How To Form an LLC in Texas

What happens in Texas stays in Texas. It’s one of the reasons thousands of people flock to this wonderful state year in year out in the hope of having a good time. Now, here is another thing that has people arriving in throngs – the profitable business environment. While you may not know this, it is one of the best states to start a business. Today, we look at why it could be a good home for your business.

Business Environment in Texas

Texas is home to grandeur, and the business environment is not different. People running small businesses are having a ball in the state. According to recent statistics, such as the 2019’s Best & Worst States to Start a Business report by WalletHub, it is the best state to start a business. That alone is enough to let you on all the amazing opportunities that await you should you choose to start a business here.

Now, how do you determine which state is a good place to start a business? Generally, rankers look at how easy it is for business owners to get access to capital. They also look at if there is a talented and skilled workforce to help business people meet their goals. Additionally, they look at how costly it is to run a business in the state, including labor and renting costs. All these and more factors put together determine just how easy or difficult it would be for you, as a business owner, to make headway in a given region.

Thus, if you have been racking your brain, trying to think of a place where you can have a fresh start, it might help to start with the Lone Star State.

Why Start a Business in Texas?

So far, we have brushed on some reasons why this state may be good for your business. How about we get deeper into it? Here goes:

Workforce

While you may have an amazing idea that is set to shake investors to the core, you need people to help you achieve it. These people are none other than the workforce needed to realize your dream. Luckily for you, Texas is home to a diverse range of talented people. Through working with local academic institutions, you can source for talented people and bring them to your team from the beginning. Plus, you also have the opportunity to work with skilled employees from different cities in the state. From Dallas to Houston through to San Antonio, the choice is yours. And you know what they say; you are only as strong as your team.

Tax Benefits

Without getting into it too much, you do know that an LLC has tax benefits. It gets even better when you form it in Texas. Did you know that business owners in the state are not subject to individual income tax? Corporate income tax is also not existent. With this tax friendliness, it is not a surprise that many companies are moving shop here.

Innovation

Many people associate innovation with Silicon Valley. However, that is not the only space where creative minds come together to work on groundbreaking ideas. The Lone Star state is also home to innovations in various industries. These include energy, aviation, petroleum refining, biotechnology, manufacturing and information technology. With all these sectors thriving, investors have also shown great interest in aiding business owners to accomplish their goals. It should not be that hard to get funding as long as you can back up your idea with good stats.

Ease of Operations

One thing that can hold a business back is the regulations to which it is subject. Factors such as tax regulations, hiring practices, training opportunities and more determine how fast a business progresses. You will be happy to know that this state has regulations that are friendly to new and upcoming businesses, helping you build a strong foundation.

Starting an LLC in Texas

Preparations 

As with any business, there is no assurance that your business will take off at a fast rate. It is thus important that you prepare adequately for the road ahead. The journey begins by understanding what documents you need and all laws to which you have to abide during this journey. We will get you started with tidbits on everything you need to know.

Once you are done with the naming and finding a registered agent in Texas, you will need to file your Certificate of Formation with the secretary of state. You can do this in person, online or by mail at a cost of $300. 

What do we have to do? You need to follow the steps below:

Step 1: Decide on a business entity and name

There are many business structure you can start, all with their upsides and downsides. It is thus important that you understand what each entity spells for your operations regarding liability, investment needs and tax liabilities. Below are the options you can consider:

  • Sole proprietorship- this is the most common entity and is the easiest to form. It works for a single person with low investment needs.
  • General partnership- here, two or more people come together to engage in business for profit under a partnership agreement. Partners do not enjoy limited liability.
  • Limited partnership- this is unlike general partnership such that some partners in this setup enjoy limited liability while others remain liable when things go wrong.
  • Limited liability partnership- partners come together to protect themselves from claims of negligence, error or incompetence. 
  • Corporation- this has central management and allows owners to enjoy limited liability. Directors take on the business affairs on behalf of the owners, known as the shareholders.
  • Limited liability company- this structure enjoys the benefits of a corporation and a partnership. It thus has more to offer in the way of structural flexibility and tax advantages.

What is the right choice for you?

Choosing between the different offerings can be challenging. The best way to choose one is by understanding what each entity offers and consulting professionals for advice. A good example would be your attorney or your accountant. They can work out the benefits of each as pertains to your operations and advise you accordingly.

Why start an LLC?

  • Limited liability – members of this entity are not personally liable for any debts accruing from the business. That means that if you get sued, you do not have to worry about your personal assets getting taken from you. While other entities can offer this, they require more formality compared to this setup.
  • Registration – in Texas, you part with only $300 to start your LLC, which is as much as you would pay for a corporation. However, compared to a LLP, this cost is lower. Plus, you are not subject to any annual registration fees under this entity.
  • Tax Flexibility – yo u can choose how you want to be taxed. For example, if you own a single-member setup, you can enjoy sole proprietorship treatment.
  • Reduced Formality – with some entities, you have to keep minutes and hold annual meetings in accordance with the law. That is not the case with an LLC, where you have more freedom as to how to run the business.
  • Membership – you get to decide how many members will be part of your business. In some entities, there are clear restrictions on the number of members e.g. an S corporation can only have 100 members.

Naming Process

The name you choose will be the identifier of your business and should thus be unique to your operations. The name should:

  • Include one of the following designators: LLC or L.L.C., Ltd. Co., LC or L.C. , Ltd. Company, Ltd. Liability Co., Limited Company, Limited Liability Company or Ltd. Liability Company. The designator should point to the type of entity and should not allude to other business types.
  • Not contain names or phrases that can confuse the public into thinking the company is a government agency
  • Not include restricted words such as attorney. Where such names are present, you need to file additional paperwork and involve a licensed individual in the formation.

Name Search

You must do a name search through the Texas Secretary Of State website to check if the suggested name is available. Failure to do this means that you can try and reserve a name, only to find that it belongs to someone else. A failed try costs you time and money. When checking for uniqueness, also look at other entities such as partnerships and ensure that your name does not share similarities with their identifiers. 

Additionally, check if the URL under that name is available. It might not be important at this time but as you progress, you may want to register a domain name. You would not want to get to this point only to find that the preferred site name is not available.

Texas Entity Name Reservation

Once you confirm that the identifier is unique to you, reserving it is possible by filing Form 501 at a cost of $40. You can do this online or by mail. The reservation will last 120 days and you can extend it 30 days to its expiry if need be. 

Online

You can file a name reservation through SOSDirect 24 hours a day, 7 days a week. On the same site you will find instructions and necessary forms

By Mail

Fill the reservation form and send it to:

Secretary of State
P.O. Box 13697
Austin, TX 78711-3697

Want to learn more? Read our full Choose a business structure and Unique Business Name For LLC

Step 2: Assign an Agent

The Texas secretary of state requires that you appoint a registered agent at the start of the formation process.

Roles of an agent

The agent can be an individual or a business entity and is your primary point of contact with the state. They not only receive correspondence on your behalf but should also accept service of process. That means that if you ever get sued, the legal summons go to them instead of law enforcement officers coming to you.

Who can represent you?

Your agent should:

  • Be aged 18 years or older
  • Have a physical address in the state where you operate your business 
  • Work during normal business hours such that law enforcement officers can reach them as needed
  • Sign a Consent to Serve as Registered Agent form (link) to show that they are willing to take on the delegated tasks

As long as one meets the above conditions, they can represent you. Even you can take on this role, or a member of the organization. However, you will find that many people opt to delegate this role to third parties as follows:

Why should you hire a third party agent?

  • Discretion- you can keep your physical address private by having the agent list theirs publicly. Also, in the event of legal summons, these will go to your agent and not your place of business.
  • Less hassle- you can operate during any hours, knowing that the agent will be around to handle any correspondence.
  • National Services- right now, you are operating in Texas. However, in the future, you may want to expand to another state. Where this happens, having a national agent would enable you to make the move without incurring additional hassles.

What is the best third party service?

  • Northwest: charges for this national service start from $125 a year. The agent scans all your documents and offers personalized customer support to each client.
  • ZenBusiness: this agent charges $99 a year, offering an easy-to-navigate site as well as annual reports for ease of tracking.
  • IncFile: rates start at $119 a year with free LLC formation services with an additional free year of registered agent services.
  • LegalZoom: with charges of $299 a year, their prices are on the steeper side. Clients also get legal services, alongside their standard packages.
  • Swyft Filings: charges start at $149 a year, allowing users to access online dashboards and filing reminders.

Want to learn more? Read our full Assign a the Registered Agent

Step 3: File a Certificate of Formation

The Certificate of Formation, known as Articles of Organization in other states, is a legal document required by the secretary of state to officially establish your business entity.

Filing steps are as follows:

1. Accessing the Forms

There are two ways to get hold of the form, which you can both achieve by accessing the Texas Secretary of State website as follows:

Online

Mail

You can download the form from the site before filling and sending it to an address we will later provide.

2. Filling the Form

The form should include the below components for it to be acceptable under the law:

  • Name of the business – this is how the state will recognize your business. We covered this in step 1
  • Registered agent and their physical address – the agent should have signed a consent form, taking on the role of primary contact
  • Governing structure – who will manage the LLC? Will members do it or will managers take over?
  • Purpose – the proposed operations should be within the bounds of the law.

3. Filing the Form

You can then file the completed forms as follows:

Online

This filing can be done via (link). 

Mail

You need to fill two forms as described above, namely the Certificate of Formation (Form 205) and the Consent to Serve as Registered Agent (Form 401A).

Mail the forms to:

Corporations Section
Secretary of State
PO Box 13697
Austin, TX 78711

FAX

You will need two forms as described above, namely the Certificate of Formation (Form 205) and the Consent to Serve as Registered Agent (Form 401A). Send the forms to:

(512) 463-5709

In Person

Prepare two forms as shown above and deliver them to the following address:

James Earl Rudder Office Building
1019 Brazos, Austin, TX 78701

Fees and Timelines

All applications will attract a filing fee of $300. It takes 3 business days for online applications to yield results. Mail applications take 5-7 business days, after which you should receive your license.

Want to learn more? Read our full File LLC Certificate of Formation

Step 4: Get an Employer Identification Number (EIN)

Getting an (EIN) is the next step after getting your business formally established. You can think of it as the social security number for your business. It enables the IRS to recognize your business for tax purposes and also adds to your credibility.

Must you have one?

Not all businesses need an EIN to be within the bounds of the law. However, you might need one if your business:

  • Plans to hire employees or has excise tax liability
  • Has more than one member in the governing structure

Should you get one?

Without this identification, you cannot enjoy the following advantages:

  • Opening a business bank account 
  • Keeping your SSN private
  • Registering for tax payments
  • Hiring employees for your business and putting them on a payroll

Thus, even if you may not need the identification, it can come in handy in other areas. It would be advisable that you apply for one.

Registration Process

The good news is that getting this identification will not cost a thing. All you need is to get your business license and use the information to get the ID as follows:

Online

You use make an application using this link, or by

Mail

You need to fill and send Form SS-4 to the following address:

Internal Revenue Service
Attn: EIN Operation
Cincinnati, OH 45999

FAX

Alternatively, you can fill and send Form SS-4 to the following address:

(855) 641-6935

Want to learn more? Read our full Get an Employer Identification Number For LLC

Step 5: Create an Operating Agreement

The state does not require you to have an operating agreement in place but it pays to have one. The agreement lays out your operating procedures, making it easier for members to know their role as far as the business goes.

What is an operating agreement?

This document sets out the structure of the business operations and the guidelines to which members must adhere. It contains the following components:

  • Governing structure – this shows who the members are and how much power they have i n the organization, including their ownership
  • Voting procedures – do all members get to vote? How many votes does a member have? Are there any votes with more weight than others?
  • Management – who is in charge of the operations? Members or managers can take over the reins, which should be clear in the agreement
  • Investment – this section should show how much money members have put into the business. It should also stipulate how members can raise money in the future
  • Profit & loss sharing – how will members divide the spoils? Is it equal or weighted on a given basis?
  • Ownership transfers – what happens if a member leaves or dies? Who has priority over the ownership and what rules are applicable?
  • Dissolution – in the event that all members decide to shut down operations, what process should they follow?

Benefits of an operating agreement LLC Texas

We earlier mentioned that the state does not require you to have an operating agreement. However, formulating one comes with an array of benefits:

  • Regulates internal affairs- with this agreement, you have a say of what happens in the event of conflict. Where no agreement is present, you have to abide by the set rules of the state in which you operate.
  • Enhances limited liability- this is especially important for a single-member LLC. Having an agreement adds to your credibility and protects you in the event of legal summons.

Is notarization important?

No, you can work with an operating agreement as is, as long as all members are in agreement. The stipulations will still hold among the members and in a court of law. Also, you do not have to file the agreement with the secretary of state.

Want to learn more? Read our full Create an LLC Operating Agreement

Step 6: Open a bank account for your LLC

The next step lies in creating a bank account for your LLC. It is especially important where the business has more than one member, hence the need for a central account.

Why you need a business bank account?

  • Asset separation- as an LLC, you enjoy limited liability. As such, in the event that you get sued, your personal assets do not go into paying off the liabilities. Without a business bank account, you can separate your personal and business finances. That ensures that you keep enjoying limited liability.
  • Efficient bookkeeping- it becomes easier to tell what belongs to you and what should go into the business. This tracking makes it even simpler for you to file your taxes.
  • Credibility- while it is okay to make and receive payments from a personal account, most businesses would rather make deposits to your business account. Separation allows you to earn more credibility in the eyes of people with whom you transact business.
  • Obtaining loans- as you build your bank account, it becomes easier to get a business loan from the bank. This relationship is key for future developments.

Required Documents

Banks are different regarding what they need from you to open an account. You should thus call ahead to find out what you need to bring. Ideally, you will need the following documents:

  • Certificate of Formation
  • Operating agreement
  • EIN
  • Two types of identification, with one having a picture

If the account has more than one member, it might be necessary for more members to be present. Again, this comes down to the operating agreement.

Want to learn more? Read our full Open a bank account for your LLC

Step 7: Texas LLC Franchise Tax & Public Information Report

Your business operations will determine the taxes to which you are subject. They include the following:

  • Sales Tax- where you sell physical products, you need to register for a seller’s permit, enabling you to collect sales tax.
  • Employer Taxes- if you hire employees in your business, you will need to pay unemployment insurance tax on behalf of the workforce.
  • Federal LLC Taxes- depending on the kind of LLC you form, you might need to report your income to the IRS as follows: Form 1065 partnership for multi-member LLCs and Form 1040 schedule C for single-member LLCs. 

The Texas Annual Report & Franchise Tax

Additionally, you should file an annual report as well as a Franchise tax with the Texas Comptroller of Public Accounts. The franchise tax is a cost of the privilege of doing business in the state. It also allows you to continue enjoying limited liability. You will be happy to know that most companies in Texas do not pay the tax. However, they still need to file.

The filing can only take place online through the comptroller’s website. To start with, you will have to create an online account and file as follows:

  • If your annual revenue is $1,180,000 or below, you are not subject to any tax. However, you should file a ‘no tax due’ report (form 05-163) and a public information report (form 05-102). 
  • Businesses with revenues greater than this baseline pay taxes based on a graduated formula. They also need to file form 05-102, an EZ Computation Report (form 05-169) or a long form (form 05-158-A & form 05-158-B).
  • If your business is veteran-owned, you are exempted from five years of taxation. However, you still need to file a report.
  • The filing should take place on or before May 15th every year. Note that a report will not be due on the year of formation. As such, if you create a business in 2018, your first report is due in 2019.
  • Filing your report late attracts a penalty of $50, regardless of whether you are subject to any tax. This penalty increases over time. If you pay it after the 15th of May, you add an extra 5% penalty fee. If 30 days go by, the fee increases by 10%.

Please note that missing one or more filings can lead to the business’s automatic dissolution, and you can risk losing your limited liability.

Want to learn more? Read our full Taxes and License Fees in Texas


Frequently Asked Question


How much to open an LLC in Texas?

The secretary of state requires that all Certificate of Formation filing applications accompany a fee of $300. Filing can be by mail, online, or in person. That is as much as one would spend to start an LLC. However, other costs come about, such as hiring a professional agent and name reservation.

Cost to start an LLC in Texas?

It costs $300 to file the Certificate of Formation. Other costs include name reservation ($40) and hiring a registered agent.

The cheapest way to start an LLC?

If you want to save money during formation, your best bet lies in filing the paperwork yourself. Do everything from reserving the name to filing the certificate of formation. Without a third party, you can save a lot on costs. However, it will cost you more in time.

How do I start an LLC in Texas?

You start by finding and reserving a name, hiring an agent, filing the Certificate of Formation, getting an EIN, formulating an operating agreement, and opening a business account. Last but not least, you register for tax payments.

The easiest way to start an LLC?

While it may not be the cheapest way, if you want to start an LLC without much hassle, hire an agent. They will take care of everything and hand over registration documents within a week or less.

Start an LLC in Texas but live in Washington?

You can create an LLC in Texas online, even if you do not live in the state. However, you may need to qualify to pursue the same operations in Washington. Additionally, you will need to pay additional fees and fill in more paperwork.

Why is it better to start an LLC in Texas?

Texas has friendly tax laws, a thriving workforce, numerous business growth opportunities, and affordable operational costs.