From the buzzing tech scene in Austin to the money-minting oilfields in Midland, Texas has a massive economy that offers plenty of opportunity–and competition.
No wonder many entrepreneurs see it as a great place to start an LLC and lay the foundation of their business.
Setting up an LLC in Texas is as straightforward as it comes. You just need to meet the unique requirements of the state.
To help you avoid any missteps, here’s our step-by-step guide to successfully form a Texas LLC.
The Easy Parts of Starting an LLC in Texas
LLCs are a simple and affordable way to protect your personal assets and save money. And when you start an LLC in Texas, these benefits are amplified.
One of the most important reasons business owners like an LLC is that it shields them from personal liability for the business’s debts, including debts resulting from lawsuits. That stands in stark contrast to the unlimited liability facing sole proprietors and partners in a general partnership.
There are other financial benefits, too. Registration costs in Texas are quite inexpensive at $300. Owners are also exempt from paying an annual Texas LLC registration fee.
Flexible tax payment is another advantage.
An LLC has choices as to how it will be taxed. A company with only one member will be taxed as a sole proprietorship unless it elects to be taxed as a C-Corp or an S-Corp. For an LLC with two or more members, they will be taxed as a partnership, unless it elects to be taxed as a C-Corp or an S-Corp.
There are also minimal formalities required under Texas law. LLCs don’t have to hold annual meetings or keep detailed minutes.
As there is no shortage of entrepreneurial spirit in Texas, there are many LLC services offering assistance in the state. Incfile, for example, completely takes over the formation and registration process, as well as assigns a registered agent to your LLC to meet state requirements.
The Difficult Parts of Starting an LLC in Texas
Texas has two types of business taxes for an LLC: sales tax and the Texas franchise tax.
While all businesses are subject to sales tax, sole proprietorships and general partnerships, where the partners are all natural persons, are exempt from paying the franchise tax. This adds to the business owners’ financial burden.
You may face difficulty raising capital too.
Unlike a corporation, LLCs cannot issue shares of stock to raise capital. Any new investor will have to become a member of the LLC, which is a complicated process. What’s more, outside investors tend to favor corporations over LLCs as they consider the latter risky.
Also, the federal self-employment tax for a Texas LLC is the same for LLCs in another state. It’s the same for businesses operated as a sole proprietorship, general partnership, LP, LLP, or S-Corp. Unless an LLC elects to be taxed as a C-Corp, all company profits are passed through to the members, who’ll have to pay self-employment tax on their share of the profits even if they don’t actually receive a share of the profits.
Now, let’s take a detailed look at how to start an LLC in Texas.
Step 1: Name Your Texas LLC
Before all the paperwork, you have to make a fundamental decision: what should you name your latest venture?
Considering your company name is your brand identity, you should pick a name after careful consideration.
Follow Texas Naming Requirements
You can opt for something witty or more straightforward—whatever you like—provided it complies with Texas naming requirements and is easily searchable by potential clients.
- LLC name must include the phrase “limited liability company,“ or its abbreviations (LLC, L.L.C., Ltd.)
- LLC name shouldn’t include words that could confuse the public with a government agency (FBI, State Department, Treasury)
- You have to file additional paperwork and have a licensed individual, such as a doctor or lawyer, join your LLC if you use restricted words (Bank, Attorney, University)
- Follow all of Texas Secretary of State’s guidelines
All of the above regulations are crucial and must be followed if you want to stay on the right side of the law.
Check Name Availability
Using a name that is already taken by other Texas businesses may get you penalized. It’s why you must check name availability before proceeding.
Do a quick search on the Texas Comptroller of Public Accounts website. If the name is available, you’re good to go.
Check URL Availability
Your customers will want to visit your website before buying any product or service.
Check if your chosen business name is available as a web domain. Do this even if you don’t want to create a business website right away. If it’s available, I highly recommend buying it to prevent others from acquiring it.
Step 2: Appoint a Registered Agent in Texas
If you’re new to the business world, you may not be aware of the term “registered agent.“ But if you want to start an LLC in Texas, you need to appoint a registered agent.
A registered agent is either a state resident or business entity who receives official correspondence and is responsible for filing reports with the Texas Secretary of State. You, or anyone else in your company, can also serve as the registered agent for your LLC.
The registered agent must have a street address in Texas. In case they’re based out of state, they can have a business office set up in Texas.
Get Written Consent From Registered Agent
Your chosen registered agent must consent to appointment in written or electronic form. The statement of consent should include the following details:
- The name of your LLC
- An express statement confirming the person designated consents to serve as the LLC’s registered agent
- The name of the person designated as registered agent
- The signature of the registered agent
- The date of execution
You don’t have to file the statement of consent with the secretary of state. You can view the Acceptance of Consent form 401-A for more information.
Hire a Registered Agent Service
As someone who has launched many LLCs, I highly recommend using a registered agent service.
Even better if you enlist an LLC service that can take over the LLC formation and registration process, as well as provide registered agent assistance. What’s more, you get a good bang for your buck since most LLC services have very affordable packages, with some even offering free registered agent services for the first year.
Step 3: File a Certificate of Formation
The Certificate of Formation is the most important form in the whole process. As soon as this form is processed and approved, your LLC will become official.
Its purpose is to provide the Texas Secretary of State with important information concerning your business, such as your business’s members, registered agent, and its general purpose.
Let’s take a look at how to draft and file your Certificate of Formation.
Prepare Your Certificate of Formation
The Certificate of Formation for your LLC should include the following information:
- The LLC‘s name, including the chosen LLC designation
- The name and address of the LLC’s registered agent
- Mention whether the LLC will be member-managed or manager-managed
- Depending on whether its member-managed or manager-managed, the name and address of each member or manager
- General purpose clause
- The name and address of the LLC’s organizer
- The effective date of the certificate
- Signature of the organizer
Decide How to File the Certificate
You can file your Certificate of Formation either online, by mail, or in person.
To register your Texas LLC online, you’ll have to file Form 205 – Certificate of Formation with the Texas Secretary of State. On the other hand, if you want to send it by mail, you’ll have to download the form and mail it to the Secretary of State at the following address:
Secretary of State
P.O. Box 13697
Austin, TX 78711-3697
If you choose to submit in person, the address will change. You’ll have to submit the certificate here instead:
James Earl Rudder Office Building
Austin, TX 78701
Keep in mind you have to pay a $300 filing fee too. While you only have to file your Certificate of Formation in Texas once, you’ll have to report and pay Texas franchise tax (if applicable) and file a public information report every year after. Make sure you find out whether the franchise tax applies to your business, and if it is, set reminders so you don’t miss filing it.
Step 4: Create an Operating Agreement
An operating agreement isn’t mandatory in Texas, but it’s highly advisable.
It’s an internal document that outlines how your company will be run and managed and the rights and responsibilities of every member and manager. Moreover, it can help preserve your limited liability by verifying your LLC is truly a separate business identity.
In case your company doesn’t have an operating agreement in place, state LLC laws will govern how it operates. The document isn’t filed with the state.
Draft the Operating Statement
The operating agreement is a straightforward document and should contain the following information:
- The products and services offered by the company
- Every member‘s name and address (and even the managers, if there is one)
- Members’ financial contributions or percentage interest in the company
- Every member’s rights and responsibilities
- Every member’s voting powers
- How profits and losses will be allocated
- Rules for holding meetings and taking votes
- Procedure for admitting new members
- Buyout or buy-sell provisions that outline what happens when a member wants to sell their interest, dies, or becomes disabled
- Dissolution procedure
After drafting your operating agreement, store it along with other important business documents. If you decide to hire an LLC service, you can enlist its help with your operating agreement. Most of them offer business formation packages that include a customizable operating agreement in addition to registered agent services.
Step 5: Fulfill Other Legal Obligations
After an LLC is registered, all members should focus their attention on fulfilling applicable legal requirements for the duration of the company’s existence. I’ve discussed them in more detail below.
Get an Employer Identification Number (EIN)
Once you start an LLC in Texas, you need a tax ID number, also known as an Employer Identification Number or EIN from the IRS.
Although obtaining an EIN isn’t compulsory for all businesses, it’s prudent for most new companies. An EIN is used to identify a business entity and keep track of its tax reporting.
Visit the official IRS website to apply for an EIN.
Register with the Texas Comptroller of Public Accounts
All Texas LLCs, including foreign LLCs, are required to register with the Texas Comptroller of Public Accounts to meet the various state tax obligations. In most cases, you can register with the Comptroller in person at the tax office, by mail, or online.
Get All Required Local Licenses
License requirements vary according to the county in Texas.
Contact your county clerk’s office to determine if you need any licenses or permits based on the nature of your business. For instance, if you plan on opening a restaurant, you’ll have to apply for the applicable licenses from the health department.
You can also contact the Texas Department of Licensing and Regulation for more information.