Congratulations! It may not feel like it, but you’ve already made an important decision: you’ve decided to form a Limited Liability Company. You could have chosen a corporation or sole proprietorship, or another type of business entity, but it’s likely you didn’t because you want benefits like personal asset protection and additional tax benefits. But how do you form an LLC, and how long does it take to get an LLC in Texas? We’ll go over all of the LLC formation basics, plus give you important information about doing business in Texas so you can make an informed decision.
Discovering Texas
First, we’ll take a look at the geography and natural resources in the Lone Star State. This should give you a proper understanding about what you can find in the state, and maybe give you an idea of the types of industries that prosper there.
Texas shares borders with Oklahoma, New Mexico, Louisiana, Arkansas, Mexico and the Gulf of Mexico.
There’s a section of the state called the Pine Belt, where lots of commercial timber is grown. The northeast section of the state is home to many of the biggest ranches in the state. You may think of prairie land in Texas, which is technically correct because The Great Plains winds through the the north and west sections of the state, but it’s also home to forests, swamps and marshes, grasslands, fertile soil, stony hills, steep canyons, caves, plateaus, and mountains. It’s also known for being hot and humid.
You’re likely aware of the oil production in Texas. There are hundreds of oil rigs in the state. But it also has a resource that many people aren’t aware of: cattle. In fact, with 12 million cattle in the state, it’s the nation’s largest source of cattle. And the largest wind-power-producing farm in the world, spanning 100,000 acres covered in wind turbines. It once supplied around 45% of the electricity in the state. And a lot of cotton and wool are produced in the state.
Economic Overview of Texas
Texas has the 2nd largest GSP (Gross State Product) in the nation at $1.9 trillion, and it’s had a growth rate of 28.6k% from 2018-2023.
The top Texas industries by revenue are Gasoline & Petroleum Wholesaling, Oil Drilling & Gas Extraction, Petroleum Refining, Gasoline & Petroleum Bulk Stations, and New Car Dealers. The biggest employers in the Lone Star State are Walmart Inc., The University of Texas System, Amazon.Com, Inc., the United States Postal Service, and The Home Depot, Inc. And the top contributors to the state’s GDP (Gross Domestic Product) are Real Estate & Rental & Leasing, Manufacturing, Mining, Professional, Scientific & Technical Services, and Wholesale Trade.
Of course agriculture is big in the state, and so is oil production. But the technology industry has taken off in Texas since the 90’s. And there are a few major companies headquartered in the state, like Whole Foods, Southwest Airlines, AT&T, and Dell.
Business Environment in Texas
Texas’ business environment was ranked #24 by usnews.com, employment was ranked #13, and growth was rated #9. It was rated #20 for long-term fiscal stability, and #14 for short-term fiscal stability.
Under the Opportunity section, it was ranked #33 for affordability, #41 for economic opportunity, and #47 for equality. The state’s cost of living index is 98.5, compared to the national average of 100.0, and the state’s median household income is $66,963 which is slightly below the national average of $69,717. This explains why the state’s poverty rate is 14.2%, which is slightly above the national average of 12.8%.
For air and water quality, it was rated #33, and for pollution it was rated #42. This is because the state has around 128 days with unhealthy air quality (national is 114), and the drinking water violation points per 100k residents is 2.39 (national is 1.91). So if you’re concerned about the environment or looking for a state with lots of equality, then Texas may disappoint you.
State Specific Regulations and Incentives for Forming an LLC in Texas
Texas provides a handful of state incentives for businesses, and a plethora of local incentives. Here’s a look at the different incentives and programs the state has in place to help businesses.
- Texas Enterprise Fund (TEF): This is a fund to encourage deal closing on projects that offers significant potential job creations as well as capital investments. Qualifying projects must be a single Texas site which is competing with out-of-state projects or companies. The funding amount awarded is dependent on things such as the number of employees, their average wage, the project location, industry and more. The amount of capital investment made is also a determining factor. Applicants are required to have support from the community. In urban areas more than 75 full-time jobs must be created, and in rural areas at least 25 jobs must be created. And the average wage paid to employees must be more than the average wage in the county the project is located in.
- Sales and Use Tax Exemptions: Manufacturing companies are not required to pay state sales and use tax for electricity or natural gas that’s used for manufacturing or fabricating tangible personal property. An exemption is also available for business owners who manufacture, fabricate or process and sell tangible property.
- Data Center Tax Exemption: If a data center project is at least 100,000 square feet and creates at least 20 jobs, with an investment of at least $200 million spread over a 5 year period, then it may be eligible for a 100% sales and use tax exemption.
- Sales Tax Exemption or Franchise Tax Credit for Qualified Research: If you’re taking part in research that’s considered qualified for this incentive, then you could qualify for either a sales and use tax exemption to purchase, lease, rent, sore or use depreciable tangible personal property that’s used for qualified research, or a credit for franchise tax for certain research expenses. The credit is 6.25% of the difference between the research expense incurred and the base period. The maximum credit amount can’t go over 50% of the franchise tax liability.
- Texas Small and Rural Community Success Fund: This is a program that offers financial assistance to projects in municipalities in Texas. It does this by allowing the communities to leverage future sales tax revenues to help economic development projects which further business expansion, recruitment and exporting in the area. It’s designed for small, rural communities that may not qualify for traditional financing sources like municipal bonds. Loan amounts can range from $25,000 to $5 million.
- Product Development & Small Business Incubator Fund (PDSBI): Businesses that may qualify for this program are small businesses with a product, either new or improved, that’s either developed, produced or commercialized in Texas, or in a small business incubator. Some of the industries that are preferred are semiconductors, biotechnology, nanotechnology, and biomedicine, but other businesses with high success potential and job creation and retention are also considered.
- The Skills Development Fund: These are grants to be awarded to public community as well as technical colleges which create customized job training programs for businesses in the state that wish to train new employees or upgrade existing employees’ skills. The average fund awarded to reimburse training costs is $1,800 per trainee, but the benefit amount differs by project.
Pros and Cons of Establishing an LLC in Texas
We’ll tell you about both the good and the bad aspects of doing business in the state so you’ll have unbiased information.
There’s a low tax burden in Texas. There’s no personal income tax, which is great news for most LLCs which are taxed as pass-through entities. But there also isn’t corporate income tax, or estate, inheritance, or gift taxes.
Real estate in Texas can be less expensive than in some other states, like New York. It’s actually around $11.5 million less to rent property in Houston than it is in New York according to this article by ioptimizeralty.
Along with its low tax burdens, Texas has provided several incentives for new businesses, and is moving to establish itself as a business-friendly state. Because of this many companies have moved their headquarters to the state.
The saying “Everything is bigger in Texas” applies to everything- including business. So you’ll encounter stiff competition. There are millions of businesses in Texas, both small and big. And Texas has the 9th biggest GDP in the whole world, so there’s immense pressure for your business to succeed here. Businesses in Texas compete not just for customers, but also for employees, real estate and more.
The political climate is tied to the business climate in the state. Texas has historically been a conservative state, and it’s passed a lot of controversial laws over the years- everything from voters rights, open carry laws, and legislation involving rights of transgender citizens. And while you may think that your business has nothing to do with that, more and more people are “voting with their money”, or protesting by boycotting businesses in states with such legislation.
There are some extreme environmental factors in Texas, and not everyone can deal with them. It’s quite hot and humid in the state and if you come from a cooler, dryer climate then it will be an adjustment. It’s also prone to hurricanes, flooding, tornadoes and more.
Texas is a huge state. It has a few major metropolitan areas within it, but its large size can make intrastate traffic difficult. And because of the high levels of urbanization in the state, it has detrimental levels of traffic and accidents.
It also has some of the highest property taxes in the United States, despite having reasonable rates for almost every other form of taxes.
Procedure of Establishing an LLC in Texas
Here is our step-by-step guide to LLC formation in the state of Texas.
- Get a Certificate of Formation Form: This is the first step you need to take to start your LLC. You can either get a PDF version to print out and mail, or file the document online on the Secretary of State website.
- Select a Business Name: Somewhere towards the top of your Certificate of Formation form you’ll be asked to list your business name, so this step is important. But you can’t just list any catchy business name here. There are lots of requirements involving business names. Once you’ve ensured that it meets all of the legal requirements, you secure a business name for use by submitting an Application for Reservation or Renewal of Reservation of an Entity Name form from the Secretary of State.
- Decide on a Registered Agent: You can’t complete most formation applications without listing your registered agent because it’s one of the main legal requirements of LLCs. A registered agent will accept legal notices like service of process on behalf of your business, as well as receive government correspondence at their address during normal business hours. Your mail is then forwarded to you. This system is designed to ensure that you receive important notices and letters, and in that spirit many registered agents have included a digital system to upload your mail and notices when they arrive so that you’re notified about them instantly and can look at them. You’re allowed to choose an individual, like a family member or friend, or hire a professional registered agent service to fulfill this requirement.
- Choose a Business Address: If your business doesn’t have a physical address, then you need to find an alternative. Your home address isn’t the best alternative due to the fact that your business address is listed on the public record, and you don’t want just anyone being able to come to your home. It poses a number of security issues. You could look into virtual offices or virtual addresses in your area, or ask about using your registered agent’s address instead.
- Sign and Submit Your Certificate of Formation: It’s important that you make sure that you’ve filled out your form correctly, included all the information and that it’s all correct. Once you’ve checked it over, it must be signed and submitted to the Secretary of State for approval. If you’re doing this yourself, then your name will be listed on the public record as your LLC’s organizer. You could also hire an LLC formation service which will sign and file the documents on your behalf. Filing can be done online, by mail, or in person.
Necessary Documentation for Filing an LLC in Texas
Before filing, you’ll need a variety of documents.
- Employer Identification Number (EIN): Your business will need an employer identification number to hire employees, fill out forms for taxes, or open a business bank account. The good news is that it’s easy to obtain one. Just go to the IRS website and fill the application out to receive one immediately and for free.
- Name Reservation Form: This step actually requires you to complete two steps in one. First, you must check that your business name isn’t used by any other business in the state by performing a search of the business name database on the Secretary of State website. Second, once you’ve found a name you can use, you must fill out an Application for Reservation or Renewal of Reservation of an Entity Name form.
- Certificate of Formation: Your Certificate of Formation is your application to receive an LLC. You’re required to list a slew of information about your business on it, such as your business name, address, a list of LLC members with their contact information, your registered agent, and your management structure- member-managed or manager-managed. You may also be asked about your business purpose and duration.
- Operating Agreement: Admittedly, an operating agreement isn’t legally required, but it’s so important that it’s strongly advised. It’s an internal business document that functions as operational instructions for your business, and an agreement between LLC members. It includes information like the roles of LLC members, their contributions to the company, information about how profits and losses will be distributed, and instructions for managers like when to conduct meetings and voting rights. Another thing that you should include is how to remove or add members, which means that if a member dies then LLC members will already have instructions in place for how to handle that difficult time.
- Tax Registrations: Your business will need to sign up with the Texas Comptroller of Public Accounts for tax purposes if it sells goods or collects sales taxes. You’ll also have to pay a franchise tax, for which you’ll need to sign up with the Comptroller of Public Accounts. Visit the CPA website for tax information and registration.
- Business Licenses: Texas doesn’t require a general state business license. But you will need to look into county and local licenses and permits. You can do this by visiting the Texas Department of Licensing and Regulation website.
Legal Requirements for Starting an LLC in Texas
Texas doesn’t enforce a lot of regulations on LLCs, but there are a couple of requirements.
Your LLC must have a registered agent to receive mail from government agencies, as well as legal notices. Registered agents must have physical addresses and can’t use P.O. boxes in most cases. Your registered agent can be an individual or a business. But the thing that influences many business owners to choose professional registered agent services is the fact that this is a highly specialized job and if your registered agent misses a service of process then your business may incur serious legal and financial consequences.
All business entities in the state must pay a franchise tax through the Texas Comptroller of Public Accounts. The rules and regulations are complicated, so check the CPA website.
Time Frame for Establishing an LLC in Texas
Once all of your documents have been filed, how long does it take to receive approval? We’ll cover all the ins and outs of formation time frames in this section.
How Long Does the Initial Paperwork Take in the State of Texas?
Approval times for mail filing are 2-3 months, or 10 to 15 days for online filing.
Processing Times in the State of Texas
Processing times to file by mail are 4-8 weeks. To file online with SOSUpload takes 13-15 days, and to file online with SOSDirect takes 10-12 business days.
Common Delays in the LLC Formation Process in Texas
There are a few factors that could significantly delay the LLC Formation process, which we’ll explain here.
- Technical Problems: If the computer system, server or power goes out at the Secretary of State’s office, then additional time will be added to your processing time until it comes back online.
- Issues with Documents: Your documents must be nearly perfect when you submit them. You can’t include incorrect information or make typos, you can’t skip sections or exclude information, and you must include 2 copies of the Certificate of Formation. If you fail at any of these steps, your application could be rejected.
- Filing Method: The method you choose to file can affect the overall turnaround time for your formation. For instance, filing by mail is typically slower than filing online.
Expedited Processing for LLC Formation in Texas
This section will be particularly interesting for anyone in search of fast formation times. We’ll explain everything about expedited processing services in the Lone Star State.
What Are the Expedited Options Available?
There is one expedited processing option in Texas: 4-5 business days. However, since there are tons of filings to process in Texas at any given time, this option usually takes about 10-12 business days. But it’s still faster than the 4-8 weeks that mail filing usually takes.
Additional Costs for Expedited Services in Texas
Fees for expedited services are in addition to the filing fee you pay to submit your Certificate of Formation. Expedited processing costs $25 extra in Texas.
Comparing LLC Formation Time Frame in Texas with Other States
There’s a lot of information you can gather from comparing the formation time frame of your state to other states. It gives you a baseline average for formation times to measure it against, and it could help you decide whether to form a domestic LLC or a foreign LLC in another state. Here’s how Texas compares to other states.
Brief Comparison with Key States
Processing times in Texas for mail filing are 4-8 weeks, or 10-15 business days if you file online. There’s also an expedited option that takes between 4-12 days depending on the filing volume at the time.
4-8 weeks is a lot, but to file by mail in New York takes 8 months. And processing for online filings in Arizona can take 14-16 days.
But there are many states with faster processing times, as well. Alabama, Alaska, Colorado, Kansas, Kentucky, Minnesota, Missouri, New York, South Dakota, Tennessee, Wisconsin and Wyoming all have immediate processing for online filings. And in Kentucky and Ohio, mail filings are processed in one day. Expedited processing isn’t always so slow, either. Delaware, Michigan, Montana, Nevada, Pennsylvania and West Virginia all have 1-hour expedited processing options.
Why is Texas a Favorable Place for Forming an LLC?
Texas can be an agreeable place to form an LLC because of its low tax burden and its reasonable real estate costs and its increasingly business-friendly government policies make it a good option for many businesses.
