Are you wondering how to start an LLC in Texas? With over 3 million small businesses in the state, entrepreneurs are seeking guidance on establishing limited liability companies.
Creating an LLC in Texas is ideal for starting or formalizing a business. While it offers significant advantages, it’s important to understand its drawbacks and the necessary setup requirements.
This guide lists all the essential steps to start your Texas LLC.
The process involves these key steps:
- Selecting an LLC name
- Designating a registered agent
- Filing the certificate of formation
- Crafting your operating agreement
- Acquiring an employer identification number (EIN)
Texas LLC Filing Requirements
Before filing your LLC in Texas, understanding the specific requirements is essential.
Texas LLC requirements include:
- Incorporating “LLC” in the name: Texas mandates including “Limited Liability Company” or “Limited Company” in the name, with options to abbreviate as “L.L.C.,” “L.C.,” or “Ltd. Co.” Variations like “Ltd.” for “Limited” and “Co.” for “Company” are acceptable.
- Name requirement: Your LLC name must be distinguishable from existing business entities in Texas. Use the Texas Taxable Entity search engine to check name availability. If available, reserve it for up to 120 days via Form 501 for a $40 fee.
- Mandatory registered agent: Texas LLCs must have a registered agent, either an individual Texan or a registered agent service authorized to operate in the state. The agent must have a physical state address, not a P.O. box, and can’t be the LLC itself. A reliable agent typically costs $100 to $300 annually. Research thoroughly to ensure their service meets your needs.
5 Steps on How to Start an LLC in Texas
Starting a Texas LLC requires specific steps to comply with state and federal regulations. This guide will walk you through these crucial steps to properly establish your LLC in Texas.
Step 1: Select A Name For Your Texas LLC
When starting an LLC in Texas, the initial step involves selecting an appropriate name for your business. Similar to how incorporated companies use “Inc.,” a Texas LLC must follow specific rules. The name should contain terms like “Limited Liability Company,” “L.L.C.,” “LLC,” “Limited Company,” “Ltd. Co.,” or “Limited Liability Co.” to comply with state regulations.
The Texas Code requires that your LLC name include “limited” and “company ” variations.” Using only one of these terms, such as “XYZ Limited” or “XYZ Co.,” doesn’t meet the requirement.
Moreover, Texas state law offers further naming guidelines:
- The name must be unique and easily distinguishable from other state businesses. Simply having a different designation like “XYZ Ltd. Co.” isn’t adequate if it’s too similar to an existing “XYZ LLC.”
- Avoid names that might mislead people into believing your LLC is a government entity. Avoid terms like “Treasury” or “State Department”.
- Certain words, such as “Bank,” “Trust,” “Olympic,” “College,” “University,” “Veteran,” and others, require permission for use unless authorized by the relevant governing committee.
Your LLC name should also align with additional Texas Secretary of State naming criteria. Use the Business Name Search tool on the Comptroller of Public Accounts website to check if your chosen name is already in use by another business entity.
Consider a Domain Name for Your Texas LLC
Considering an online presence for your business is beneficial. You can provide a website and associated email address for your LLC, which boosts your online visibility and aids potential customers in finding you.
Choose a domain name similar to your LLC’s name. Purchase your domain from a domain registrar, which manages internet domain names. Numerous top domain registrars offer domain name purchase options.
Step 2: Appoint a Registered Agent for Texas LLC
When learning how to start an LLC in Texas, the second step is to appoint a registered agent. Every Texas LLC needs a registered agent who receives legal documents, like tax documents or lawsuit notices. The agent must maintain a physical Texas address and be available during business hours to accept service in person or by mail.
The agent can be:
- A Texas resident over 18
- A company authorized to do business in the state
You have options when appointing an agent:
- DIY: You or another LLC member can be the agent or hire a registered agent service.
- Using an LLC service: Some services offer a registered agent as part of their formation package.
- Hiring an attorney: Ask if they can act as your agent.
Ensure the chosen person or service consents to being your LLC’s registered agent. Although the consent doesn’t need filing, keep a copy of your business records. Texas Form 401-A outlines the required details for consent, including:
- LLC name (“represented entity”)
- Confirmation of the designated person’s consent to serve as the LLC’s registered agent
- Name of the designated registered agent
- Signature of the registered agent
- Date of execution (signatures by all parties)
Step 3: Filing the Certificate of Formation for Your Texas LLC
The Certificate of Formation, equivalent to “Articles of Organization” in other states, outlines your Texas LLC’s structure and management. Although you can establish your LLC with one or more individuals, only one organizer must file the formation paperwork.
The Texas Certificate of Formation requires various LLC details:
- Entity type and name
- Registered agent and office
- Governing authority (member-managed or manager-managed)
- Business purpose
- Initial mailing address
- Additional provisions/info
- Organizer’s name, address, and signature
Forms and Fees for Texas LLC Filing
Here are the essential forms and filing fees for your LLC.
- Form 205: The “Certificate of Formation—Limited Liability Company” is vital for starting your LLC. You can download the form, complete it online through SOSDirect, or file it offline. The filing fee is $300.
- Form 304: LLCs outside Texas seeking operation in the state must submit the “Application for Registration of a Foreign Limited Liability Company” and pay a $750 filing fee. Download the form here.
Physical forms in duplicate should be mailed to P.O. Box 13697, Austin, Texas 78711-3697.
Additional expenses, including taxes, filing fees, or a registered agent, can range from $100 to $1,000. While Texas LLCs don’t file annual reports or pay reporting fees, they are subject to a state franchise tax.
How To Complete Your LLC Certificate of Formation
For accurate completion of the Certificate of Formation for your LLC, prepare the following details:
- LLC Name: Provide the full legal name with appropriate designations like “LLC” or “Limited Liability Company.”
- Registered Agent: Include the appointed registered agent’s contact details and written consent.
- Management Structure: Specify if it’s member-managed or manager-managed, with relevant names and addresses.
- Purpose: Briefly describe the LLC’s business activity.
- Mailing Address: Offer an alternate mailing address if different from the principal place of business.
- Additional Provisions: Optionally include specific provisions or leave this section blank.
- Duration: Indicate if the LLC operates for a specific period.
- LLC Organizer: Name the individual or entity responsible for initiating and filing the LLC documents.
- Formation Date: Mention the official or future date of LLC establishment within 90 days of signing.
- Execution: Review and sign the form, confirming accuracy and the registered agent’s consent.
After filing, expect the approved Certificate of Formation within 10 to 12 business days when filing online.
What if I Need To Amend My Certificate of Formation?
The initial filing is a one-time requirement, but updates or modifications require filing a Certificate of Amendment with the state. This process involves updating information or expanding details by filing the amendment with the Texas Secretary of State and paying the associated fee.
Keeping the Certificate of Formation current is crucial for obtaining a Certificate of Fact-Status, proving the company’s ability to conduct business in Texas. Non-compliance might limit your LLC’s potential.
Step 4: Create Your Texas LLC Operating Agreement
In Texas, although not mandatory, crafting an operating agreement is highly recommended for a well-structured LLC. This internal document outlines operational procedures and ownership within the business, ensuring alignment among stakeholders on crucial business aspects.
An operating agreement serves several essential functions:
- Establishes financial practices and defines liability agreements between the LLC and its members.
- Governs the LLC’s operation, shaping business practices instead of relying on default state laws, potentially benefiting the business and its members.
- Facilitates conflict resolution by outlining procedures for handling disagreements among members.
Critical Elements of an Operating Agreement:
A Texas LLC operating agreement isn’t legally mandatory or filed with the state. Yet, having one is highly recommended to establish business policies and procedures. A comprehensive agreement should cover these essential elements:
- Organization: Identifies all LLC members and specifies ownership distribution.
- Management: Defines whether the LLC is member-managed or manager-managed.
- Contributions and Distributions: Specifies member investments and outlines profit/loss distribution.
- Structural Changes: Outlines procedures for altering the LLC’s structure, like member withdrawals.
- Dissolution: Sets procedures for ending the LLC’s operations and filing a Certificate of Termination (Form 651) if needed.
Step 5: Obtain Your LLC Employer Identification Number
The IRS provides your LLC with an employer identification number (EIN) used primarily for tax purposes, but it holds various other benefits. While mandatory for LLCs with multiple members, even single-member LLCs may benefit from obtaining an EIN for certain businesses, including:
- Opening a business bank account,
- Acquiring a business line of credit,
- Applying for specific permit
- Establishing contracts with wholesale vendors
Even if you don’t foresee needing those activities, getting an EIN reduces your risk of identity theft. Without an EIN, you’ll use your Social Security number for business applications, potentially exposing personal information to theft when sharing it with clients.
After LLC Formation: What’s Next?
After forming your Texas LLC, prioritize these tasks for smooth business operation:
- Bank account: Utilize the EIN to open a dedicated business account, ensuring a clear separation between personal and business finances.
- Permits and licenses: Verify local requirements for essential permits or licenses. Some industries might need federal or state permits for legal operation.
- Insurance: Consult an agent to determine necessary coverage, including general liability or workers’ compensation insurance, crucial for business protection.
- Annual report: File the Texas yearly report with the state comptroller’s office to maintain compliance.
Pros and Cons of a Texas LLC
Like any business setup, there are advantages and disadvantages to evaluate before creating an LLC. Let’s explore a few of these pros and cons.
Pros:
- Limited liability protection shields owners’ personal assets from the company’s debts.
- It can have a single or multiple members with easy profit distribution.
- It can enhance credibility and a professional business image.
- Ease of transfer and minimal paperwork for ownership changes.
- Allows income to pass through to personal tax filing as a corporation.
Cons:
- Requires paperwork and administrative tasks like filing, creating agreements, and record-keeping.
- It involves various fees—state, legal, annual, etc.
- Subject to self-employment taxes on business-generated income.
- Personal liability is possible for debts, legal actions, or improper separation of personal and business activities.
- The inability to issue stock may limit capital-raising opportunities compared to corporations.
LLC State Guides
Starting an LLC in Texas FAQs
An LLC in Texas, or “limited liability company,” is a hybrid business entity that combines liability protection from corporations with the tax flexibility of sole proprietorships or partnerships. It offers pass-through taxation like a corporation without demanding strict corporate formalities.
Texas LLCs with multiple members must acquire an Employer Identification Number (EIN) as federal law mandates.
As of January 1, 2022, new Texas businesses that are 100% veteran-owned can register for free, avoiding the usual $300 filing fee. Additionally, these businesses are exempt from franchise tax for their initial five years.
To change a Texas LLC’s name, file a certificate of amendment with the Secretary of State and ensure the new name is available before submission, just like when filing the original name.
Ownership changes for a Texas LLC don’t require a separate filing. Instead, note the new members and managers in your annual Public Information Report, submitted during your franchise tax filing with the state comptroller’s office.
Forming your LLC involves a $300 filing fee for the Certificate of Formation. Additionally, to maintain compliance with state regulations, you must file the Franchise Tax Report annually by May 15, with the amount varying.
Online submissions for your LLC’s certificate of formation can take five to seven business days, while mail or in-person filings may take up to 22 days. Texas also provides expedited processing for an extra $25 fee.
