Fact checked for accuracy by Billie Anne Grigg, a bookkeeper and Mastery Level Certified Profit First Professional.
If you are looking to start a business in Texas, forming a limited liability company, or LLC, may be a great option. As the name suggests, the main advantage of forming an LLC is that it provides liability protection, which means your personal assets will be protected from any business lawsuits or debts. But how do you get started?
Forming an LLC in Texas is quite a simple process. In this article, you will find a step-by-step guide and additional advice on how long it takes to form the LLC, the costs involved, the tax filing requirements, and what tax structure you should choose.
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Step 1: Choose a Name For the LLC
The first step in forming an LLC in Texas is choosing a suitable and unique name for your business. The State of Texas has a list of guidelines to be followed when deciding on a name.
Here are the Texas naming guidelines:
- No matter what name you decide, it needs to have the following words: Limited Liability Company, LLC, L.L.C., Ltd., Limited, Company, or Co.
- Your chosen name must be 100% unique and not used by another company. You can check if your desired name is still available for use with the Taxable Entity Search on the Texas Comptroller of Public Account’s website.
- Your chosen name cannot use words that might be confused with military or government institutions. For example, “CIA” or “FBI.”
- In the State of Texas, certain businesses may need additional permits for their name; this is usually for medical practitioners or lawyers.
For a full list of the naming guidelines in Texas, you can visit here.
If you have chosen a name but are not ready to file the Certificate of Formation yet (which is what officially forms your LLC), you do have the option of reserving the name for up to 120 days for a fee of $40. This can be done by completing and submitting Form 501. This can be done online through the Texas Secretary of State website or by mail.
Sometimes, some businesses like to trade under a different name than what is registered. This is known as a DBA (Doing Business As) or a fictitious name. In Texas, to use a DBA, you will need to register this name with the state for a fee of $25. To do this, you must complete and submit Form 503 online or by mail.
Step 2: Appoint a Registered Agent
Appointing a registered agent is a legal requirement under Texas law. A registered agent is someone who will be your direct line of contact with the state, a kind of middle-man. They will accept and manage all legal documents, mail, and general paperwork on behalf of your business. Your registered agent can either be an individual (even you) or belong to a company that offers registered agent services.
A registered agent must meet the following requirements:
- If an individual, they must have a physical address in Texas
- If a company, it must be authorized to do business in Texas
- They must have a physical street address in Texas, not a PO box
- They must be available every day and on-site during regular business hours
In the State of Texas, a registered agent must consent to the appointment in the form of a written statement. This can also be completed electronically.
A statement of consent will include the following:
- The name of the LLC
- A brief statement by the registered agent to say they consent to serve as the registered agent for the LLC
- The name of the designated registered agent
- The signature of the registered agent
- The date the statement was signed
While the statement does not need to be sent to the state, they have provided a readily-drawn consent form to use.
Step 3: File the Certificate of Formation
The Certificate of Formation, commonly known as Articles of Organization in other states, is what you will need to complete and submit to the State of Texas. This certificate is what will officially establish your LLC in Texas.
To do this, you must complete Form 205 and submit it for a non-refundable fee of $300. There are three methods you can choose from to submit your form:
- By mail
The Certificate of Formation will include the following:
- The name and address of the LLC
- The name and address of the registered agent
- The management structure
- A brief description of the business and services offered
- The name and address of the organizer of the LLC
- The date of the certificate – this is the date you completed the form
- The signature of the person organizing the LLC
Step 4: Create an Operating Agreement
Creating an operating agreement is not a legal requirement in Texas, but it is strongly recommended that you do. An operating agreement is a document that consists of all information about the business, the general day-to-running, and important legal information.
This agreement can be drawn up by a lawyer or the members of the LLC so long as everybody agrees with all points.
There are no hard and fast rules on what needs to go into an operating agreement, but it is a good idea to include the following information:
- The name and address of the LLC
- The name and address of the registered agent
- The signed consent of appointment by the registered agent
- A brief summary of what information was provided in the Certificate of Formation
- The general procedure of business, including the purpose of the business
- The names of all members and their roles in the business
- The management structure
- The procedure for hiring and firing employees
- How profits and losses are divided amongst all members
- Any liability clauses or legal guidelines
- The signatures of agreement from all members
Step 5: Obtain an EIN
An Employer Identification Number (EIN) is a nine-digit number issued by the Internal Revenue Service free of charge.
There are many reasons you will need an EIN:
- To manage taxes on both a federal and state level
- To hire employees
- To open a business bank account
You can apply for an EIN online or by mail.
Cost to Start an LLC in Texas
Starting an LLC in Texas comes with many costs. Reserving a name for 120 days will cost $40, and registering an additional fictional name will cost $25. The filing of the Certificate of Formation is a non-refundable $300. Because it is a legal requirement to hire a registered agent, you will also be looking at spending between $50 and $300 a year.
These are just the costs of starting an LLC; there may be additional costs further down the road.
What To Do After Forming Your LLC in Texas
After forming your LLC, you need to do a number of things to ensure that the business runs smoothly and legally.
Separate Personal and Business Assets
Opening a bank account for your LLC is a great way to separate your business and personal assets. Another advantage of doing this is that it makes it easier to file business taxes. Getting a business credit card is another step to keeping track of all of your business expenses as well.
Invest in Business Insurance
You should invest in good insurance for your business. At the very least, you should consider getting general liability insurance to protect you from legal troubles that may appear down the road.
Hire an Accountant
Taxes can get confusing for even the best of us. It is highly recommended to hire an accountant to help you through tax season and to help you handle everything money-related throughout the year as well. By hiring an accountant, you will have one less responsibility off your shoulders to focus on the bigger picture instead of worrying about paperwork and money. You can hire a third-party accounting service or put one on your payroll.
For any business in this day and age, it is important that you have an online presence. Most companies will have a website, which helps to establish their legitimacy. However, more and more businesses nowadays are focusing on social media. Having a social media presence can make a massive difference for your LLC.
How to Keep Your LLC Compliant in Texas
Forming your LLC is only the first part of owning an LLC. You need to also ensure that it remains compliant with the State of Texas.
To stay compliant, you should:
- File the Franchise Tax Report with the Texas Comptroller’s Office on time
- Manage and pay all taxes on time – this includes state or federal taxes
- Maintain your registered agent
- Ensure all permits are up to date and fees have been paid
- Remain knowledgeable about state regulations
- Operate your business as described in the Certificate of Formation
Tax Filing Requirements for LLCs in Texas
Managing taxes on time and correctly is an important aspect of owning an LLC in Texas. Unlike other states, Texas does not require LLCs to submit annual reports; instead, they are legally obligated to submit an annual Franchise Tax Report. This report must be filed on May 15th each year, starting one year after formation.
There are a couple of requirements for paying this tax:
Businesses with revenue below $1,130,000
These LLCs do not need to pay tax but must still file a tax note called a No Tax Due Report.
Businesses with revenue above $1,130,000:
These LLCs must pay a graduated tax and submit their tax note. The tax rate is calculated by a number of different and complex formulas.
These forms can be submitted online.
You must also collect and pay Sales Tax if your LLC sells physical products. To collect Sales Tax, you must apply for a seller’s permit. This can be done online free of charge.
Finally, employer taxes are the last tax filing requirement for LLCs in Texas. LLCs with employees must register and pay employer taxes, such as the Unemployment Insurance tax.
Frequently Asked Questions
How long does it take to register an LLC in Texas?
According to the Secretary of State’s website, the processing time for registering an LLC in Texas is generally 5-7 business days.
However, due to high demand in current times, registering your LLC can take as long as 13-15 business days if filed online. But if you file by mail, this can take up to 70-72 business days.
There is an expedited option available for mail filings. For an additional $25, your application can be processed and returned to you in 12-14 days.
What tax structure should I choose for an LLC in Texas?
Typically, all LLCs will be automatically treated as a pass-through entity. This means all tax requirements are passed onto the individual members of the LLC, besides the Franchise and Sales Tax (if applicable). In some cases, an LLC should be taxed as a corporation instead. However, consult a business attorney to know if that would be the right move for you.
Should you hire an LLC formation service in Texas?
Hiring an LLC formation service is entirely up to you and your personal business needs. While forming an LLC is not difficult, it requires a lot of paperwork and good organizational skills. If you are not someone great with admin or prefer to focus on other aspects of forming a new business, then hiring a formation service could be a great idea.
Filed under: Texas Business Guides