Starting a Limited Liability Company (LLC) in Texas can be an exciting venture for any entrepreneur. This article is designed to guide you through the process of forming an LLC in the Lone Star State, from choosing a business name to understanding the costs and benefits involved. Whether you're a seasoned business owner or new to the entrepreneurial world, understanding how to navigate the formation of an LLC is crucial.
As we delve into the details of starting a business, remember that starting an LLC is more than just paperwork; it's about creating a stable and profitable business.
How to start an LLC in Texas in 7 steps
01. Pick your business name
The first step to starting a business in Texas is to select a name for your LLC. This isn't just a creative process, it's a legal one too. Your business name should be unique and must not be the same as or too similar to other names on record with the Texas Secretary of State. You'll want to make sure your chosen name ends with "LLC," "L.L.C.," or "Limited Liability Company" to comply with state requirements.
Here's how you can ensure your business name stands out and meets all legal criteria:
Check for availability: Use the Texas Secretary of State's online database to search for existing business names.
Follow naming guidelines: Avoid restricted words that could confuse your LLC with a government agency (e.g., FBI, Treasury).
Consider your online presence: Look up domain availability if you plan to also focus on creating a website, which can be easily done through platforms like Wix.
Tip: If you're having trouble coming up with a unique name for your business, consider using a business name generator.
02. Choose your registered agent
Every LLC in Texas must have a registered agent, an individual or company that agrees to accept legal papers on behalf of your LLC. Your registered agent must be available during regular business hours and have a physical address in Texas.
To choose the right registered agent, consider the following:
Reliability: Ensure they are dependable and can handle confidential documents.
Availability: They should be consistently available at the listed address during business hours.
Compliance: Verify that they meet all legal requirements set by the state of Texas.
Need help setting up your LLC? Wix has partnered with LegalZoom, the No. 1 choice for online business formation to help you start, run and grow your business.
03. Obtain state business permits
Depending on the nature of your business, you may need specific permits or licenses to operate legally in Texas. These could range from general business licenses to industry-specific permits.
To obtain the necessary permits in order to register your business, follow these steps:
Identify requirements: Check with local and state agencies to determine what permits you need.
Complete the applications: Fill out all required paperwork accurately and submit them to the appropriate authorities.
Pay any fees: Be prepared to pay any associated fees for obtaining your permits.
Let’s say you want to start a food business in Texas. First, you’ll need a permit to operate. The three main types of permits are: for a fixed food establishment (a restaurant), mobile food unit (including roadside vendors, food trucks) and temporary establishment (a food business operating for no more than 14 days at a single event, or valid for multiple events for up to 2 years).
You'll then need one person with a food manager certification and all employees who handle food will need Food handler certifications. You will also need to show that any water used in the preparation or cooking of food comes from an approved source.
Learn more: How to get a business license
04. File a Certificate of Formation
The Certificate of Formation is a critical document that officially creates your LLC in Texas. You'll file this with the Texas Secretary of State, either online or by mail, along with the required filing fee. This example meets the legal minimum requirements set by the Texas Secretary of State for such a document.
Filing involves these key actions:
Gather your business information: You'll need details like your LLC's name, registered agent information and management structure.
Fill out Form 205: This is the specific form used for filing an LLC's Certificate of Formation in Texas.
Submit and pay fees: Complete the submission process by paying the necessary fee. This is $300 to file an LLC, an extra $30 if you want a certified copy of the Certificate of Formation and an extra $5 for a certificate of status.
05. Draft your LLC operating agreement
Although not legally required in Texas, creating an operating agreement is highly recommended for any LLC. This internal document outlines ownership structures, member roles and operational procedures for your type of business.
Here’s why an operating agreement is important:
Clarifies business rules and guidelines: It sets clear expectations for members regarding operations and conflict resolution.
Protects LLC status: Helps maintain limited liability status by proving that your LLC is a separate business entity.
Prevents misunderstandings: Reduces potential disputes among members by detailing policies and procedures for how the business should be run.
06. Apply for an EIN and pay relevant taxes
An Employer Identification Number (EIN) is like a social security number for your LLC. It’s necessary for hiring employees, opening bank accounts and filing taxes.
Securing an EIN involves:
Applying online or via mail: The IRS provides free EIN registration through their website or via mail submission.
Understanding your business tax obligations: Learn about state-specific taxes that apply to your LLC, such as franchise tax or sales tax. In Texas for an LLC owner this means a 15.3% self-employed tax (12.4% social security, 2.9% Medicare). For more information, visit the Texas Comptroller's Office website.
07. Organize annual reports
In some states, annual reports are mandatory filings that keep your company's information up-to-date with the state government. However, Texas does not require annual reports but does require an annual franchise tax report.
To ensure you’re compliant with this reporting requirement make sure to:
Know due dates: Mark your calendar for May 15th each year when franchise tax reports are due.
Maintain proper records: Keep accurate records throughout the year to simplify report preparation when due dates approach.
How much does it cost to start an LLC in Texas
When planning to start an LLC in Texas, it's important to budget for the various costs involved. These expenses can vary depending on the complexity of your business and any additional services you may need. Below is a breakdown of the typical costs you'll encounter when setting up your LLC in Texas.
The main costs involved in starting an LLC in Texas
Filing fee for Certificate of Formation: The state of Texas requires a non-refundable fee to file your Certificate of Formation. This is one of the primary costs you'll incur. For an LLC it costs $300.
Registered agent fee: If you choose to hire a professional registered agent, they will charge a fee for their services. This fee can vary widely based on the provider.
Business permits and licenses: The cost for permits and licenses can differ depending on your business type and location. Some industries may require multiple licenses, which will increase this cost.
Franchise tax: While not an upfront cost, remember that your LLC will be subject to Texas's franchise tax, which is based on your business's revenue and is calculated one of several ways - total revenue times 70 percent, total revenue minus cost of goods sold, total revenue minus compensation, total revenue minus $1million.
Operating agreement: If you decide to have a lawyer draft your operating agreement, there will be legal fees involved. However, drafting one yourself or using a template can reduce or eliminate this cost.
EIN registration: Fortunately, obtaining an EIN from the IRS is free of charge.
Additional costs may include:
Legal or financial consulting fees: If you seek professional advice during the formation process, these services will add to your startup costs.
Domain registration and website creation: Building a website is crucial in today's online market. Costs here include domain registration and potentially hiring a web designer or using a website builder like Wix.
Business insurance: Depending on your industry, you might need various types of insurance to protect your LLC.
Learn more: Cost to start an LLC
Who can start an LLC in Texas
In Texas, starting an LLC is open to a wide range of individuals and groups, but there are certain eligibility criteria that must be met. Understanding who can form an LLC in the state is crucial before you embark on the process.
Age requirement
There is no minimum age requirement to start an LLC in Texas. However, individuals under 18 may face challenges entering into contracts with suppliers and other vendors.
Residency
You don't have to be a Texas resident or a U.S. citizen to form an LLC in the state. However, your LLC must have a registered agent with a physical address within Texas.
Legal status
Both individuals and entities can form an LLC. This includes sole proprietors looking to change their business structure and existing businesses wanting to create a new LLC.
Industry restrictions
Most types of businesses can form an LLC in Texas but certain professions with specific regulatory requirements might need to form professional limited liability companies (PLLCs).
Number of members
Texas does not require a minimum or maximum number of members to start an LLC.
Business name restrictions
Your chosen business name must comply with Texas naming laws and cannot imply that it is associated with government agencies or activities it's not legally authorized to perform.
Benefits of starting an LLC in Texas
Forming an LLC in Texas comes with a host of advantages that can be appealing to business owners. These benefits range from legal protections to tax advantages.
Limited liability protection
As the name suggests, an LLC provides its owners with limited liability. This means your personal assets are typically protected if your business faces lawsuits or debts.
Shylene D’Addario, VP and associate general counsel at LegalZoom, sheds some light on defining this popular business structure.
“A limited liability company—or LLC—is a type of business entity that offers some of the benefits of a corporation with less formality. One key benefit of an LLC is that it can protect a small business owner’s personal assets—like homes, cars and personal bank accounts—from lawsuits against the business.”
Pass-through taxation
LLCs often benefit from pass-through taxation where the business itself is not taxed. Instead, profits and losses pass through to the individual members' tax returns.
Flexible management structure
Unlike corporations, LLCs are not required to have a board of directors or annual meetings, offering more flexibility in how the business is managed and operated.
Ease of formation and maintenance
Starting an LLC in Texas is relatively straightforward, with fewer formalities compared to corporations. Ongoing maintenance is also simpler, with no requirement for annual reports.
Credibility with customers and partners
Having 'LLC' after your business name can enhance your credibility with potential customers, suppliers and financial institutions. You can then choose an .llc domain for your website to reinforce this.
No ownership restrictions
Texas allows for unlimited owners (members) in an LLC, who can be individuals, corporations, other LLCs, or foreign entities.
Attractive business climate
Texas is known for its business-friendly environment, including no state income tax and a supportive regulatory framework.
Access to business resources
The state offers various resources to support businesses, such as development programs and incentives. These include business resources from the Texas Economic Development & Tourism Office, the Governor’s Small Business Resource Portal and the Texas Secretary of State Start-up guides and resources.
Potential disadvantages of starting an LLC in Texas
While forming an LLC in Texas has many benefits, it's also important to consider the potential disadvantages. Being aware of these drawbacks can help you make a well-informed decision about whether an LLC is the right structure for your business. Here are some challenges you might face with an LLC in Texas:
Franchise tax
Although Texas does not have a personal income tax, LLCs are subject to a franchise tax based on earnings. This could be a financial burden depending on your company's revenue.
Public disclosure
Information about your LLC, such as names of members and the registered agent, becomes public record when you file with the state. This might be a concern if privacy is important to you.
Limited growth potential
If you plan to seek outside investors, an LLC may not be as attractive as a corporation. Investors typically prefer corporations for their established equity structures and potential for growth.
Self-employment taxes
Profits from an LLC may be subject to self-employment taxes, which can be higher than corporate taxes because they include Social Security and Medicare contributions.
Transferability of ownership
Transferring ownership interests in an LLC can be more complicated than with a corporation. Typically, all members must approve adding new members or altering ownership percentages.
Complexity in multi-state operations
If your LLC operates in multiple states, you may need to comply with the laws and regulations of each state, which can complicate taxes and regulatory compliance.
Less structure
The flexibility of an LLC's management can also be a downside if there's not enough structure or clear roles defined within the business.
Why start an LLC over another business entity in Texas?
Choosing the right business structure is a critical decision for any entrepreneur. In Texas, forming an LLC is often favored over other entities due to its unique advantages. However, it's essential to compare it with other types of business structures to understand why an LLC might be the best choice for your situation.
Here's how an LLC stacks up against other business entities:
Sole proprietorship: Unlike a sole proprietorship, an LLC provides personal asset protection, separating your personal liabilities from those of your business.
Partnership: An LLC offers more protection for each member compared to a partnership, where each partner can be personally liable for the debts of the business.
Corporation: While corporations also provide limited liability protection, they’re also subject to double taxation (taxes on both corporate profits and shareholder dividends). An LLC avoids this with pass-through taxation.
LLCs also offer these unique advantages:
Operational flexibility: Corporations are required to have a formal structure with directors and officers, while an LLC can be managed by its members or managers, providing greater operational flexibility.
Fewer record-keeping requirements: An LLC has less stringent requirements for record-keeping and reporting compared to a corporation.
Profit distribution flexibility: Profits in an LLC can be distributed in any manner agreed upon by the members, unlike corporations that distribute profits according to the number and type of shares held.
You've formed your LLC in Texas, now what?
After successfully forming your LLC in Texas, the journey to building and growing your business is just beginning. There are several important steps you should take to ensure that your LLC operates smoothly and remains compliant with state laws.
Open a business bank account
To maintain your LLC's liability protection, it's crucial to keep your business finances separate from personal ones. Opening a business bank account is a key step in achieving this.
Obtain necessary insurance
Depending on your industry, you may need various types of insurance to protect your business and comply with state regulations.
For example, if you’re looking to start a handyman business in the state you’ll need to consider general liability insurance, professional liability insurance, workers’ compensation insurance, tools and equipment insurance and potentially commercial property insurance too.
Stay compliant with state taxes
Make sure you understand and meet all tax obligations, including the Texas franchise tax and any other applicable state taxes.
Additionally, focus on these areas to manage and grow your LLC:
Understand ongoing compliance requirements: Familiarize yourself with any annual filings or fees required by the state of Texas to keep your LLC in good standing.
Develop a strong brand identity: Create a logo with a logo maker, establish a brand voice, and build a professional website to present a cohesive image to customers.
Implement a good accounting system: Good financial management is essential for any business. Set up an accounting system that allows you to track expenses, profits, and financial growth accurately.
For more information on how to start an LLC by state
How to start an LLC in Texas FAQ
How long does it take to form an LLC in Texas?
The time it takes to form an LLC in Texas can vary. If you file online, the processing time is typically faster, often within a few business days. Mailed applications may take several weeks.The time it takes to form an LLC in Texas can vary. If you file online, the processing time is typically faster, often within a few business days. Mailed applications may take several weeks.