Texas

How to Form an LLC in Texas

Wondering how to form an LLC in Texas? You're on the right track! Starting a Texas LLC has been the first step toward building some of the best companies in operation today.

On August 26, 1991, Texas become one of the earliest states to recognize a Limited Liability Company as a new form of business organization. The state of Texas and the limited liability company (LLC) both embrace business-friendly principles. The LLC offers entrepreneurs the benefit of liability protection without the burdensome corporate structure.

That's why by 1996, the Limited Liability Company became a very popular business formation type in the United States, and every jurisdiction formed LLC statues. The LLC is popular in the state of Texas and elsewhere due to its flexibility and personal liability protection.

TL;DR - Here are the LLC formation requirements in the state of Texas:

1. Choose a Name for Your LLC

The first step in forming an LLC in Texas is choosing a name for your business. The name must be distinguishable from other registered businesses in Texas and must include "Limited Liability Company" or an abbreviation such as "LLC."

2. Appoint a Registered Agent

Texas law requires LLCs to appoint a Texas registered agent who can receive legal documents and official notices on behalf of the business. The registered agent must have a physical address in Texas.

3. File Certificate of Formation

The next step is to file a Certificate of Formation with the Texas Secretary of State. The certificate includes the name and address of the LLC, the name and address of the registered agent, and the names and addresses of the LLC's members or managers.

The filing fee for a Certificate of Formation in Texas is $300. Expedited processing is available for an additional fee. Don't forget to obtain any necessary business permits (not every industry requires this).

4. Operating Agreement

Although not required by Texas law, it is recommended that LLCs have an operating agreement in place. The operating agreement outlines the management structure, ownership percentages, and operating procedures of the LLC.

5. Obtain an EIN

An Employer Identification Number (EIN) is required by the IRS for LLCs that have more than one member. The EIN is used to identify the LLC for tax purposes. LLCs can obtain an EIN for free from the IRS.

6. Obtain Necessary Licenses and Permits

Depending on the type of business, LLCs may need to obtain licenses and permits from federal, state, or local government agencies. For example, certain industries such as healthcare and food service may require additional licenses and permits.

7. File Annual Reports

Texas LLCs are required to file annual reports with the Texas Secretary of State. The annual report includes the LLC's name, registered agent information, and information about its members or managers.

The filing fee for an annual report in Texas is $0. Expedited processing is available for an additional fee and a professional registered agent service can help ensure that you do this properly.

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How To File an LLC in Texas: The Meat and Potatoes

Step 1: Choose a name for your Texas LLC

In Texas, almost anyone with a valid business purpose can form an LLC. The Texas Secretary of State has published a guide of permissible entity types, broken down by profession. The first step is choosing a business name. 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 latter would have to provide its consent on a Consent to Use of Similar Name Form (Form 509).

LLC name availability search and reserving a business name

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. 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.

In Texas, the requirements for naming an LLC are as follows:

1. When choosing a company name it must contain the words "Limited Liability Company" or the abbreviation "LLC".
2. The name must not be the same or too similar to any other LLC or corporation name registered in Texas.
3. The name must not imply that the LLC is engaged in any illegal or unethical activities.
4. The name must not contain any restricted words such as "bank" or "insurance" unless the LLC is licensed to operate in that industry.

It is important to note that the Texas Secretary of State's office will reject any LLC name that does not meet these requirements.

Before selecting a name for any Texas LLC, it is recommended to conduct a name search on the Texas Secretary of State's website to ensure that the name is available. Additionally, it may be helpful to consult with an attorney or business advisor to ensure that the name complies with all legal requirements and effectively represents the company's brand. Also, if you choose to utilize a top LLC formation service, they can help you with this.

The Texas Secretary of State may reject business names that do not meet the following requirements:

1. The name is already in use: If the proposed name is already being used by another entity registered in Texas, the Secretary of State will reject it. The name must be unique and distinguishable from all other business names registered with the state.
2. The name is too similar to an existing name: If the proposed name is too similar to an existing business name, the Secretary of State may reject it. The test for similarity is whether the proposed name creates confusion or deception among the public.
3. The name includes restricted words: If the proposed name includes words that are restricted, such as "bank," "insurance," or "college," the Secretary of State may reject it unless the business is authorized to use those terms.
4. The name implies illegal or unethical activities: If the proposed name suggests illegal or unethical activities, the Secretary of State may reject it.
5. The name is offensive: If the proposed name contains profanity, obscenities, or derogatory language, the Secretary of State may reject it.

It is important to note that the Texas Secretary of State has the final say on whether a business name is acceptable or not, and there is no guarantee that a proposed name will be approved. It is recommended to conduct a thorough search of existing business names and consult with an attorney or business advisor to ensure that the proposed name complies with all legal requirements.

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Pro Tip 1: Time is not your friend. Register your desired entity name before someone else does before you! 

Pro Tip 2: Be mindful of URL availability!

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Step 2: Choose a Texas registered agent

Every company, including every LLC in Texas, must have a registered agent. It's a thing in every US state, and while it may seem like a mandate, it's actually quite helpful to business owners and it is fairly inexpensive. That's why we wrote an entire section on Registered Agents in Texas.

An individual Texas resident or an organization that is authorized to do business in Texas can act as your registered agent but the physical address must be within the confines of Texas state lines. So what does a registered agent actually do? We actually have a section on that titled "Registered Agent Services: A Guide for New and Serial Entrepreneurs", but in short, a registered agent helps to ensure compliance with state business laws and it is publicly available to accept legal and financial documents.

You can also draft your own consent form, as long as it contains the information included in the Secretary of State’s form. 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. There are many good reasons to leave the office, including much needed vacations or meetings with customers. That's why new and established Texas businesses choose to utilize the services of professional registered agents.

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Step 3: File A Certificate of Formation

In your pursuit to form an LLC in Texas, assuming you breezed right through steps 1-3, now it is time to file a Certificate of Formation with the TX Secretary of State. This document is equivalent to what other states call the articles of organization.

You can file the form online, by mail, by fax, or in person.

How much does it cost to start an LLC in Texas?

The Texas filing fee is $300 for domestic LLCs and $750 for foreign LLCs. This fee is payable to the State of Texas and required for every new business. This fee of $300 is in addition to any legal or professional services that have helped you get to this point.

Once you have filed your certificate of formation, the Secretary of State will review it and file it. They will then send you back a stamped copy of the document. This typically takes one to three business days.

Here are the steps on how to file a certificate of formation for an LLC in Texas:

1. Be prepared to provide the full legal for your LLC. Remember that your LLC name must be unique and cannot be the same as the name of any other existing business in Texas.
2. Designate a registered agent. The registered agent is a person or business that will accept legal documents on behalf of your LLC.
3. Choose a management structure. You can choose to have a member-managed LLC or a manager-managed LLC.
4. File the certificate of formation. You can file the form online, by mail, by fax, or in person.

Once your certificate of formation has been filed, your LLC will be officially formed. You will then need to take care of a few other things to ensure that your LLC remains in good standing with the state, such as obtaining an EIN and filing annual reports.

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Step 4: Obtain Texas business permits for your new LLC

Depending on the industry your business is in, the Texas Department of Licensing and Regulation may require you to obtain a permit from one of many Texas regulatory agencies. For example, restaurants, food trucks, and other food-service businesses will need to obtain a permit from the Texas Department of Health. Businesses that sell alcohol will need a permit from the Texas Alcoholic Beverage Commission. And businesses that operate in certain industries, such as healthcare, construction, or transportation, may also need additional permits or licenses.

Cities and counties might have their own permitting requirements. Any business in Texas that sells tangible personal property and certain types of 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.

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Step 5: Draft an LLC Operating Agreement for your New Texas LLC

This is super important!

Texas law does not require that you operate according to a formal operating agreement, but any experienced entrepreneur will advise the importance of taking time to draft a formal operating agreement. Thinking through this in advance will help you avoid the unforeseeable, and it will also help ensure the highest standards of professionalism in navigating routine and difficult situations that come up from running a company. Any attorney or advisor with experience in investment banking will tell you that this step is obligatory, and to create a business without this is foolish.

An operating agreement is truly the backbone of how your new business is managed. It can be used to dictate how leadership decisions are made and it should also map out things ranging from conflict resolution to dissolution and even the sale of your company.

These are the key components to a Texas Operating Agreement:

• What does your business sell? Indicate the products or services offered by the new LLC.
• Is the company member-managed or how a manager been appointed? Be ready to provide each LLC member or managers' name.
• Who owns the equity? Provide a capitalization table that indicates each member's ownership interest.
• What if you want to distribute capital or onboard a new owner? Write out the procedure to admit new members to the Texas LLC.
• What about cases of promotion or attrition? Provide a procedure for electing a manager if the LLC is member-managed.
• Does the ownership team have set meetings? Indicate whether or not top-level leaders meet weekly, monthly, quarterly, or annually.
• What about urgent business matters? Provide a formal procedure for voting on important business decisions.
• What if you need to dissolve your LLC? Dissolution procedures are an important part of any Operating Agreement.

Texas Operating Agreement Templates:

• Single Member Managed LLC Operating Agreement Template
• Manager Managed LLC Operating Agreement Template
• Member-Managed LLC Operating Agreement Template

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Step 6: Pay Texas State Taxes and File your LLC's Annual Report

A professional registered agent will ensure that your business is on top of annual report filings, but don't lose sight of the importance of paying state taxes and any necessary license renewals. The bottom line is that most LLCs that operate in Texas must file an annual report and pay franchise taxes to the Texas Comptroller of Public Accounts by May 15 of each year. Sorry, but like the mandatory LLC filing fee of $300, annual reports to the state government are unavoidable.

In Texas, the annual report, also known as a Public Information Report (PIR), contains information about the LLC's members and any investors in the company. The purpose of the PIR is to ensure that there is up-to-date information about your business on file with the secretary of state. Things change and whether a particular was planned or unplanned, the state wants to ensure that its records are current and that there is integrity in its public information about your business.

As for the taxation side of things, a Texas LLC's franchise tax is based on the company's annual gross revenue. For 2022 and 2023, the tax only applies to businesses that make over $1,230,000 in annual gross revenue. 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. Even if you don't have to pay the franchise tax, you still have to file a no-tax due form.

The good news is that most LLCs in Texas will not have to pay the franchise tax. In fact, according to the Texas Comptroller of Public Accounts, only about 1% of LLCs in Texas paid the franchise tax in 2021.

Normally, members of LLCs must pay personal state income taxes on their share of the LLC's profits. A Form K-1 helps with personal income tax filings and will be necessary at the end of each tax year. At the state level, however, Texas is one of nine states that do not charge state income tax. This is a big bonus for companies that are doing business in the Lone Star State.

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Step 7: Texas Companies Must Ensure Compliance with Federal Requirements

In addition to the state requirements for LLCs in Texas, there are also some federal requirements that must be met.

• Employer Identification Number (EIN): All LLCs with employees or those that are taxed as corporations at the federal level must obtain an EIN. An EIN is like a Social Security number for your business, and is used to identify your business when you file federal taxes. You can apply for an EIN online through the IRS website.
• Self-employment taxes: Even though Texas does not have a state income tax, LLC members are still responsible for paying federal self-employment taxes. Self-employment taxes are a combination of Social Security and Medicare taxes, and are due on the net profits of your LLC. The self-employment tax rate is 15.3%.
• Federal withholding taxes: If you have employees, you are also responsible for withholding federal income taxes, Social Security taxes, and Medicare taxes from their wages. You must also pay the employer share of these taxes. The federal income tax withholding rate depends on the employee's filing status and income. The Social Security and Medicare tax rates are both 6.2%.

It is important to note that these are just some of the federal requirements for LLCs in Texas. There may be other requirements that apply to your specific business, so it is important to consult with an accountant or attorney to ensure that you are in compliance with all applicable laws.

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Creating a Texas LLC? Things for New Texas Companies to Consider...

Is Texas a Good State to Form a Business?

Absolutely! According to the Texas Secretary of State's website, there were over 2.6 million active businesses registered in Texas as of 2021, and a significant portion of them are LLCs. Of these companies, 4.9 million people are employed. It is worth noting that this number includes all types of businesses, including corporations, partnerships, sole proprietorships, and LLCs. The exact number of LLCs in Texas may vary depending on various factors such as the economic climate, business trends, and state regulations.

Texas is a popular state for forming LLCs (Limited Liability Companies) due to several factors, including:

1. Low taxes: Texas has no state income tax, which can be a significant advantage for business owners looking to save money on taxes.
2. Business-friendly laws: Texas has a pro-business legal environment that makes it easy and straightforward to form an LLC. The state's laws also provide a high degree of protection for LLC owners.
3. Flexibility: Texas offers LLC owners significant flexibility in how they structure their businesses. For example, there are no restrictions on who can be a member of an LLC, and LLCs can be managed by either the members or a designated manager.
4. Strong economy: Texas has a strong and diverse economy, making it an attractive location for businesses in many different industries.
5. Access to resources: Texas has a wealth of resources for businesses, including top-rated universities, a skilled workforce, and access to capital.

Overall, these factors make Texas an excellent state for forming an LLC, and many entrepreneurs and business owners choose to do so to take advantage of the benefits that the state offers.

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Does Texas Offer Startups Access to Capital?

Yes, Texas offers entrepreneurs access to capital through a variety of sources, including:

1. Banks and financial institutions: Texas has a robust banking and financial services sector, which provides access to loans and other forms of financing for entrepreneurs and business owners.
2. Venture capital firms: Texas has a growing number of venture capital firms that invest in startups and early-stage companies. These firms provide funding, expertise, and resources to help entrepreneurs grow their businesses.
3. Angel investors: Texas is home to many angel investors who are interested in investing in new and innovative businesses. These investors typically provide funding in exchange for equity in the company.
4. Government programs: Texas offers a range of government programs that provide funding and support to entrepreneurs and small businesses. These programs include grants, loans, tax incentives, and other forms of assistance.
5. Business incubators and accelerators: Texas has a number of business incubators and accelerators that provide funding, mentorship, and other resources to help entrepreneurs launch and grow their businesses.

Overall, Texas offers a range of options for entrepreneurs to access capital, and the state's strong economy and pro-business environment make it an attractive location for startups and small businesses.

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Pros and Cons of Starting an LLC in Texas

Texas is a popular state for starting a business due to its low taxes, business-friendly environment, and growing economy. Here are some of the pros and cons of starting a business in Texas:

Pros:

• Low taxes: Texas does not have a state income tax, which can save businesses a significant amount of money.
• Business-friendly environment: Texas has a reputation for being a business-friendly state. The state has a relatively low regulatory burden and is generally supportive of businesses.
• Growing economy: Texas has a growing economy and a large and diverse population. This can create opportunities for businesses to grow and expand.
• Low cost of living: The cost of living in Texas is relatively low, which can save businesses money on overhead costs.
• Access to skilled labor: Texas has a large and growing pool of skilled labor. This can make it easier for businesses to find and hire the employees they need.

Cons:

• High property taxes: Texas has relatively high property taxes, which can be a burden for businesses.
• Traffic congestion: Traffic congestion can be a problem in some parts of Texas, which can make it difficult for businesses to get around.
• Extreme weather: Texas is prone to extreme weather events, such as hurricanes and tornadoes. This can damage businesses and disrupt operations.
• Political climate: Texas is a politically conservative state, which can be a challenge for businesses that operate in industries that are regulated by the state government.

Overall, Texas is a great state for starting a business. The state has a number of advantages that can help businesses save money, grow, and succeed. However, there are also some challenges that businesses should be aware of. Ultimately, the decision of whether or not to start a business in Texas is a personal one. Businesses should weigh the pros and cons carefully and consider their specific needs and goals before making a decision.

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Is Texas a good state for hiring and employment?

Absolutely! Texas is a great state for hiring and employment. Texas has a growing economy and a large and diverse population, which creates opportunities for businesses to grow and expand. Texas also has a low unemployment rate, which means that there are a lot of people looking for work in terms of advancement and promotion.

According to the Texas Workforce Commission, the state's unemployment rate was 2.9% in July 2023, which is below the national average of 3.6%, indicating that a good company should be able to retain great employees. The state also added 50,800 jobs in July, the 14th consecutive month of job growth. Common sense states that a healthy, employed economy translates into a good quality of life, complete with intact, safe local economies, good schools, and a generally engaged public-private workforce.

Some of the most in-demand jobs in Texas include:

• Software developers
• Registered nurses
• Truck drivers
• Electricians
• Heavy equipment operators
• Carpenters
• Teachers
• Sales representatives
• Customer service representatives
• Financial analysts
• Marketing managers

These jobs are in high demand because they are essential to the state's economy. Software developers are needed to create and maintain the software that businesses and organizations use. Registered nurses are needed to provide care for patients in hospitals, clinics, and other healthcare settings. Truck drivers are needed to transport goods across the state and throughout the country. Electricians are needed to install and maintain electrical systems, and they are in high demand noting the vast population growth of the state. Heavy equipment operators are needed to operate construction equipment, and investment in major capital projects and residential developments continues at a high pace. Carpenters are needed to build and repair structures. Teachers are needed to educate students in schools, and Texas has some of the best schools in the United States. Sales representatives are needed to sell products and services to businesses and consumers and noting that Texas is the headquarters to some of the largest companies in the world, there is a vast workforce of highly skilled, capable talent when it comes to business development. Customer service representatives are needed to provide support to customers. Financial analysts are needed to analyze financial data and make recommendations to businesses. Marketing managers are needed to develop and implement marketing strategies.

If you are looking for a job in Texas, or you are concerned about what your family members might jump into or where you are going to source talent, the bottom line is that there are a number of highly capable resources available to help you. To that end, the robust school system in Teas in addition to the Texas Workforce Commission have websites where you can search for jobs, learn about training programs, and connect with job and internship candidates.

Overall, Texas is a good state for hiring and employment. The state has a growing economy, a large and diverse population, a fantastic education system, and a low unemployment rate. All of this creates opportunities for businesses to grow and expand.

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Ready to Form an LLC in Texas?

In conclusion, forming an LLC in Texas is a straightforward process with relatively few requirements. Seriously, other states present a lot of other mandates starting with state income tax and all sorts of seemingly ridiculous mandates. However, while Texas may be relatively flexabile, it is important to ensure compliance with all state and federal regulations to avoid any legal or financial issues down the line. Entrepreneurs who are considering forming an LLC in Texas should consult with a legal or tax professional to ensure that all requirements are met.

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