Are you looking to form a limited liability company (LLC) in the state of Texas, but you’re not sure how the formation process works? There are several important steps when it comes to creating a Texas LLC that is compliant and able to do business in the state.
To get started, please reference our 6-step guide below or hire an affordable online LLC formation service.
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What is a Texas LLC?
The Texas LLC is one of the most popular business structures in state. It's a more casual and flexible type of business than a corporation, but includes personal asset protection that's lacking from sole proprietorships and general partnerships.
LLCs in Texas have simple formation and maintenance requirements, several options for how they can be taxed, and flexible management. From one-person businesses to multi-member LLCs with several owners, the LLC is a popular choice for a reason.
Forming an LLC in Texas (in 6 Steps)
Step One) Choose an LLC Name
Your LLC’s name is often the first impression you get to make on potential customers, and therefore it goes without saying that this is an important step. There are a few different aspects to take into consideration when selecting a name for your business:
In the state of Texas, every limited liability company is required to have either the initials “LLC” or the phrase “limited liability company” in the name. In addition, you cannot include any words that refer to other business types (like “corporation” or “incorporated”), and you also can’t use words that are typically used to refer to specific kinds of businesses (like “bank” or “law office”).
Another aspect to consider is including language that explains what your business does ― for example, if you’re a plumber, put the word “plumber” or “plumbing” in your LLC name. Additionally, if your business has strong values like being environmentally friendly, you can indicate that by including the word “green.”
Do You Like It?
At the end of the day, this is your business, and you should choose a name that makes you proud. You should also make sure your LLC name both sounds good when spoken out loud, and looks good when written down.
The most important consideration for naming an LLC is to not get too attached to any one business name until you have either reserved the name with the state of Texas, or you’ve officially formed your business. Texas makes this process rather easy, as you can search their entire database of business names at this link (you’ll need to create an account to check availability). If you’re not yet ready to form your LLC, you can reserve your desired name. Simply fill out this Application for Reservation or Renewal of Reservation of an Entity Name and submit it to the state. Reserving your name gives you an extra 120 days to get your business affairs in order; please note that there is a $40 fee to reserve a name.
Step Two) Designate a Registered Agent
Every LLC in Texas is required to designate a registered agent, which is the individual or registered agent service that receives government correspondence on behalf of your business, then forwards those documents to you.
According to the Texas Secretary of State,
A registered or appointed agent’s duties are: to receive or accept, and forward to the represented entity at the address most recently provided to the registered agent by the represented entity, or otherwise notify the represented entity at that address regarding, any process, notice, or demand that is served on or received by the registered agent; and provide the notices required or permitted by law to be given to the represented entity to the address most recently provided to the registered agent by the represented entity.”
Without a registered agent, you could lose your good standing with the state of Texas, and the state also has the right to dissolve your LLC if they decide to. In a worst-case scenario, the state could fail to alert you regarding a lawsuit against your company, which could even lead to a judgment against your business because you didn’t defend yourself.
Step Three) File Formation Documents with State
Once you are ready to form your Texas limited liability company, you will fill out the certificate of formation.
This is THE document that will register your LLC with the state. You’ll want to ensure all of the following information is correct on the form:
- Your chosen business name
- Name and address of your registered agent
- Management style (member-managed or manager-managed)
- Name(s) and address(es) of the LLC’s manager
- Name and address of the LLC’s organizer
- Signature of organizer and registered agent
- Effective date
Cost to Form an LLC: The state of Texas charges a $300 fee to form an LLC.
Processing Time: It can take 3-5 business days for the state to process your mailed-in Texas LLC formation paperwork and get your finalized documents in the mail to you. Online filings are usually processed more quickly. Please note that the estimate of business days begins once ALL required paperwork is in order and filed correctly.
Step Four) Create an Operating Agreement
After you register an LLC in Texas, create a detailed outline that explains how you will run and manage your new business. Even though it doesn’t need to be filed with the state, put one together and keep it for your records.
When you open a bank account, you may be asked for this document in order to open an account. You’ll also want to keep in mind that any future business partners or managing members may also be interested in seeing your Operating Agreement before joining your company. After all, this document essentially serves as your overall plan for success.
An attorney can help you outline your Operating Agreement or create one from a free template online. You can read more about Operating Agreements here, but some of the basic information you’ll want to have includes:
- Individual members' ownership percentages
- Rights and responsibilities
- Voting powers and meeting guidelines
- Allocation of profits and losses
- Management rules for the LLC
- Provisions for buying a member owner out, or transferring their shares in the case of illness or death
Step Five) Handle Taxation Requirements
The vast majority of LLCs require a federal tax ID number, or EIN. An EIN is basically the business version of a social security number, and it’s used for a variety of important LLC functions.
For instance, you’ll need an EIN if you want to hire any employees, and many banks require them to open business bank accounts as well. You’ll also need one for tax purposes, hence the name federal tax ID number. Get an EIN for your LLC for free through the IRS.
When it comes to state-level LLC taxes, Texas levies these taxes based on the nature of your business. Normally, you’d be responsible for paying an income tax, whether through your personal income taxes or corporate taxes. However, Texas foregoes a state income tax. Instead, the state requires a business franchise tax. All LLCs are responsible to pay this franchise tax, including sole proprietorships. You can read all about the tax here.
LLCs involved in retail sales are also responsible for the state’s streamlined sales tax. The current rate is 6.25%; you can read an in-depth guide for the tax here.
LLC owners with employees are also required to pay a number of taxes. For example, Texas employers are also required to make payments to the state’s unemployment insurance. While it’s not technically a tax, you do need to pay it on a regular basis, so we’ve included it in this section. You can learn more about this fund at Texas Workforce Commission.
In addition to these general taxes, Texas also requires taxes specific to particular industries. For example, there are taxes on crude oil, fireworks, and more. You can learn more about the state’s various taxes here.
Depending on where in Texas your business is located, you could also need to pay some local taxes. For example, Texas allows counties to impose additional sales tax on top of what the state charges. You can can use the Sales Tax Rate Locator to determine your tax requirements. We also recommend that you contact your local government office to be sure you don’t overlook any local obligations.
Step Six) Obtain Business Licenses and Permits
The state of Texas does not have a statewide general business license that each LLC needs to acquire in order to do business.
However, Texas upholds the licensure required by the federal government for certain occupations, including agriculture, aviation, and more. Please consult the Small Business Association’s listings for federally-regulated industries requiring licensure.
And much like the state has industry-specific tax requirements, it also has licenses and permits that are required for businesses in certain industries. Texas has more than 750 of these licenses, so there’s a good chance at least one of them applies to your LLC. We recommend that every LLC owner search through the state database of licenses for businesses here, and don’t forget that your local government may require licenses or permits as well.
Next Steps: What to do After Creating a Texas LLC
Open a business bank account
We highly recommend that you establish a separate business banking account so that your business and personal finances are maintained completely separate. This is important because it helps protect your personal assets and also makes filing taxes much easier. Once you receive your EIN from the IRS, you’ll be able to use it to establish an account at the bank or credit union of your choice.
Get Business Insurance
Every Texas business with employees is strictly required to acquire workers’ compensation insurance. For more information on this policy, check out the Texas Department of Insurance. Essentially, this policy helps to pay your employees when a work injury or illness keeps them from working. After you obtain these legally required policies, it’s probably also a good idea to pursue general liability insurance, as well as some industry-specific policies.
Understand income reporting
Income reporting is just what it sounds like – reporting the income you made from your business. It’s important to note that you must file this form whether you made or lost money over the course of the year. Even though Texas businesses do not pay income taxes to the state, you’ll still be responsible for making reports to the federal government. Single member LLCs use this form, and multiple member LLCs file this one.
Understand annual reporting
Texas requires that all LLCs file an annual report. You can file it online by creating an account at the SOSDirect. Your annual report will essentially serve to update the state on any pertinent information regarding your business that has changed over the course of the year.
Find an accountant
We don’t recommend that you attempt to manage your business finances without the help of a professional. There is too much room for error, and a professional can ultimately save you time and money by guiding you on how best to manage your business finances. At a minimum, enlist professional help to set you up with software and the steps for keeping up with your finances on a regular basis. Then, consult back with your accountant at least a couple of times per year – and especially at tax time – to ensure you’re keeping track of everything correctly.