How to Start an LLC in Texas? | 11 Steps To Follow
Texas is a business-friendly state with numerous opportunities for entrepreneurs. Starting a limited liability company in Texas may be advantageous for entrepreneurs planning to establish a small business.
Understanding the process and requirements is crucial to meeting the legal obligations of an LLC.
With years of experience as experts in business law and Texas regulations, our team has compiled a concise guide to starting an LLC in Texas.
The article will explore the benefits of forming an LLC and fulfilling the legal requirements and ongoing obligations, backed by legal consultation from attorneys and business consultants in Texas.
Also, you have the option to utilize a Texas professional LLC service to establish an LLC on your behalf.
- To start an LLC in Texas, one should choose the type of LLC, select a business name, appoint a registered agent, and file the Texas Articles of Organization.
- Texas is known for being business-friendly, offering numerous opportunities for entrepreneurs, particularly those starting a small LLC.
- Small businesses represent a staggering 99.8% of all business entities in Texas, totaling 3.2 million, as highlighted by the U.S. Small Business Administration, indicating the critical role of small enterprises in the state's economy.
- From my experience, forming an LLC in Texas is an astute decision for entrepreneurs, given the state's business-friendly policies and straightforward formation process.
How To Start an LLC in Texas?
To start an LLC in Texas, file the required formation documents with the state and adhere to specific regulations outlined by the Texas Secretary of State.
1. Choose the Type of Your Texas LLC (Mandatory)
In the dynamic Texas business environment, small businesses account for an astounding 99.8% of all enterprises, totaling 3.2 million, according to U.S. Small Business Administration data .
This highlights the critical role these entities play in the Texan economy and underscores the strategic necessity of choosing the appropriate LLC structure to thrive in this vibrant marketplace.
Therefore, when choosing the type of Texas LLC, consider the two primary structures: Single-Member LLC and Multi-Member LLC.
It is ideal for solo entrepreneurs; it offers simplicity in management and tax filing. The major advantage is the ease of set-up and operation, as there's no need for complex agreements or decisions by multiple members.
However, this simplicity can be a disadvantage, as it may lack robustness in operational structure and decision-making, potentially impacting business growth and investment opportunities.
It is suitable for businesses with multiple owners. It provides a clear structure for decision-making and profit-sharing, fostering collaboration and potentially attracting more investors.
The complexity of management, however, is a drawback. Multi-member LLCs require detailed operating agreements and more intricate tax filings, which can be challenging for those inexperienced in business administration.
Both structures offer limited liability protection, but the choice largely depends on the size and nature of your business.
2. Choose a Name for Your Texas LLC (Mandatory)
Leveraging my knowledge of consulting, when starting an LLC in Texas, selecting an appropriate name is crucial. It's vital to choose a name that reflects your business's essence and complies with Texas's regulations.
A thorough search is necessary to ensure the name is unique and doesn't mirror any existing Texas-based business, thus securing a distinct identity and avoiding legal issues.
This careful selection process sets a strong foundation for your business's identity and legal standing.
Additionally, ensure that your chosen name meets the Texas LLC naming requirements.
The state of Texas has very strict rules as to what terms you can or can not use in Texas business names. The state requires that all business names include the Roman alphabet and Arabic numerals, if needed.
For some terms, especially those involving banking, education, engineering, and sports, you will need additional permissions issued by appropriate State Boards.
Read our article if you need to change your LLC name in Texas.
3. Select a Registered Agent (Mandatory)
The Texas Secretary of State requires business owners to appoint a registered agent in Texas.
You’ll get all the names and addresses of Texas agents on the Texas Secretary of State’s website .
The registered agent will:
- Be a point of contact between your LLC and the Texas State government
- Receive important legal and tax documents on behalf of your business
- File an LLC annual report in Texas and annual franchise tax
Their service will ensure you stay informed and comply with the state's requirements.
4. File Texas Articles of Organization (Mandatory)
To establish your LLC in Texas, the Secretary of State requires the articles of organization.
This document formally registers your business and provides essential information, such as:
- The LLC's name
- Registered Agent
- Management structure and members
- Purpose of the LLC
You should file the Articles of Organization with the Secretary of State either online or by mail, accompanied by a non-refundable filing fee of $300.
Steps to Take After Forming an LLC in Texas
After establishing your LLC, it's crucial to integrate into Texas's vibrant business ecosystem, where small businesses employ 5 million individuals, accounting for 44.3% of the state's workforce, according to the United States Census Bureau .
This highlights the significant impact your LLC can have on the local economy and the importance of strategic planning for growth and sustainability.
5. Create a Texas LLC Operating Agreement (Optional, but Recommended)
A Texas LLC operating agreement is a document that sets forth the rights and obligations of members. The LLC operating agreement governs how an LLC will be managed.
Operating Agreements can regulate many aspects of your business, including:
- How profits are distributed
- What happens to excess cash when it's not needed for operations or expansion
- The duties and responsibilities of the managers
- How decisions are made in the LLC, such as voting rights
- What happens to members' interests if they die or want to leave?
You should also remember that the law does not require an operating agreement. However, it's a good idea for your business to have one.
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6. Apply for an Employer Identification Number (EIN) (Optional, but Recommended)
When forming an LLC, obtaining a federal employer identification number (EIN) from the IRS is essential for legal business identity and tax purposes.
Drawing from my experience as a business consultant, applying for an EIN is straightforward and free of charge. Typically, after submitting an application, the IRS issues the EIN within seven to ten days.
This EIN is crucial for all business dealings with state and local taxing authorities, ensuring proper tax identification and compliance for your LLC.
You can also apply online at the IRS website or hire someone else to do it on your behalf .
The benefits of obtaining an EIN are that it allows you to open a business bank account, apply for loans, and form other legal entities.
7. Open an LLC Bank Account (Optional, but Recommended)
Once your Texas LLC is legally established, opening a dedicated business bank account is a wise step, though not mandatory.
This account separates your personal assets from your company's assets, which is crucial for personal asset protection. A business bank account also simplifies accounting and tax filing processes.
To open an LLC bank account in Texas, you’ll typically need your LLC's EIN, a copy of the Texas LLC Articles of Organization, and possibly a resolution identifying authorized signers if there are multiple members in the LLC.
It’s advisable to contact the bank beforehand to check if additional documents are required.
Having a separate business account enhances your LLC’s credibility and professionalism, especially when dealing with clients and vendors.
It also provides clear financial records and easier management of business expenses, making it a recommended practice for any LLC in Texas.
8. File Your Texas LLC Annual Report
In Texas, LLCs are not required to file an annual report in the traditional sense that many other states require.
Instead, LLCs in Texas are obligated to file an annual franchise tax report.
This report is crucial for the business and serves a similar purpose to an annual report, providing the state with updated information about the company's earnings and other relevant details.
The franchise tax report is mandatory for most entities doing business in Texas, including LLCs.
The report typically includes information about the LLC's revenue and determines the amount of franchise tax owed by the business. The due date for this report is May 15th each year.
It's important to comply with this requirement to maintain good standing for your LLC in Texas. Failure to file the franchise tax report can result in penalties and may eventually lead to the forfeiture of the right to conduct business in the state.
For specific guidance and the most current information, LLC owners should consult the Texas Comptroller’s website or seek advice from a tax professional or legal advisor.
9. Obtain Business Licenses and Permits
A Texas limited liability company may need federal business, occupational, or contractor licenses.
The Texas Secretary of State is not responsible for issuing these licenses and permits. Rather, the responsibility falls on the state agency regulating the particular industry.
For example, if you're opening your LLC in Dallas County, then you'll need to apply with the county clerk's office for the occupational license.
You'll need to contact that particular agency to find out what licenses and permits you need for your LLCs, how much they cost, and how long it will take to obtain them.
10. Texas Public Information Report (Mandatory)
In addition to the formation documents and the annual franchise tax report, Texas LLCs must file a Public Information Report (PIR) with their franchise tax report.
As a business consultant, I've seen how this PIR, a critical compliance step for LLCs, helps maintain transparency with Texas state laws.
It's a unique requirement that ensures businesses are accountable and up-to-date with their information, reflecting the state's commitment to business regulation and public record-keeping.
The Public Information Report provides the Texas Comptroller with updated information about your LLC, such as the names and addresses of its officers, directors, and registered agent.
This report is crucial for keeping the state informed about your business's key aspects and ensuring transparency.
The PIR is typically filed annually at the same time as the franchise tax report, with a due date of May 15th. It's important to note that even if your LLC qualifies for a franchise tax exemption, you still need to file the PIR.
The requirement to submit this report applies to most entities operating in Texas, including LLCs, corporations, and limited partnerships.
Failing to file the Public Information Report can lead to penalties and may affect your LLC’s standing with the state.
It’s recommended to check with the Texas Comptroller’s Office for the latest forms and requirements to ensure accurate and timely filing.
11. Choosing Your Tax Structure
When forming a Limited Liability Company in Texas, one of the most crucial decisions you'll face is selecting the appropriate tax structure for your business. In Texas, LLCs enjoy a range of tax classifications, each with its own unique advantages and challenges.
Default Tax Classification:
- Sole Proprietorship/Partnership (for single-member or multi-member LLCs, respectively): LLCs in Texas are pass-through entities, meaning the income passes through to the members, who pay self-employment tax on this income. They also pay franchise tax on the LLC’s income. This default classification avoids the double taxation seen in corporations.
Elective Tax Classification:
- C-Corporation: Electing to be treated as a C-Corporation involves corporate taxes. It's not a pass-through entity, leading to potential double taxation—once at the corporate level and again at the shareholder level—on dividends. This option may be less favorable for smaller LLCs due to its complexity and tax burden.
- S-Corporation: Offers limited liability protection while maintaining separate legal entity status. Unlike C-Corporations, S-Corporations don't pay corporate income taxes but pass income, losses, deductions, and credits to shareholders. Shareholders pay self-employment tax only on their salaries, not on other profits from the LLC.
Texas LLCs enjoy significant tax flexibility and benefits, like avoiding double taxation prevalent in C-Corporations. The income is taxed once at the member's income tax rate.
Additionally, Texas does not impose a state income tax on individuals, further simplifying tax obligations for LLC owners.
I would recommend the default pass-through classification for most small to medium-sized LLCs. This structure simplifies tax filing and minimizes the tax burden by avoiding double taxation. It is particularly beneficial in Texas, given the state's favorable tax policies for LLCs.
The tax structure of an LLC can be changed by filing Form 8832 with the IRS. The election to change the classification cannot take effect more than 75 days before the election is filed and not later than 12 months after filing.
Also, for certain taxes in Texas, quarterly reports are due in April, July, October, and January
Benefits and Drawbacks of an LLC in Texas
- Limited Liability Protection: LLCs provide personal liability protection, meaning owners are not personally responsible for business debts and legal judgments. This is a significant advantage over sole proprietorships and partnerships, where personal assets are at risk.
- Tax Flexibility: Texas LLCs benefit from pass-through taxation, meaning the company's profits and losses are passed directly to owners' personal tax returns, avoiding double taxation. Additionally, LLCs can choose to be taxed as corporations if it's more beneficial.
- Ease of Formation and Maintenance: Forming an LLC in Texas is relatively straightforward, with fewer formalities compared to corporations. Ongoing requirements, such as annual reports or board meetings, are also minimal, making it easier for small business owners to comply.
- Credibility and Name Protection: Establishing an LLC can enhance your business’s credibility with customers and partners. Also, once you register your LLC in Texas, the name of your business is protected in the state.
- Franchise Tax Obligations: Although Texas does not levy a personal income tax, LLCs are subject to a franchise tax, also known as the “Margin Tax.” This applies to businesses with gross receipts above a certain threshold and requires careful financial planning.
- Limited Growth Potential: For businesses planning to go public or seeking significant outside investment, an LLC might not be the ideal structure. Investors and venture capitalists often prefer corporations for their familiar structure and the ability to issue stock.
- Complexity in Multi-Member LLCs: When an LLC has multiple members, issues like profit sharing, management, and the transfer of membership interests can become complex. Proper legal agreements are essential to avoid disputes.
- Self-Employment Taxes: Members of an LLC are considered self-employed and must pay self-employment taxes on their share of the profits. This can be higher than the taxes on wages from employment.
"Texas does not levy a business income tax, but it does apply a franchise tax to specific enterprises. Companies earning less than $2.47 million are exempt from this tax. Those generating up to $20 million in revenue are subject to a 0.331% tax rate. Meanwhile, larger companies are taxed at rates of either 0.375% or 0.75%, based on their business category."
- Jon Morgan, Co-Editor & Co-Founder of Venture Smarter
DIY vs. Professional LLC Formation
When forming an LLC in Texas, entrepreneurs face a choice: should they handle the formation process themselves (DIY) or hire a professional service?
Both paths have their merits and drawbacks, and the best choice depends on individual circumstances and requirements.
Let's compare these options based on various factors:
DIY LLC Formation
- Cost-Effective: The primary advantage of DIY LLC formation is cost savings. You only pay the state filing fees without any additional service charges.
- Control and Learning: Handling the process yourself offers more control and a deeper understanding of your business’s legal framework.
- Time-Consuming: It requires a significant time investment to understand and complete all the steps correctly.
- Risk of Errors: Without professional guidance, there's a higher risk of making mistakes in forms and understanding legal requirements, which could lead to delays or rejection.
- No Legal Advice: DIY does not provide access to legal advice, which can be crucial for some businesses, especially those with complex structures or unique needs.
Professional LLC Formation Services
- Expertise and Efficiency: Professional services bring expertise in state-specific regulations, ensuring that all paperwork is correctly filed. This can save time and prevent delays.
- Legal Compliance and Customization: Many services offer additional legal compliance support and can customize the LLC to your specific needs.
- Peace of Mind: Using a professional service provides peace of mind, knowing that experts are handling the process.
- Cost: Professional services come with a fee, in addition to the state filing fees. This can be a significant factor for budget-conscious entrepreneurs.
- Less Hands-On Involvement: You may have less involvement and understanding of the intricate legal details of your LLC formation.
Choosing between DIY and professional LLC formation in Texas depends on individual preferences, business complexity, time availability, and budget.
If cost-saving is a priority and you have the time and confidence to navigate the process, DIY could be a good choice. However, for those seeking expertise, efficiency, and peace of mind, especially in more complex cases, professional services are a valuable investment.
Ultimately, the decision should align with your specific business needs and personal comfort with handling legal procedures.
What Happens to LLC When an Owner Dies in Texas?
When an LLC owner dies in Texas, the provisions in the operating agreement will dictate the actions the members should take. Generally, the deceased's share will be transferred to their estate or designated beneficiary.
Can a Single-Member LLC Be a Parent Company in Texas?
In Texas, a single-member LLC can be a parent company regardless of whether single-member or multi-member. Parent companies are usually not doing business in the state they're set up (i.e., their home state), but often child companies do business. Hence, they need to be registered locally.