Are you looking to form a limited liability company (LLC) in Texas, but you’re not sure how the process works? There are several important steps to create a compliant Texas LLC that can do business in the state.
To get started, please reference our 6-step guide below or hire an affordable online LLC formation service.
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What is a Texas LLC?
The Texas LLC is one of the most popular business structures in the state. It’s a more casual and flexible type of business than a corporation, but includes the personal asset protection that’s lacking from sole proprietorships and general partnerships.
LLCs in Texas have simple formation and maintenance requirements, several options for how they can be taxed, and flexible management. From one-person businesses to multi-member LLCs with several owners, the LLC is a popular choice for a reason.
Setting up a brand-new Texas LLC in 6 Steps
For the first part of this guide, we’ll cover the 6 essential steps to setting up a Texas business that doesn’t have employees yet. These steps also apply to businesses with employees, but we’re keeping things streamlined to start. If you do have employees, make sure you complete these steps and the steps for employers (which we’ll cover later in the guide).
Step One: Choose a business name
Your LLC’s name is often the first impression you get to make on potential customers, and therefore it goes without saying that this is an important step. There are a few different aspects to consider when naming your business.
In the state of Texas, you’re required by law to meet several requirements for your business name. Here’s a quick glimpse at the rules for LLCs:
- Your name must include an appropriate entity type identifier, such as “LLC” or “limited liability company”
- Your name must be written in Roman numerals, Arabic numerals, or the characters included on a standard English keyboard
- Your name cannot falsely imply a different purpose or government affiliation
- Your name may not include specific restricted words (unless you have appropriate approval to do so) or grossly offensive language
- Foreign language words are not translated to determine availability; a business name in Spanish and one in English with the same literal meaning are regarded as unique as long as they are expressed in their respective languages
- Your name must be “distinguishable,” or distinct from the names of other entities in the state
For more information on naming rules in Texas, please consult the Entity Names Subchapter of the Texas Administrative Code.
Another aspect to consider is including language that explains what your business does ― for example, if you’re starting a coffee shop, put the word “coffee” or “brew” in your LLC name. Additionally, if your business has strong values like being environmentally friendly, you can indicate that by including the word “green.” This helps potential customers know exactly what to expect from your business.
Once you’ve picked the perfect name for your business, you don’t want to lose it to another aspiring entrepreneur. Thankfully, Texas allows you to reserve your business name if you’re not quite ready to register your business. To do that, you’ll need to file the Application for Reservation or Renewal of Reservation of an Entity Name along with a $40 fee.
Filing this reservation protects your chosen name for 120 days. You can learn more about name reservations here.
Step Two: Appoint a Registered Agent
Every LLC in Texas is required to designate a registered agent, which is the individual or registered agent service that receives government correspondence on behalf of your business, then forwards those documents to you.
When you appoint a Texas registered agent, here are the state requirements to be mindful of:
- Every entity that registers with the Secretary of State (both domestic and foreign) must appoint a registered agent
- The agent must be an individual resident of the state OR a third-party business entity with authority to operate in Texas
- The individual or entity must sign a written consent to their appointment
- An agent must be continuously maintained
You can find a full rundown of the state laws here.
Without a registered agent, you could lose your good standing with the state of Texas, and the state also has the right to dissolve your LLC if they decide to. In a worst-case scenario, you could miss the alert regarding a lawsuit against your company, which could even lead to a judgment against your business because you didn’t defend yourself.
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Step Three: File Formation Documents
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Once you are ready to form your Texas limited liability company, you will fill out the Certificate of Formation. You can either do this on your own or hire a Texas LLC service. Some services, like ZenBusiness, even offer discounts on their service.
This is THE document that will register your LLC with the state. You’ll want to ensure all of the following information is correct on the form:
- Your chosen business name
- Name and address of your initial registered agent
- The management structure for the LLC
- Name and address of each governing person
- Initial mailing address
- Any additional provisions you wish to include
- Name and address of the organizer
- Effective date for the document (usually date of filing)
- Date of filing
- Name and signature of organizer
At first glance, the Certificate of Formation looks like a long form, but frankly, it’s quite simple to fill out. Texas doesn’t require any complicated information. All you really have to do is fill out each section with the proper info, and you’ll be set to go. If you prefer, you can file the form online instead.
- Total cost: $300, plus a 2.7% convenience fee if paying by card
- Processing speed: 3-5 business days
- Expedited processing: $25 extra
Step Four: Draft an Operating Agreement
After you register an LLC in Texas, create a detailed outline that explains how you will run and manage your new business. Even though it doesn’t need to be filed with the state, put one together and keep it for your records.
When you open a bank account, you may be asked for this document in order to open an account. You’ll also want to keep in mind that any future business partners or managing members may also be interested in seeing your Operating Agreement before joining your company. After all, this document essentially serves as your overall plan for success.
An attorney can help you outline your Operating Agreement or create one from a free template online. You can read more about Operating Agreements, but some of the basic information you’ll want to have includes:
- Individual members’ ownership percentages
- Rights and responsibilities
- Voting powers and meeting guidelines
- Allocation of profits and losses
- Management rules for the LLC
- Provisions for buying a member owner out, or transferring their shares in the case of illness or death
Step Five: Get Licenses & Permits
Texas law requires an LLC to obtain all necessary licenses and permits before starting operations. State law also decrees that an LLC can only provide one specific type of service. All owners of the LLC must be licensed or registered to provide the specific service under which the LLC was assembled.
The type and cost of the permits that your business may require varies depending on the nature of the services your LLC offers. Some businesses won’t even need licenses. That’s especially true since Texas does not have a statewide business license that applies to all entities in the state.
However, there is a decent chance that your business will need to get one or more industry-specific licenses, as Texas requires a variety of occupational and professional licenses and permits. For example, Texas has license requirements for dietitians, midwives, barbers, and many others. It’s up to you to do the research to learn if your industry requires a license; the Texas Department of Licensing & Regulation is a good place to start that search.
Last but not least, you should check with your city or county to see if they maintain any licensure requirements.
Obtain a Business Bank Account
One of the most important aspects of running an LLC is ensuring that your business funds remain separate from your personal finances. And to do that, you’ll need a separate bank account for your business.
Obtaining a business bank account is pretty simple, and you can choose the financial institution you like best. Some banks will ask to review your LLC’s operating agreement, and some also ask to see your EIN (see the Employers section below). Once you have your account, you’ll be able to get checks, make payments using your business card, and so on.
If you failed to get a business bank account, you would technically be blurring the line between your personal accounts and your business accounts. That compromises your personal asset protection.
Next Steps for Newly-Formed LLCs
1. Prepare for tax time
Regardless of how far away April 15th is, it’s never too soon to prepare for tax time and setting up accounting software. As an LLC owner, the exact tax rates you’ll pay depend on the taxation structure you choose for your business. If you choose to be taxed as a corporation, the LLC itself will pay taxes from its own funds. Meanwhile, LLCs taxed as pass-through entities don’t technically pay taxes; its members do. The profits are distributed to the LLCs members, and each member reports that income on Schedule C of their personal taxes.
If you choose to be taxed as a corporation, you’ll pay the following rates:
- Federal: 21%
- State: none; business franchise tax instead
Meanwhile, LLCs taxed as pass-through entities pay these rates:
- Federal: 10-37%, rising on a fixed-bracket scale
- State: none; business franchise tax instead
In order to compliantly file and pay your taxes, you’ll fill out a complete copy of federal Form 1065 including all federal K-1s, statements, and attachments. Texas is a bit unique because they don’t have a traditional income tax for corporations or individuals. But there may still be a tax on your business’s income—provided your income meets the tax-due threshold of $1,300,000. If you meet that threshold, you’ll be taxed at a rate of 0.75% of your taxable margin. Businesses beneath that threshold won’t owe a tax.
Businesses involved in retail sales will need to apply for a state sales tax permit so they can collect and pay the state sales tax (6.25%). Next, some businesses will be subject to miscellaneous taxes and fees since Texas has a few industry-specific ones. For example, there are taxes for hotels, crude oil, cigarettes, and more. You can learn more about business taxes in Texas at the Texas Comptroller of Public Accounts.
Because taxes can be incredibly complicated, we highly recommend consulting with a business attorney or accountant to ensure that you cover all requirements on the state and federal levels.
2. Be ready to file your annual report
All business owners operating in Texas must complete an annual report filing each year. Not only does this document demonstrate that your business is still open, but it also keeps the state up-to-date regarding any information regarding your business that might have changed over the course of the year.
It’s easy to file this report online, and you’ll need to submit it by May 15th. Unlike most states, Texas does not charge a filing fee for this report.
3. Consider business insurance
The big advantage to the LLC is that it offers you personal asset protection. But that doesn’t mean that mishaps won’t happen along the way. We highly recommend obtaining a general liability policy with the right coverage for your business.
In the event of a mishap or natural disaster, an insurance policy can help you navigate unexpected expenses. Be sure to compare your different options to get the best coverage for your particular type of business.
Extra Steps for Businesses with Employees
When you’re operating as a one- or two-person show, operating a business is relatively streamlined. Things get more complicated when you bring employees into the picture, but employees also help raise your business to new heights. But to reach those heights, you need to comply with employee-related legal requirements.
Step One: Address employee-related taxes
Any business with employees must obtain an EIN, or an Employer Identification Number. This is a free registration with the IRS, and the number acts a lot like a social security number for a business. Obtaining the number also lays the groundwork for other taxes, such as social security and withholding taxes. For example, you’re required to withhold income taxes from employee paychecks, make social security and medicare tax payments, and pay unemployment fund taxes. For more information on employer taxes at the federal level, look here.
There are similar taxes on the state level. Since Texas doesn’t have an income tax, there’s no withholding tax requirements. But you will have to pay the unemployment tax, and there may be other miscellaneous taxes to consider. To learn more about the unemployment tax, check out the Texas Workforce Commission.
Step Two: Obtain additional insurance
In Texas, private employers do not have to carry workers’ compensation insurance, but in many cases, it’s a good idea. That’s especially true if your industry has a moderate to high risk of injury. And if you opt not to have a policy, you still have to report to the state compliantly. For more information on this policy and state requirements, check out the Texas Department of Insurance.
If you haven’t already obtained a general liability policy, we highly recommend that you do so when you bring employees into the business. The more people you have involved in a business, the higher your risk of needing general liability insurance.
Of course, proper care and discretion will eliminate most problems, but incidents happen—from faulty products to an employee slipping and falling and theft and many places in between. And in some cases, insurance can be the difference between a minor hiccup and a budget-breaker.
Step Three: Enlist Help
For some entrepreneurs, part of the fun of running a business is the opportunity to wear lots of different hats: accountant, manager, marketer, quality control expert—it’s a near-endless list. And if your business is still pretty small, you might be able to handle many of these tasks yourself, especially if you’re prepared with a business administration degree.
But if you aren’t (and it certainly isn’t a prerequisite), some of these tasks may leave you feeling overburdened or out of your depth. For instance, navigating employer-related taxes might steal valuable time that you’d rather spend promoting your business or developing a new product. An accountant or tax attorney, however, knows those tasks like the back of their hand. You may decide it’s worth the added expense to enlist their help.
Ultimately, it’s your decision whether to bring in professionals or DIY. But in our opinion, it’s often worth it to get help from specialized pros.