’s office to maintain compliance.
Texas LLC Pros and Cons
Like any business setup, there are advantages and disadvantages to weigh before establishing an LLC in Texas. Let’s examine the pros and cons.
- Limited liability protection shields owners’ personal assets from the company’s debts
- LLCs can have one or multiple members, offering flexibility in ownership structure
- More flexibility in profit distribution among members compared to corporations
- Enhances a business’s credibility and professional image when operating as an LLC in Texas
- Easy transfer or sale of LLC ownership with minimal paperwork
- Owners can choose to have the LLC’s income pass through to their personal income tax or elect corporate taxation
- Administrative tasks like filing articles of organization, creating an operating agreement, and maintaining records are required
- Various fees, such as state, legal, and annual fees, are involved in the formation of an LLC in Texas
- Income generated by the business is subject to self-employment taxes
- Owners can still be personally liable for the company’s debts and legal actions if they don’t maintain a clear separation between personal and business activities or provide personal guarantees
- LLCs cannot issue stock, making it more challenging to raise capital compared to corporations
Alternative Business Structures in Texas
A common question that arises when considering LLCs is whether they’re a necessary choice to begin with. In Texas, the filing fees for both corporations and LLCs are roughly equivalent.
Before making your decision, it’s crucial to comprehend the significant differences in taxation, ownership structure, management, and liability between LLCs and corporations.
There are various business structures available to choose from:
- Sole Proprietorship: Sole proprietorships are unincorporated businesses owned by a single individual. They’re the easiest type of business to establish but carry the highest liability for business owners since there is no separation between personal and business assets.
- General Partnership: Similar to a sole proprietorship, a general partnership allows two or more individuals to form a business together, but it does not offer liability protection. Owners report business income on their personal tax returns rather than filing taxes as a separate business entity. This can be quite risky for all parties involved if someone behaves dishonestly.
- Corporation: To establish a corporation in Texas, there is also a $300 registration fee. Some entrepreneurs may prefer a corporation over an LLC to attract external investments. Corporations provide liability protection similar to an LLC. They can be taxed as C corporations (C-corps), or certain corporations can opt for pass-through taxation by electing to be taxed as an S corporation (S-corps).
Registering a “doing-business-as” (DBA) name, known as an “assumed name certificate” in Texas, is significantly more cost-effective than creating a corporation or LLC, thanks to the $25 state filing fee. However, DBAs can often be a source of confusion for novice entrepreneurs, as they do not constitute a business structure like an LLC or corporation.
Essentially, a DBA serves as a registered alias for your already established business. While these terms are frequently discussed together, it’s important to note that DBAs and LLCs are distinct entities.
How to Form an LLC in Texas – FAQs
Is an EIN Required for LLCs in Texas?
For LLCs in Texas with multiple members, it’s mandatory under federal law to obtain an Employer Identification Number (EIN).
Can I Create a Free LLC in Texas?
Normally, the filing fee for Texas LLC registration is $300. Nevertheless, as of January 1, 2022, there is no filing fee for new businesses that are 100% veteran-owned. Additionally, these veteran-owned businesses are exempt from paying franchise tax for the initial five years.
How Do I Change Ownership of a Texas LLC?
Changing ownership of a Texas LLC doesn’t require a separate filing. Instead, you should include the details of new members and managers when you file your annual Public Information Report along with your franchise tax return to the state comptroller’s office.
In summary, commencing an LLC in Texas is a straightforward procedure that comes with various advantages for entrepreneurs. By adhering to these uncomplicated steps, you can establish a solid foundation for your business and benefit from limited liability protection, flexible management options, and potential tax perks. If you prefer to avoid the complexities of initiating an LLC, you have the option to enlist the services of reputable companies such as ZenBusiness and Swyft Filing.
It is essential to conduct thorough research, seek professional advice when necessary, and ensure your business remains compliant with state regulations to guarantee a smooth and prosperous journey as an LLC proprietor in the Lone Star State. Therefore, seize this opportunity and transform your entrepreneurial aspirations into reality by creating your Texas LLC today!
About the author
Dr. Alexander Sterling, Esq, a distinguished legal scholar with a business law degree and a Doctor of Juridical Science, is a leading expert in business registration and diverse business departments. Renowned for his academic excellence and practical insights, Dr. Sterling guides businesses through legal complexities, offering invaluable expertise in compliance, corporate governance, and registration processes.
As an accomplished author, his forthcoming book is anticipated to be a comprehensive guide for navigating the dynamic intersection of law and business, providing clarity and practical wisdom for entrepreneurs and legal professionals alike. With a commitment to legal excellence, Dr. Alexander Sterling, Esq, is a trusted authority dedicated to empowering businesses within the ever-evolving legal landscape.