How to form your LLC in Texas?
Texas has often been ranked as one of the best states for starting a new business and has held this ranking since 1996. The primary reason behind this favorable ranking is the welcoming business climate, which has been heightened by a talented workforce and a state-of-the-art infrastructure. These factors make it a highly favorable destination for a startup. You can form a Texas LLC, which is a type of business structure where owners are not personally liable for any type of debts or liabilities of the company. We have created this guide to help you understand the benefits of a limited liability company and how to file LLC in Texas, preparing operating agreements, local licenses and permits, and obtaining EIN among others.
LLC in Texas
Texas as a state and Austin as a city defies stereotypes thanks to the pro-business environment that is not only progressive for entrepreneurs but fiercely competitive. You can form a Texas LLC in a state that is home to some of the top fortune 500 companies including Oracle, Texas Instruments, Dell Technologies, McKesson, Phillips 66, ExxonMobil, AT&T, Valero Energy, Sysco, and Hewlett Packard Enterprise among others. As a startup or new business, you will be able to leverage the innovation platform, deep talent pool, and a robust industrial infrastructure. If you are planning to go the “startup way” then you can file an LLC in Texas, meet compliances, obtain licenses and permits, and make the business operational.
What is Texas LLC?
A Texas Limited Liability Company is a type of business structure where the owners also known as members will not be personally liable for any liabilities or debts that the company may incur. If you are thinking of filing a Texas LLC application then it is important to understand that a limited liability company is a hybrid entity, which combines the characteristics of a sole proprietorship or partnership with that of a corporation. If you want a single-member LLC then you can start as a sole proprietorship firm. Alternatively, you can opt for a multi-member limited liability company. One of the major differences in Texas LLC filing requirements for either type of structures is the registration process. A single-member LLC or sole proprietorship is not required to file any registration documents with the state while a multi-member LLC has to file a “Certificate of Formation”.
Benefits of forming an LLC in Texas
A Texas Limited Liability Company is one of the most popular forms of business because of the many advantages it offers. The key benefits are:
- When you form a Texas LLC, one of the top benefits is limited liability protection, which ensures owners and members are not held personally liable for any debt or loss, the business suffers. In other words, it means personal assets like houses, vehicles, and bank accounts will be protected.
- A limited liability company will be subjected to pass-through taxation by default and hence the tax status will be similar to that of a sole proprietorship or a partnership entity.
- If you file an LLC in Texas you can also opt to be taxed as an S corporation and such a move can help reduce self-employment taxes and thus lower the overall tax burden.
- A limited-liability company is easy to form in Texas with less amount of paperwork as compared to some of the other states. You can opt for Texas LLC filing online or offline.
- Since, an LLC is a recognized formal business structure vis à vis sole proprietorships, it brings forth higher credibility.
- You will be able to enjoy flexibility in terms of structuring the ownership as well as management of a Texas limited liability company.
- Once you file an LLC in Texas, you will be able to apply for business incentive programs administered by the office of the Texas Governor, Texas Economic Development
Forming an LLC in Texas
Texas is a pro-business state that provides robust infrastructure, foreign trade zones, and business incentive programs for startups. If you are thinking of filing a Texas LLC application, what is the process and what Texas LLC filing requirements do you need to fulfill? There are several steps involved towards helping a startup become completely operational in the state. Let’s take a walk through the important aspects of the Texas LLC formation process.
1. Choose Texas LLC name
Choosing a business name is one of the first steps towards new business formation. The business name is a mandatory requirement of a Texas LLC application and is governed by Texas Administrative Code, Title 1 – Administration, Part 4 – Office of the Secretary Of State, Chapter 79 – Business Entity Filings, Subchapter C – Entity Names. There are certain guidelines; you are required to follow when choosing a business name like:
- The chosen name should include the phrase “limited liability company” or any abbreviations like LLC or L.L.C and is an important part of Texas LLC filing requirements.
- The chosen name should be distinguishable from any other name in the records of the Texas Secretary of State pursuant to 1 TX Admin Code § 79.38.
- The chosen name should not falsely imply any governmental affiliation pursuant to 1 TX Admin Code § 79.33
- Certain words are prohibited or restricted and cannot be used pursuant to 1 TX Admin Code § 79.34.
Once you have identified a business name, you need to conduct a Texas LLC search or name availability search. If your chosen name is available then you will be required to submit a form – Application for Reservation or Renewal of Reservation of an Entity Name. It can be reserved for a period of 120 days.
2. Choose Texas LLC registered agent
If you are planning to form a Texas LLC then one of the important requirements is that of a registered agent. In fact, it is mandatory for domestic and foreign LLCs or any business entity to hire and maintain a Texas LLC registered agent in the state pursuant to TX Bus Orgs § 5.201 (2019). A registered agent in Texas is someone who will accept any notice, process, or demand that has to be served to the business entity. IncParadise is one of the most reputable registered agents in the state offering a wide range of business services. We can also be your Texas LLC registered agent.
3. File certificate of formation with Texas SOS
In order to conduct business in the state of Texas, you will need to file a Texas LLC application with the office of the Secretary of state. This application is known as the Certificate of Formation for a Limited Liability Company pursuant to TX Bus Orgs § 101.0515 (2019). You have to file LLC in Texas along with a filing fee of $300. You can mail the certificate of formation form or have it delivered to James Earl Rudder Office Building, 1019 Brazos, Austin, Texas 78701. We at IncParadise can assist you with the process of filing for a Texas LLC.
4. Prepare Texas LLC operating agreement
Texas LLC filing online makes the process of new business formation easier but sometimes, it is necessary to have an operating agreement as well. It is not a mandatory Texas LLC filing requirement but it can help your business in the long run. An operating agreement helps in structuring your financial and working relationships with other owners or members in such a way that it is best suited for the business. It is important to note that if you have an operating agreement then it will help in protecting your limited liability status.
If you form a Texas LLC then the operating agreement should contain the following elements:
- All formation details of your Texas LLC
- The name and address of your chosen Texas LLC registered agent
- The terms of the limited liability company
- The purpose of your business
- The names of all members and managers
- The location of your business
- The process by which you admit or nominate new owners or members
- The percentage of membership interests allotted to each of the members and proposed method of valuation
- The process by which any member of the said LLC can exit
5. Obtain EIN for Texas LLC
An Employer Identification Number or EIN is also known as a Federal Employer Identification Number (FEIN). It is a unique 9 digit tax ID number that is assigned by the Internal Revenue Service (IRS) to businesses. It is primarily used for reporting employment taxes and most forms of businesses including a Texas LLC would require this number. If you form a Texas LLC with multiple members then you will be required to apply for and obtain the Employer Identification Number. You can apply for an EIN after you file for LLC in Texas or before applying for a certificate of formation.
6. File Franchise tax report and Public information report (PIR) every year
You can form different types of businesses in Texas but if you plan to form a Texas LLC then you will have to comply with annual state filings. Every entity that has a franchise tax responsibility will be required to file the Public Information Report (PIR) including a limited-liability company. The due date of the PIR coincides with the due date of the franchise tax report and they are both key to Texas LLC filing requirements. It is important to note that even if you file your franchise tax report and ensure payment of all applicable taxes, you may still lose the right to transact business in Texas if you fail to file the Public Information Report.
7. Check local licenses and permits
Once you have filed your Texas LLC application for formation, you will need to apply for business licenses or permits in the state. The type of license required is dependent on the type of business activity and a Texas LLC may require a single or multiple licenses or permits or both. Although, it is not a part of the initial Texas LLC filing requirements; without a business license, you will not be able to conduct business within the state. Business licenses or permits can be classified as under:
- Licenses or permits issued by Government Agencies or Regulatory bodies like the Texas Alcoholic Beverage Commission or Department of State Health Services
- Licenses or permits issued by cities or counties like the Houston Permitting center are responsible for issuance of the majority of licenses and permits and are governed by the City of Houston Code of Ordinances.
Hence, it is important to check for license requirements at the state and city or local county level. You can also avail of the IncParadise Business License Research Report service as it provides detailed information on licenses and permits in Texas.
8. Open Texas LLC bank account
One of the first things to consider before or after you form a Texas LLC is opening a bank account. Yes, even if you have a personal banking account, you will need a business account so that your business and personal transactions don’t get mixed. It will not only be easier to track purchases or gains but also help you to manage your business finances efficiently.
When you file an LLC in Texas, a business bank account will provide the following benefits:
- Help maintain accurate bookkeeping
- Increases business credibility and professionalism
- Creates a clear auditing path for the IRS
9. Comply with taxes and other regulations
Texas, as compared to some of the other states, has low taxes including the fact that there is no personal income tax. Yet, when a Texas LLC application has been filed, and a business formed; you will be required to ensure compliance with taxes and other state regulations. The most distinctive tax in the state is the franchise tax and it is applicable for all businesses transacting in the state.
A limited liability company is a pass-through entity and hence the taxes will be passed on to the owners, hence you will have to file personal income tax instead of business income tax on the gains. If you file an LLC in Texas then there are several other forms of taxes that may or may not be applicable to your business like the Texas’s Unemployment tax, employment taxes, and sales and use tax among others.
Are you ready to form an LLC in Texas?
Know more about forming a Texas LLC
If you are planning to form a Texas LLC, there may be many questions that you will be confronted with. Questions may arise pertaining to LLC names, state information, startup costs, taxes, and much more. Hence, we have created this section of “Frequently Asked Questions” for addressing some of the most common queries that small businesses and entrepreneurs have pertaining to new business formation.
Is Texas a good state to form an LLC?
Texas has been consistently ranked as one of the states with the most favorable business climate due to its low tax burden as well as a competitive regulatory environment. The state has corporate real estate opportunities for businesses having plans for long-term expansion. A deep talent pool, business incentive programs, robust infrastructure, and trade zones make up for an excellent business climate.
How do I know if my Texas LLC name is available?
If you have identified a name for your LLC and it is in compliance with the state laws then you can conduct a Texas LLC search or a Taxable Entity Search through Texas Comptroller of Public Accounts. If your chosen name is available then it will not show up in the search. Alternatively, you can also call the office of the Texas Secretary of State at (512) 463-5555 or even email them at firstname.lastname@example.org to avail of their preliminary name availability screening service.
How much does an LLC cost in Texas?
If you file an LLC in Texas then there are one-time costs like the registration of LLC ($300). There are also recurring yearly or annual costs like the cost of a business license. There are other costs like reserving a business name ($40).
Do I need a business license for my Texas LLC?
The requirement of a business license is dependent on the type of business activity you undertake. Business licenses issued by state agencies and well as those issued by the office of the county clerk. You can obtain your Texas licensing requirements by applying for our Business License Research Report service.
Can I set up a single member LLC in Texas?
Like many other states, Texas also allows you to form a Texas LLC – single member. Single member LLCs are quite common in the state and are considered as a disregarded entity, which means they will be taxed in the same way as a sole proprietorship is.
What taxes does an LLC pay in Texas?
An LLC in Texas will not pay any federal income tax since they are a pass through entity. The state imposes a franchise tax for LLC’s and it is payable to the Texas Comptroller of Public Accounts (CPA). If your LLC has employees then you will be required to file employer taxes. If you are selling goods to Texas customers then you will have to register with the Comptroller of Public Accounts so that periodic sales tax payments can be made on goods sold.
Can I register a foreign LLC in Texas?
You can transact business in the state of Texas as a foreign entity but you will need to register under chapter 9 of the Texas Business Organizations Code (BOC). You will need to undergo foreign qualification and register your business using the Application for Registration of a Foreign Limited Liability Company (Form-304). The filing fee for foreign registration is $750.
How do I dissolve my Texas LLC?
You can dissolve your Texas LLC by filing the “Certificate of Termination of a Domestic Entity” with the office of the Secretary of State. The filing fee is $40 and you can file the termination online. You will have to attach a “Certificate of Account Status for Dissolution/Termination” issued by the Texas Comptroller along with your termination filing documents.
If you feel that your query has not been answered above then you can contact us for information and guidance on Texas LLC formation. We have a team of experts well-versed with different aspects of Texas LLC filing requirements, Texas LLC Laws, and documentation.
Ready to form a Texas LLC?
There are several types of business structures but if you are planning to form a Texas LLC then it is one of the best forms of entity to choose. The process of LLC formation can require extensive documentation and information and IncParadise can assist you with the same. IncParadise is one of the top Texas LLC registered agents and we have helped thousands of companies start their own businesses in Texas.
We also offer a wide variety of additional services like foreign qualification, EIN assistance, and certificate of good standing in Texas among others.