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The state of Texas has 2.6 million small businesses that employ nearly half of Texas residents, making these businesses very important to the state’s overall economy. Like other states, Texas recognizes limited liability companies (LLCs) as a type of business entity. Many small business owners choose to structure their companies as LLCs because they offer a combination of flexibility, legal protections, and tax advantages.
Fortunately, starting an LLC in Texas is relatively straightforward and doesn’t require too much paperwork. However, it’s a good idea to know the requirements in advance. Here, we’ll break down everything you need to know to successfully form an LLC in Texas.
In order to form an LLC in Texas, you must register your company with the Texas Secretary of State. The Texas Secretary of State implements and enforces the Texas Business Organizations Code, which defines the requirements for forming a new LLC in Texas.
Here are the steps for forming an LLC in Texas:
In Texas, almost anyone with a valid business purpose can form an LLC. Certain regulated professions, such as doctors and veterinarians, have to form a professional entity, such as a professional limited liability company (PLLC) or professional corporation (PC). The secretary of state has published a guide of permissible entity types, broken down by profession.
The first step to form a Texas LLC is to choose a business name. Under Texas law, an LLC must have a name that’s sufficiently distinct from other business names in the state so that it doesn’t mislead the public.
Names for Texas LLCs must end with “limited liability company” or “limited company.” Abbreviations of those terms, such as L.L.C., LLC, L.C., or LC, are also appropriate.
Under Texas law, an LLC’s name cannot contain any of the following words: bank, bank and trust, trust, trust company, and bail bonds. The name of the LLC also cannot suggest that the company is affiliated with the government. The words “insurance” and “surety” can be problematic as well unless it’s absolutely clear that the business isn’t an insurance agency or surety agency. The reason is that insurance and surety companies are regulated by the Texas Insurance Code.
If the name of your Texas LLC is so similar to that of another Texas business that it wouldn’t pass muster under the law, there’s a way around it—the other company must consent to your business’s use of a similar name. For example, let’s say you want to name your company Texas Super Bakery LLC, but a company called Texan Super Bakery LLC already exists. The latter would have to provide their consent on a Consent to Use of Similar Name Form (Form 509).
Once you’ve selected some possible names for your LLC, you can check their availability online at Texas’s SOSDirect website. You can also request a preliminary determination that the name is available by contacting the Secretary of State. You can call (512) 463-5555, dial 7-1-1 locally for relay services, or email your name inquiry to the Secretary of State.
Optionally, you can reserve a business name for up to 120 days while you complete other steps for forming your LLC. To reserve a name, you must file an Application for Reservation of an Entity Name (Form 501), along with a $40 filing fee. The form can be filed online, by mail, by fax, or by personal delivery.
You don’t have to get name clearance or reserve a name to form your LLC, but doing so can give you some peace of mind that you’ve chosen an appropriate name for your business. Just keep in mind that even if the Secretary of State clears a name or allows you to reserve a name, that’s not a guarantee that the name complies with trademark laws. It’s your responsibility to choose a legal name for your business, so if you have concerns, we suggest consulting a business attorney.
Photo credit: sos.state.tx.us
Every LLC that’s authorized to do business in Texas must have a registered agent. This is true whether you’re forming your business under the laws of Texas or are an out-of-state business that will be operating in Texas.
A registered agent is an individual or company that accepts legal and official documents on your business’s behalf. An individual Texas resident or an organization that is authorized to do business in Texas can act as your registered agent.
If you choose an individual, they should be:
Registered agents in Texas must provide consent to serve in that capacity, using Form 401-A: Acceptance of Appointment and Consent to Serve as Registered Agent (you can also draft your own consent form, as long as it contains the information included in the Secretary of State’s form). This consent form doesn’t get filed with the state, but the business should retain the signed copy with other business documents.
Although a business entity cannot serve as its own registered agent, you or another member of the LLC can serve as registered agent. The problem with this is that a member of the LLC might not always be available to accept business documents. For example, a member might fall sick and temporarily be out of the office. For this reason, many businesses opt to use online legal services, which will act as your registered agent in exchange for a fee. We recommend Incfile for registered agent services. If you use Incfile to form your LLC, you will even get one year of free registered agent service.
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There’s no such thing as a general business license in Texas. However, depending on the industry your business is in, you might need a special permit from one of many Texas regulatory agencies. The Texas Business Permit Office has published a guide about the different types of state licenses you need depending on your type of business. Cities and counties might have their own permitting requirements.
Any business in Texas that sells tangible personal property and certain types services must apply for a sales and use tax permit from the Texas Comptroller. And if you’re doing business under a trade name that’s different from your LLC’s legal name, then you’ll also need to file an Assumed Name Certificate (Form 503), also known as a fictitious business name. The filing fee for an assumed name is $25.
The next step to form your LLC is to file a certificate of formation with the state of Texas. This document is equivalent to what other states call the articles of organization. You can file the form online at SOSDirect for faster processing, mail the form, send it by fax, or hand deliver it to the Secretary of State’s Austin office.
All of the following will be included on your Texas certificate of formation:
The filing fee for the certificate of formation is $300. Domestic LLCs—LLCs that are based in and organized under the laws of Texas—should fill out Form 205. Foreign LLCs—those that are formed under the laws of another state but want to do business in Texas—must fill out Form 304. Form 304 has a filing fee of $750.
Once you submit your certificate of formation, the secretary of state will review and file it, and send you back a stamped copy of the document. This typically takes one to three business days.
If you’ve reached this point, congratulations! You’re now authorized to do business in Texas as an LLC. But there are still a few more things you need to take care of to ensure that your LLC remains in good standing with the state.
Texas doesn’t require an LLC operating agreement, but members should create one. The operating agreement forms a backbone of your business.
The LLC operating agreement should contain the following types of information:
You won’t file your operating agreement with the state. You should store it along with other important business documents. If you need a little extra help with your operating agreement, try a service like Incfile. Most of their business formation packages include a customizable operating agreement.
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LLCs that operate in Texas must pay a franchise tax to the Texas Comptroller of Public Accounts and fill out a public information report (PIR) by May 15 of each year. For example, if you started your LLC in December 2018, your first PIR and franchise taxes would be due on May 15, 2019. The form contains information about the LLC’s members and any investors in the company. The purpose of the PIR is to ensure that there’s up-to-date information about your business on file with the secretary of state.
The good news is that the majority of LLCs won’t have to pay the franchise tax. For 2019, the tax only applies to businesses that make over $1,130,000 in annual gross revenue (this ceiling changes every two years). Retail and wholesale businesses that fall into that category have to pay a 0.375% tax rate. Other business types pay a 0.75% tax rate (reduced to 0.331% if you use an EZ computation form). Even if you don’t have to pay the franchise tax, you don’t get away with less paperwork. You still have to file a no-tax due form.
Normally, members of LLCs must pay personal state income taxes on their share of the LLC’s profits. However, Texas is one of nine states that don’t charge state income tax. This is a big bonus for companies that are doing business in the Lone Star State.
In addition to Texas state requirements for LLCs, you’ll also need to comply with federal requirements.
LLCs with employees or those that are taxed as corporations at the federal level must apply for an employer identification number (EIN). An EIN is like a social security number for your business, and is used to identify your business when you file federal taxes.
Although there’s no Texas income tax, LLC members should be prepared to pay 15.3% in federal self-employment taxes to cover social security and Medicare obligations. If you have employees, you also have to withhold federal social security and Medicare taxes from your employees’ wages and pay the employer share of these taxes.
There are some unique advantages to starting an LLC in Texas or operating your business in Texas. LLCs have more operational flexibility than corporations and are easier to maintain. But the choice of business entity isn’t always easy. Here are some pros and cons to consider.
As you evaluate these benefits and drawbacks, make sure you consider other types of business entities. Many small business owners get started as sole proprietorships or partnerships. These business types require much less paperwork and have an easier time filing taxes. Businesses planning to raise money from investors should consider a C-corporation or S-corporation. Corporate structure is more suitable for investor-backed companies because of the ability to issue and sell stock.
Forming an LLC in Texas can give a small business owner some unique advantages. Not only do you enjoy the operational flexibility and legal protections that come with this business entity form. You also can save on taxes since Texas only minimally taxes LLCs.
When you’re ready to form your LLC in Texas, we suggest using Incfile to file your certificate of formation. Incfile can also help you with other steps in the process, such as creating your operating agreement.