If you’re considering forming an LLC in Texas, this is the article for you. First of all, congratulations! Creating a new business or starting a business in another state is always exciting.
I’m going to tell you everything you need to know to start an LLC in Texas, but first I’ll tell you what a Limited Liability Company (LLC) is as well as some of the reasons that other small business owners choose LLCs over other business types (such as a sole proprietorship, partnership, or C Corporation) so that you can make an informed decision about whether an LLC is the right business structure for you.
(If you want to skip to the ‘how to form an LLC’ section, click here)
Table of Contents
What Is A Texas LLC?
A Texas LLC is a Limited Liability Company formed in the state of Texas that is governed by the laws, regulations, and statutes of the state of Texas.
Why choose An LLC?
It’s pretty likely that you’ll find many advantages of choosing to form a Limited Liability Company (LLC) over the years but there are three main reasons that small business owners cite as the reasons they chose to form an LLC themselves. Here are three reasons to choose an LLC rather than another business structure:
1. Limited Liability And Asset Protection
The first reason is arguably the most important to many business owners. Owners of an LLC cannot be held personally responsible for their LLC’s debts and liabilities.
This means that if your Texas business falls on financial hard times and goes bankrupt, or if it is sued, the creditors of your Limited Liability Company (LLC) can’t demand that you give them your personal assets to compensate for debts owed to them by your LLC. This means that your house, car, funds in your personal bank account and other personal assets will remain safe because the only things your LLC’s creditors can list as forms of financial recompense are the assets of your Texas LLC.
Americans have seen a lot of unexpected events during the past year, like hurricanes, wildfires, floods, horrible winter storms and a global, viral pandemic. Many businesses have been crippled overnight by these unexpected events.
Because of all this, small business owners tend to appreciate the personal asset protection that a Limited Liability Company can provide them. Even if you were to tragically lose your Texas LLC, you won’t lose everything you’ve worked hard to buy and save.
Another reason that business owners choose Texas LLCs over other business types is that you can keep your personal information safe and receive liability protection.
Sadly, cyberpunks and online scam artists have become masters of their craft during the past decade. They’ve stolen people’s identities and accumulated thousands of dollars worth of debt in their names in just a few minutes using information that most people would deem insignificant (like their name and address).
If you’ve chosen a business type such as a sole proprietorship or sole trader then you’ll have no choice but to register your personal information with the Texas Secretary of State. When your name and address are registered with the Secretary of State that means they list it on the public record on their website, where anyone (including online criminals) can access it.
However, you’ve got the option to protect your information and keep it off the public record when you form an LLC in Texas.
To do this you hire an LLC formation service. When you hire an LLC formation service they will register their details with the Texas Secretary of State so that the name and address they provide will be put on the public record for your business, rather than your own information. This is an ideal agreement for Texas LLCs because even though LLC formation services register their information on an LLC’s behalf they don’t gain ownership of the LLC for doing this, and Texas LLC owners can enjoy a degree of privacy and liability protection.
The two LLC formation services that I recommend the most are Northwest Registered Agent and Zenbusiness. If you want to know how they stack up against the competition, you can read all about them in my breakdown of the best LLC service in Texas.
The tax benefits that are limited to LLCs are an attractive reason to choose a Texas LLC.
If you were to choose the corporation business type rather than an LLC, you would experience a tax phenomenon known as “double taxation”.
Here’s how “double taxation” works. The profits of a corporation are initially taxed with corporate tax rates and then dispersed to corporation shareholders in the form of dividends, which are also subject to another tax. Because the profits are taxed twice before it even reaches corporation shareholders, it’s known as “double taxation”.
However, forming an LLC in Texas allows you to avoid “double taxation” entirely.
This is how the profits of a Texas LLC are taxed. First, the profits are taxed using company tax rates (not corporate tax rates) and are then distributed to LLC members as personal income (which isn’t subject to the same tax rates as dividends). This is later taxed at personal income rates. So, as you can see, the profits of an LLC in Texas aren’t taxed the same way that the profits of corporations are.
Avoiding “double taxation” isn’t the only tax benefit that LLCs in Texas enjoy.
When the Job Cuts and Tax Act was instituted in 2017, it introduced a form of tax benefit for LLCs called the Qualified Business Income Deduction (QBID). QBID provides LLCs with a 20% tax discount that other business types don’t qualify for, which is a great reason to choose to form a Texas LLC.
How To Start An LLC In Texas
If you’ve reached this section of the article, you should now know what a Texas LLC is and some of the reasons people choose to form an LLC in Texas. If you’re still sure that an LLC is right for your business in Texas, here are the steps you’ll need to take to start your LLC.
*IMPORTANT* If you’ve never created a Texas LLC and would like someone to guide you through the long and complicated process, there is a professional service dedicated to doing just that. An LLC formation service will help to obtain and file all of the forms and documents associated with LLC formation in the state of Texas, assist with establishing your LLC and keep your personal information confidential.
LLC formation services typically start as low as $0 plus the state filing fees. However, my favorite LLC formation service is ZenBusiness and they charge $49 plus state filing fees.
If you’d like more information about LLC formation services, check out my guide on the Best LLC Service.
1. Obtain Certificate Of Formation Form
The first thing you’ll need to do is get your hands on a Certificate of Formation form from the Texas Secretary of State because an LLC is created by filing a Certificate of Formation in Texas.
You can get the Certificate of Formation PDF form here.
This form from the Texas Secretary of State is the primary form you’ll need to file to form your Texas LLC, so it’s important.
Because this is the main form you’ll need to file, the subsequent steps will refer to the Certificate of Formation.
2. Choose Your Business Name
One of the first things you’ll need to add to your Texas Certificate of Formation form is the name of the LLC.
However, you can’t just add the first business name you think of here. Each business and LLC in Texas is required by Texas law to have a name that is unique. This means that you can’t choose a name that another business is already using.
You can quickly perform a search of all the business names currently in use in Texas on the Texas Secretary of State SOSDirect website.
If the name that you’ve chosen is unavailable, you could add a suffix to the end of it like “L.L.C.”, “Ltd.”, “Co.” or “Limited Liability Company”. Doing this is a bit like adding numbers to the end of an online username once you’ve found out that the name you originally picked wasn’t available.
Once you’ve chosen a legal name, you must file an Application for Reservation or Renewal of Reservation of an Entity Name form (which you can get here) and then file it online or by mail (file online here) along with a $40 filing fee.
If you’re not a fan of the official business name that you’ve registered with the Texas Secretary of State for your business, you can register for what is known as a DBA (Doing Business As) name, trade name or assumed name. The assumed name will be the business name that you use on signs, on your website, in ads and is generally the name that your LLC presents to the world.
To get an assumed name for your Texas LLC, you must register an Assumed Name Certificate with the Texas Secretary of State. You can get the PDF here and submit it online or by mail along with the filing fee payment of $25. If you choose to submit the form online, you can do so on the SOSDirect website.
3. Choose A Texas Registered Agent
To complete the Certificate of Formation form, you’ll need to choose a registered agent. Every LLC in Texas is required to have what is known as a “registered agent”.
A registered agent is a person or professional service that accepts mail and service of process from official government offices or departments (like the Texas Secretary of State) on behalf of your business in Texas. A registered agent must also be available to do this job during normal business hours on business days.
You have two options here: you can choose to take on the role of registered agent for your LLC, or you can choose to appoint a registered agent service. I’ll discuss the pros and cons of both options so that you can make an informed decision about the registered agent for your Texas business.
If you choose to be the registered agent for your LLC then you should know that it will be a time-consuming and potentially costly job. You’ll need to be available to receive mail and service of process from the Texas Secretary of State during the same times that most businesses operate. And unfortunately, you can’t be in two places at once.
You’ll also have to put your name and address on the public record, which will leave you vulnerable to identity theft and cybercrime.
In addition, if you miss a service of process for your LLC, the consequences could be dire. You may be sued with no way to defend yourself and a default judgment against your company could result in the loss of your Texas business.
The only benefit of becoming the registered agent of your LLC is not paying registered agent fees.
If you choose to appoint a registered agent service, then you can rest easy. Professional registered agents will keep your personal information safe, while also guaranteeing that you never miss a piece of mail or service of process. The downside of choosing a registered agent service is that you’ll have to pay a fee of somewhere between $99-$299.
But when you consider that you could be vulnerable to lawsuits or even lose your Texas business, it’s well worth the cost to hire a registered agent service. For all of these reasons, I always recommend that inexperienced LLC owners use a registered agent service.
If you’re interested in learning more about registered agent services then check out my article about the Best Texas Registered Agent.
4. Choose Your LLC Address
Along with the name of your LLC, you’ll need to register a business address with the Secretary of State to be listed on the public record for your LLC. The business address that you list on your Certificate of Formation will be the address that mail from government agencies will be sent for your LLC.
If you haven’t hired a registered agent service, you can use your business’s physical street address. If your business doesn’t have a physical office or street address, then you’ll be forced to use your home or home office address, which makes you vulnerable to identity theft. Furthermore, you can’t use a P O Box address as the business address on the Certificate of Formation form.
If you’ve hired a registered agent service, they will register a business address with the Secretary of State. The address that they register can’t be traced to you nor your home, which avoids criminal activity as well.
5. Sign And File Your Certificate of Formation
Once you’ve added all of the information to your form and double-checked to make sure that the information is accurate, it’s time to file the Texas Certificate of Formation form for your LLC.
You can sign and file a Certificate of Formation form yourself, but like most things listed on this form, this information will be registered with the Secretary of State and listed on the public record. If you use an LLC formation service then they will sign and file the form on your behalf so that your personal information remains safe.
You have two options when it comes to filing the Certificate of Formation for your Texas LLC. You can submit the form by mail along with a check or money order for the filing fee to the following address:
Secretary of State
P.O. Box 13697
Austin, TX, 78711
You can also file the Certificate of Formation online, using a debit or credit card on the SOSDirect website.
Once you’ve submitted your Certificate of Formation form and paid the filing fee, the Secretary of State will notify you by mail or email once they’ve processed the form and the payment. It typically takes between 3-5 business days to process the payment. If you’d like to speed up this process, many LLC formation services offer expedited processing which takes 1-3 days.
Other LLC Activities
Your work isn’t done when you file your Certificate of Formation. In fact, there are several activities your LLC will need to take part in to maintain its “good standing” status with the Secretary of State. These activities have nothing to do with LLC formation, but they’re still vital for the establishment of the legal standing of your business entity.
Luckily, you won’t be required to file an annual report for your Texas business because the Secretary of State doesn’t require LLCs to file them in Texas. But even though you don’t have to file an annual report, there are several other things you’ll need to pay, file and keep track of.
Every Texas business entity must pay a Texas franchise tax, so you’ll need to register with the Texas Comptroller of Public Accounts (CPA). Calculating the Texas franchise tax is complicated and you may not have to pay anything to the Texas Comptroller of Public Accounts. If you do have to pay the annual franchise tax you’ll likely have to file several forms with the Texas Comptroller, and you can go to the CPA website for more information.
Business entities that sell goods and collect sales tax must register with the Texas Comptroller of Public Accounts as well. You’ll be required to make payments for the sales tax on the goods that your business sells. You can file the Texas Applications for Sales Tax Permit form online here.
In general, you’re not going to need a state “business license”, but you’ll still need to check with the county clerk in your area to see if you need any local licensing. You may also need other licenses from the state. You can go to the Texas Department of Licensing and Regulation website for more information and also download a Texas Licenses and Permits Guide.
You can form an LLC in Texas from another state, which is called a foreign LLC. To do so the steps are generally the same as all of the steps to form a domestic LLC that are listed above, however, rather than filing a Certificate of Formation form you’ll file an Application for Registration of Foreign Limited Liability Company form which can be submitted online or by mail, and pay a $750 filing fee.
On top of all of this, you’ll have to pay a federal tax return for your LLC, obtain a Certificate of Good Standing from the Texas Secretary of State, obtain an EIN (more on that later) and maybe even perform other activities to keep your business entity in good legal standing to do business in the state of Texas.
This probably sounds like a lot of work and things to remember, and you would be absolutely correct. If you’d like some help to remind you when to file things like your franchise tax, or to help with some of the many applications you must file to form your LLC, you should consider hiring a Texas PEO service along with online legal services.
Texas LLC Fee Summary
You may be wondering how much it costs to form an LLC in Texas because that’s one of the most frequently asked questions about LLC formation in the state. Whether you choose to use an LLC formation service or decide to form your LLC on your own you’re going to incur a number of state filing fees and taxes. Here are some of the costs of forming your LLC in Texas you’ll need to pay.
Certificate of Formation filing fee: $300
Name Reservation filing fee: $40
Registered Agent Fee: $99-$299 per year
Annual Franchise Tax: 0.37% for retail or wholesale and 0.75% for other industries
After Starting Your Texas LLC
At this point, you’ve formed your LLC in Texas, which is cause to celebrate. Do something to cut loose and relax like going to dinner, having a small celebration party with close friends, colleagues and family, go for a weekend trip and relax, or simply enjoy a glass of champagne or wine. And truly enjoy the celebration because you won’t have much time to relax in future.
There’s still work to do! Here are the next steps you must take to ensure that your Texas LLC has the necessary business foundations to function properly.
Step 1. Create An Operating Agreement
You’re not required by the state of Texas to create and file an LLC Operating Agreement, but I highly recommend that you do so anyway.
Just to properly express the importance of an Operating Agreement, I would like you to think of your business entity as an animal of some sort. The LLC would be the animal’s skin, shell or scales that protect it and the LLC Operating Agreement would be like the central nervous system of the creature that tells it how to react and what to do.
In the simplest terms, an Operating Agreement is both a contract between LLC members and a set of thorough instructions about how the business should run. After listing each of the LLC members individually, the Operating Agreement should provide the instructional framework for the operational, structural, managerial and financial facets of your business.
Along with the names of the LLC members, Operating Agreements should spell out the ownership percentages and the shares of profits of losses of each member, as well as identify which members have the authority to make high-level decisions for the business. It’s a good idea to include the job roles of each member, explain which departments or other members they should work most closely with, who their superiors are, as well as describe the tasks that each department is in charge of. This should prevent any infighting and squabbles among LLC members.
Another component that Operating Agreements should include is a section about what should happen when a member leaves and what should happen when a new member joins. Adding this section to the Operating Agreement will provide clear directives when there is a fight among LLC members. Having a set of easily understood, rational instructions is invaluable when tempers are running high.
Because the Operating Agreement provides protocol and guidelines for how the business should run, the jobs of your LLC members and details about their compensation, it is a very important document during the beginning stages of your business. It’s likely that you’ll refer to it often to provide operating guidelines.
As I stated before, you aren’t required to create and file an Operating Agreement for your LLC. But if you do decide to create one (which I suggest you do), they should be written using the sections I’ve listed here. I’ll explain next why the Operating Agreement should be written this way and what happens if you leave these sections out or get them wrong.
As you can likely tell from the description I’ve provided so far, the rules that you create in your Operating Agreement specify how your business is required to operate, so if you’ve created a poorly thought-out Operating Agreement then your business growth could be hindered. It’s easy to screw up your Operating Agreement by not including wiggle room for things like change, growth or innovation in your business. If you draft a well-thought-out Operating Agreement, you’ll be able to sit back and watch as your business takes off, grows and flourishes without being confined to the faulty instructions of a poorly drafted agreement.
If you’re inexperienced with drafting Operating Agreements and are concerned about possibly screwing up the agreement (which is a real and legitimate concern), you have a few options available to you.
Many LLC formation services will draft the Operating Agreement for business entities as part of their services. But if you don’t want to use an LLC formation service and want to take a crack at creating the agreement yourself, you can use the free Operating Agreement template for LLCs that Northwest Registered Agent provides on their website. You can also subscribe to online, legal services because they will typically provide guidance regarding the legal jargon and wording required in the agreement to get it right.
Step 2. Apply For An Employer Identification Number
Certain business activities (like opening a business bank account or hiring employees for your business) will require you to obtain an EIN. An Employer Identification Number (EIN) can qualify your business for certain permits and licenses that it otherwise wouldn’t qualify for, as well. You aren’t required to hire employees for your business to acquire an EIN- it’s simply a tax identification number for businesses.
An EIN is used by the Internal Revenue Service to identify a business in much the same way that a Social Security Number is used to identify people. You receive an EIN from the Internal Revenue Service (IRS). It’s easier to apply for an EIN than you would think.
Most LLC formation services will apply for an EIN on behalf of your business. But you can fill out the application yourself by going to the IRS website Monday- Friday between 7 am – 10 pm, complete the application and file it.
Step 3. Open A Business Bank Account
You’ll put the last piece of foundation in place when you create a business bank account for your LLC.
A lot of small business owners skip this step, but you shouldn’t because it’s important. Many people think that using their personal bank account for both business and personal transactions is easier and more convenient because they’re using one account for two things. But I’ll explain two very good reasons why you shouldn’t do this.
The first is that people assume they’ll be able to tell the difference between business and personal transactions for federal tax purposes. However, these purchases are often made long before you have to pay federal taxes and, unfortunately, it’s harder to remember things with the passage of time. It’s a lot easier to tell the difference between transaction types for tax purposes if you have an account dedicated to business transactions.
The second reason is when you run business transactions through your personal bank account, you become vulnerable to lawsuits and your personal information is no longer protected even though you enjoy a degree of privacy protection when you form an LLC. The assets in your bank account aren’t protected when you use your personal bank account for business transactions either.
So, if you want to make annual tax filing easier and maintain your asset and identity protection, you should open a business bank account for your LLC.
You’ll need to create what is known as a “bank kit” to open an LLC bank account. A bank kit contains copies of many of the formation documents I’ve previously listed, like your Certificate of Formation, Operating Agreement, EIN and initial resolution.
Rather than gathering up all of these documents yourself, an LLC formation service will typically collate them for you and create the bank kit as part of their services, which takes a lot of the guesswork out of bank kit creation.
Once you’ve decided to form an LLC, you’ve taken a giant step towards taking control of your business future, so congratulations!
If you don’t use an LLC formation service (which can charge fees as low as $0 plus state filing fees), these are the steps you’ll need to complete to form an LLC in Texas.
- Obtain the Articles of Organization form
- Name your LLC
- Choose your Registered Agent
- Choose your LLC address
- Sign and file your Articles of Organization
When confronted with all of the form filing, applications, red tape and legal jargon associated with LLC formation in Texas, it’s pretty easy to feel overwhelmed, but if you keep going and push through it there’s no greater feeling than the sense of achievement and accomplishment that comes from forming an LLC on your own without the assistance of an LLC formation service, so it’s worth all of the work and trouble!
Congratulations again on your decision to form an LLC in Texas, and best of luck to you on the rest of your business journey!