How to form an LLC in Texas
Forming a Texas Limited Liability Company (LLC) can be an empowering step for entrepreneurs and small business owners, providing a blend of liability protection and operational flexibility. In the Lone Star State, establishing an LLC involves navigating through specific state-level guidelines and submitting the necessary paperwork to the Texas Secretary of State.
Dive into this guide for comprehensive insights into forming your LLC in Texas, from the preliminary steps like choosing a name, through to filing formation documents, and ongoing compliance requirements.
What is an LLC?
An LLC, or Limited Liability Company, blends the simplicity and flexibility found in partnerships with the robust liability protection typically reserved for corporations. In a nutshell, it shields your personal assets from business-related debts and lawsuits while enjoying a friendly tax treatment called 'pass-through taxation'.
This means the LLC's profits or losses pass through directly to you, the owner, making tax time a bit simpler. Whether you're going solo or with partners, forming an LLC offers a flexible path to keep your business and personal worlds separate and secure.
Texas LLC filing requirements
Here’s your quick-start guide, ensuring your Texas LLC setup is as smooth as possible. Unique steps for Texas LLCs include:
- Naming your LLC. It's more than choosing a catchy phrase. Texas insists on including 'Limited Liability Company' or its variants in your name. Opt for abbreviations like 'L.L.C.,' 'L.C.,' or 'Ltd. Co.' if you prefer a snappier title.
- Claiming your unique name, Ensure your chosen business name isn't already taken in Texas. A swift check through the Texas Taxable Entity search and a name reservation (using Form 501 and a $40 fee) will keep your chosen name snugly in your pocket for up to 120 days.
- Securing a registered agent. Texas mandates every LLC to have a registered agent. This can be a Texan individual or a registered agent service authorized in the state. Remember, this agent is your official legal contact, so a physical Texas address is a must—no P.O. boxes allowed. Annual fees for a dependable agent range between $100 and $300, ensuring all legal paperwork is adeptly handled.
- Operating agreement. While not a state requirement, drafting an LLC operating agreement is crucial. This document lays out the roles, responsibilities, and ownership distribution among the LLC members and provides a clear guideline on how your business will run.
- Compliance details. Stay in good graces by keeping up with annual franchise tax requirements and maintaining a keen eye on any changes in Texas business laws to ensure continuous compliance.
- EIN. Don’t forget to snag your Employer Identification Number (EIN) from the IRS. It’s like a social security number for your LLC, vital for filing taxes and managing employees.
Step 1: Decide on a business name for your Texas LLC
For example, you can't choose a business name already used by another business in Texas.
Additionally, Texas prohibits LLC names that include certain words that imply you're in a specific type of industry, such as 'bank.' And, you'll need to have 'LLC' or 'Liability Company' in your LLC's name so that people know your company is an LLC.
You can also search existing registrations to ensure that the business name you intend to register isn't already taken in your state. And if you're not ready to form your LLC yet, it is a good idea to reserve the name. Texas lets you do that for a small fee.
Generally, Texas requires the following:
- LLC name must be unique
- must include the phrase 'Limited Liability Company,' 'LLC,' or 'Ltd.' (or an acceptable variation)
- cannot include words or phrases that could make people think you're a government agency ('IRS,' 'FBI,' 'Police')
- cannot include certain words like 'Hospital' or 'Bank' unless you're chartered or authorized to operate a business in that industry.
Don't overthink this process. Remember that you can always change the name of your LLC at a later date. You don't need to operate your business using your registered legal name. You can create your LLC using one name but run the company using a fictitious trade name by filing a 'doing business as' (DBA) certificate.
Step 2: Designate a registered agent
Texas requires LLCs to have a registered agent.
You don't need to pay someone to be your registered agent. Anyone at least 18 years old can be a registered agent, and you can name yourself, a friend, or an employee as your registered agent.
However, the registered agent must be available at a physical address within your state during regular business hours. As a result, it's more common for people to designate an attorney, accountant, or company that specializes in providing registered agent services. Typically, you'll pay $100 to $300 annually for registered agent services, depending on your registration state.
A registered agent's job is simple: they receive official or legal documents sent to the LLC and send these documents to the appropriate person at the LLC. Typically, they scan your documents and send you electronic versions via email or online portal.
But while the job sounds simple, is rarely a good idea to appoint yourself as your LLC's registered agent.
Registered agent information is public and can be accessed online. So, if privacy is essential, don't appoint yourself as your LLC's registered agent.
And, because registered agents must be available during regular business hours, you be unable to close the office and take a vacation or leave (unless someone is available to receive service of official documents).
We highly recommend Northwest Registered Agent. One standout feature of Northwest’s Registered Agent Service is the option to use their office address during your LLC registration, allowing you to maintain privacy from public records.
Furthermore, they promptly scan and upload any mail addressed to your LLC to your online account.
Step 3: Prepare an LLC operating agreement
- Member and manager directives. Clearly defined rights, duties, and managerial permissions for LLC members and non-member managers.
- Management and membership protocols. Procedures for onboarding new members, exit strategies for departing ones, and hiring or termination of managers.
- Financial mechanisms Detailed allocation and distribution protocols for profits among members.
- Conflict resolution. Mechanisms on how and when profits are disbursed to members and strategies for conflict resolution and avoidance.
- Legality and modifications. Specifications on the LLC's legal boundaries, conditions for ending the LLC, and protocols for altering the operating agreement.
While the agreement hones the operational context, it simultaneously:
- Preserves the LLC's autonomy. It reinforces the LLC's separate legal standing, bolstering protections against personal liabilities and shielding members under various circumstances.
- Mitigates future contingencies. Having a predetermined action plan for unexpected scenarios, such as a member’s inability to manage the business or resolution of potential conflicts, ensures smoother sailings.
- Overrides default state provisions. Enabling your LLC to steer clear from stringent default state provisions, it provides the liberty to carve out its own governance norms.
Despite most states not requiring the filing of operating agreements with state entities, maintaining it as a private, internal document becomes indispensable. It meticulously orchestrates the rights, obligations, and protective mechanisms for the owners and members, weaving a secure safety net that minimizes disputes and furnishes a structured operational pathway for your LLC.
Always engage an attorney to review your operating agreement. This ensures all bases are covered, and your LLC is fortified against potential internal and external disputes.
How to complete the certificate of formation
Ensure you have the following details ready:
- LLC name. Your LLC’s full legal name, embellished with a proper designation like 'LLC' or 'Limited Liability Company.'
- Registered agent details. Your registered agent’s full name, physical address, and phone number, along with their written consent to serve in this role.
- Management structure. Declare whether your LLC will be member-managed or manager-managed. Provide the names and addresses of the managers - remember, it's public info, so a P.O. box is okay.
- Purpose of LLC. A succinct description of your LLC’s business activity. It can be general but should give a clear idea of your venture.
- Mailing address. Specify a mailing address if it's different from your main business address - this is where all the official correspondences will land.
- Supplemental provisions/information. Optionally, add any extra provisions instructed by your attorney; otherwise, feel free to skip.
- Duration. While LLCs in Texas exist perpetually by default, you can specify a different time span if needed.
- LLC organizer. Name the individual or entity orchestrating the LLC formation, ensuring all paperwork is in order and compliant with state regulations.
- Formation date. Specify the official inception date of your LLC - whether it’s immediate or a future date (no more than 90 days out).
- Execution. Put pen to paper and sign only after verifying every detail and ensuring your registered agent has given their consent.
Once your filing is submitted digitally (or is en route via snail mail), expect to have that approved Certificate of Formation from the state of Texas in about 10 to 12 business days (if filing online).
Texas Franchise Tax Fee
Most Texas LLCs must pay an annual state franchise tax. It's not just a suggestion - it’s a requirement. The specific details on how this tax is calculated are readily available on the official Texas Comptroller website.
When it’s time to file your paperwork, you have a couple of straightforward options:
- Online filing. Particularly important, if you’re submitting 'No tax due' forms, you'll need to file electronically. The state requires it.
- Postal mail, If you prefer, mailing your documents is also an option. Send them to P.O. Box 149348, Austin, Texas 78714-9348.
Step 5: Obtain an EIN
After establishing the LLC, you may need to get an employer identification number (EIN) from the IRS.
This is not required if you’re a sole owner and don't have employees. But you might want to get an EIN anyway to keep your personal and business taxes separate to be sure that you can quickly hire when the time comes to expand your business and open a bank account. The IRS has a helpful checklist to help you decide whether you will need an EIN to run your business. If you do need an EIN, you can register online for free.
Additionally, in each state where the LLC will be doing business, you must apply for a tax identification number and register with the state's Department of Labor.
Step 6: Open a business bank account
You are not required to have an LLC business bank account. But it would be best to separate business finances from your personal finances.
Remember that your LLC can protect your personal assets if someone sues the LLC or it goes bankrupt. But you have this protection only if you strictly keep your personal and business finances separate. Otherwise, a creditor can sue you and attempt to 'pierce the corporate veil.' An LLC is not a corporation, but this legal maneuver is still called 'piercing the corporate veil' when asserted against an LLC).
Business bank accounts typically offer other benefits unavailable in a personal bank account. For example, banks that provide merchant services allowing you to accept credit card payments offer purchase protection for your customers and ensure that their personal information is secure.
Finally, a business bank account helps you make large purchases and establishes a credit history for your business.
Here are a few other reasons why you should consider opening a business bank account:
- It makes business accounting easier. You must keep detailed financial records about your business expenses and income.
- It makes it easier to get credit for your LLC. Many banks offer a line of credit, allowing you to take out loans as needed. You can use such loans if there's an emergency or you need to buy new equipment or launch a new product or service line.
- You can prove to the IRS that you're running a business. Otherwise, the IRS might claim it’s a hobby and not an actual company (limiting your tax deductions).
- It makes you look more professional. People want to deal with legitimate businesses. By creating a business bank account, you'll also create an outstanding level of trust with your customers and prospects. Customers can pay with credit cards and write checks to your business instead of directly to you.
For more details about business bank accounts, look at our comprehensive how to start a business guide.