Form an LLC in Texas

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Many entrepreneurs across the United States, including in Texas, choose to operate their businesses as an LLC ( limited liability company). The LLC is a business entity type that offers some of the same legal protections and tax flexibility as corporations but with less administrative complexity and fewer costs.

Should you form an LLC in Texas? Let’s look at the LLC’s features, advantages, formation process, ongoing compliance, and frequently asked questions.

Legal and Tax Considerations When Forming an LLC

An LLC is a separate legal entity from its members. So, if the business gets sued or faces financial difficulties, the owners’ personal assets are generally not at risk of being used to settle those debts.

By default, the IRS treats an LLC as a pass-through entity. It considers the LLC and its members as the same tax-paying entity. Profits, losses, and income tax obligations flow through to the LLC’s owners’ personal tax returns. Qualifying Limited Liability Companies may instead be taxed as an S Corporation. S Corp tax treatment is also on a pass-through basis. However, how self-employment taxes (Medicare and Social Security) are applied differs from how they are handled with the default LLC tax treatment. Normally, all an LLC’s profits are subject to self-employment taxes. Alternatively, with the S Corp tax election, only owners’ salaries and wages are subject to Medicare and Social Security taxes. Compensation paid as distributions to members is subject to federal income tax but not self-employment taxes.

Advantages of LLC Registration

Here are some of the reasons entrepreneurs find the LLC business structure attractive:

Limits the owners’ personal liability for the business’s debt and legal issues.
Allows for the transfer of ownership – If a member leaves or dies, an LLC’s operating agreement should have provisions for handling that member’s ownership stake.
The business may survive beyond a member’s lifetime because an LLC is a legal entity separate from its owners.
Has fewer corporate formalities than a corporation – e.g., no bylaws, board of directors, shareholder meetings, etc.
May have an unlimited number of members.
Provides ownership flexibility – LLC members do not need to be U.S. citizens or have permanent residences in the state.
Offers tax treatment flexibility – Members may choose to be taxed as either a Partnership (or Sole Proprietorship if a single-member LLC), S Corporation, or C Corporation.

Comparison of Types of LLCs

LLCs come in different sizes, management structures, and other variations. Here’s a comparison of some of the options entrepreneurs may choose from.

Single-Member LLC vs. Multiple-Member LLC

If a company has just one owner (or a married couple as the owner), the business is a single-member LLC. That single member has full control over the company and how it’s managed. When an LLC has two or more owners, it is a multiple-member (multi-member) LLC. Multi-member LLCs may have an unlimited number of members (unless they elect for S Corporation tax treatment, which limits ownership to 100 or fewer members). All LLC share control over their multi-member LLC, with roles, responsibilities, and profit distribution set forth in the LLC operating agreement.

Member-Managed LLC vs. Manager-Managed LLC

LLCs may choose to be member-managed or manager-managed. An LLC is member-managed when the business’s owners run the day-to-day operations and administration efforts. Rather than task the LLC owners with managing everyday details, members may identify their company as a manager-managed limited liability company. As such, they appoint someone as a manager responsible for handling daily business activities. An LLC’s manager could be someone that the company hires or one of its members.

Domestic LLC vs. Foreign LLC

When an LLC has registered its Articles of Organization in a state, it goes on record as a domestic LLC there. That state is the company’s home state (a.k.a. domicile). If an LLC registers as a domestic LLC in one state and it conducts business in another state (with either physical presence or economic nexus), typically, it must file as a foreign LLC (foreign qualify) in the additional state(s).

LLC vs. PLLC

The primary difference between an LLC and a professional limited liability company (PLLC) is that only professional license holders in certain fields (attorney, physician, accountant, architect, etc.) may form the entity. Some states do not recognize the PLLC structure but have other options for licensed professionals who want to start a business. Another difference between an LLC and PLLC is that in a PLLC, each member is shielded from personal liability for other members’ malpractice. If any member conducts malpractice in a regular LLC, all owners can be held personally liable.

LLC vs. LLP

An LLP (limited liability partnership) is like a general partnership except that an LLP is considered a separate legal entity from its owners. The business structure provides personal liability protection similar to that of a PLLC, with individual members shielded from debts of the business and any malpractice by other partners. Each owner is responsible for their own malpractice or negligence, though. Some states laws only allow certain licensed professionals to form an LLP, something significant to consider if a business might expand to multiple states in the future.

8 Steps to Form an LLC in Texas

1. Select a Name for Your New LLC

After the business owners know what they’d like to call their business, they should conduct a name search to ensure no other company has already claimed the name at the state or federal level. For Texas LLCs, you can search for name availability in the Texas Comptroller of Public Accounts, Taxable Entity Search, or CorpNet can search and reserve the business name for you.

The name must be unique and not easily confused with any other business in Texas. States will usually deny a business from using a name that’s too similar to another company’s name within the state, especially if the two businesses provide similar services or products.

2. Appoint a Registered Agent

An LLC must designate a registered agent authorized to accept service of process (essential government documents and legal notices) on behalf of its business in the state. Having a registered agent is legally required for LLCs. LLCs that have operations in multiple states must designate a registered agent in each of those states. Fortunately, CorpNet is authorized to provide our registered agent services in all 50 states, so we make things easy for business owners who want to grow and expand their companies.

3. File Articles of Organization

LLCs must file Form 205 Certificate of Formation, which serves as the Articles of Organization in Texas. The turnaround time and cost to file formation documents vary by state. If the paperwork is completed incorrectly, it will cost business owners more money (filing fees are not refundable) and cause delays in opening the company. For peace of mind, consider asking CorpNet’s filing experts for assistance. We have experience helping entrepreneurs in all 50 states correctly prepare and file their LLC formation documents.

4. Draft an LLC Operating Agreement

LLCs do not need an Operating Agreement in Texas, although it is highly advisable to have one. An LLC operating agreement is the governing document that describes the roles and responsibilities of an LLC’s members and managers and how to run the business entity. While states don’t require LLCs to have (or file) their operating agreements, these legal documents can help reduce misunderstandings among members by spelling out the business’s owners’ authority and obligations.

Possible elements included in an LLC operating agreement:

How the LLC should distribute profits among members
The approval process when making certain decisions (such as adding or removing members, hiring employees, entering into vendor contracts, applying for loans, etc.)
Whether the LLC must hold annual member meetings and record minutes (including how to approve meeting minutes)
Dispute resolution process
What happens when a member leaves or dies

These are just a few examples of the details an LLC operating agreement might contain.

5. Apply for an EIN

An EIN (employee identification number) is required for any business that hires employees. EINs are free of charge and may be ordered online from the IRS (or CorpNet can take care of ordering your EIN for you). A multi-member LLC (taxed as a partnership) must include its EIN (also known as its “federal tax ID number”) on the informational return the business must file with the IRS at tax time. Moreover, many banks require that an LLC have an EIN before they open a bank account in a business’s name. An EIN may also be required when applying for business licenses and permits or a business line of credit.

6. Obtain Required Business Licenses and Permits

Depending on the type of business an LLC conducts, there may be state, federal, or local business licenses and tax permits required to operate legally. It’s critical to research the business license requirements so that the LLC has the proper authority to conduct business in the jurisdictions where its located.

7. Register for State Payroll Taxes

Businesses with employees must be set up to remit any employment-related taxes and fees to the state tax authorities. Payroll tax registration details can become confusing, so consider relying on CorpNet’s specialists to manage the process of registering your LLC for Texas payroll taxes.

8. Keep Your New LLC Compliant

Besides the startup activities involved in forming an LLC, Texas business owners must also fulfill some ongoing compliance requirements. Below are a few common LLC compliance obligations that entrepreneurs might expect.

Keep your business bank account and transactions separate from your personal finances.
Renew business licenses and permits.
Texas LLCs must file an Annual Report on May 15 of each year in business.
Texas LLCs must also file and pay an annual franchise tax on May 15 to the Texas Comptroller of Public Accounts (no tax is due during the business’s first year of operation).
Hold an annual member meeting and record meeting minutes (if required by the LLC operating agreement).
File and pay taxes.
Inform the state of any significant changes to the business, such as moving to a new location or adding (or removing) members. CorpNet can help process Articles of Amendments when needed.

FAQs About LLC Formation

What Does LLC Stand For?

LLC stands for “limited liability company.” An LLC is a business entity that is legally separate from its owners. The owners of an LLC are called “members.”

What are the Advantages of Setting Up an LLC?

An LLC offers some legal protections to business owners, shielding their personal assets from being taken to settle debts and legal claims against the business. Another advantage is tax flexibility. LLCs are by default pass-through tax entities, with all profit and loss flowing through to the owners’ personal tax returns. However, eligible LLCs may be taxed as S Corporations to help minimize business owners’ Social Security and Medicare tax obligations

What are the Disadvantages of Setting Up an LLC?

A potential drawback of the LLC is that pass-through taxation may create an unfavorable financial situation for some business owners. Because all profit and loss are taxed at the owners’ individual tax rates, the LLC structure could cost owners more in taxes — depending on their tax bracket. In some cases, the corporate tax rate (at the federal or state level) might be less than the individuals’ tax rates. It’s important for entrepreneurs to talk with a tax professional for advice on how setting up an LLC will affect their tax obligations.

Can Anyone Form an LLC?

Individuals, other LLCs, corporations, or foreign entities may own a limited liability company. Note that some states also allow the formation of variations on the LLC, such as PLLC (professional liability company), and those may come with restrictions on who may own them.

Do I Need a Lawyer to Form an LLC?

There are no requirements to have an attorney complete LLC formation paperwork. CorpNet saves our clients money on legal costs because we can prepare and submit your LLC forms for less than many lawyers charge for providing those services. However, entrepreneurs can greatly benefit from consulting an attorney when deciding which business entity type will be best for their business.

Which LLC is Right for Me?

That will depend on several factors, such as how many owners the business has and who will manage day-to-day operations. Also, the eligibility requirements for certain types of LLCs (such as professional liability companies, a.k.a. PLLCs) may limit which kind of LLC entrepreneurs may form. That’s why it’s essential to ask for professional advice on the legal and tax aspects before deciding on a business structure.

How Many LLCs Can I Own?

No restrictions exist on the number of LLCs that eligible individuals or companies may set up and operate. Know that how entrepreneurs structure their multiple LLCs has legal and financial impacts, so it’s helpful to research the options carefully before forming the entities.

Do I Register a Single-Member or Multi-Member LLC?

A single-member LLC must have a sole owner or be a married couple that is collectively considered the owner. An LLC with multiple owners is considered a multi-member LLC.

How Many Members Can an LLC Have?

LLCs may have an unlimited number of members. The exception is if an LLC elects to be considered an S Corporation for tax purposes; then, it may have no more than 100 members.

Does an LLC Need a Board of Directors?

No. An LLC is not required to have a board of directors. However, LLC members may choose to have one if they adopt that method of management in the LLC operating agreement.

Do I Need to Register an LLC in All States I Operate?

Typically, an LLC that conducts business in states beyond its home state must apply for foreign qualification in those additional states. The rules for what “conducting business” means vary depending on the state. In general, the following activities require an LLC to foreign qualify:

Having a physical presence, such as an office, retail store, or warehouse in the state.
Having a distributor or sales representative in the state who sells the LLC’s products and services there.
Owning property (e.g., a vehicle fleet or real estate) in the state
Reaching a level of income or sales in the state that defines the LLC as having economic nexus there.

Do I Need a DBA?

If an LLC will use its registered name to do business, it does not have to file that name as a DBA (doing business as). However, if the LLC’s owners want to conduct business under a different name or use another name for a particular product line or another purpose, they will have to file a DBA to get the state’s permission to use the fictitious name. For example, suppose an entrepreneur forms an LLC registered as “Josephine’s Creperie.” If Josephine wants to offer catering services under a different name, say “Josephine’s Event Catering,” she would need to file a DBA for that name.

FAQs About Texas LLCs

How Do You Start an LLC in Texas?

To start an LLC in Texas, begin your journey at the Texas Secretary of State website. Under the “Starting a Business” link, there is a comprehensive list of Formation of Texas Entities FAQs.

To file formation documents online, you must obtain a SOSDirect Account through the Secretary of State. Once the account has been approved, the certificates of formation can be filed online through SOSDirect 24 hours a day, 7 days a week.
Formation documents can also be faxed to (512) 463-5709.

To file the forms by mail, send to:
Corporations Section
P. O. Box 13697
Austin, Texas 78711-3697

To file the forms in person, take to:
James Earl Rudder Office Building
1019 Brazos
Austin, Texas 78701

The LLC filing process starts by choosing a unique business name. If the name you choose is not available, the Texas Secretary of State will inform you. The next step is to file Form 205/Certificate of Formation—Limited Liability Company. The filing fee is $300. Fees paid by credit card are subject to a convenience fee of 2.7%.

Finally, you’ll want to create an operating agreement that documents how your LLC will be structured (member-managed or manager-run), member responsibilities, how members will be paid, and the steps to take when a member leaves.

How Do I Perform a Business Entity Search in Texas?

You can search for name availability in the Texas Comptroller of Public Accounts, Taxable Entity Search, or CorpNet can search and reserve the business name for you.
The name must be unique and not easily confused with any other business in Texas.
You can reserve a name for up to 120 days by filing Form 501—Application for Reservation or Renewal of Reservation of an Entity Name with the Secretary of State ($40 filing fee).

How Much Does it Cost to Start an LLC in Texas?

The fee to submit formation documents in Texas is $300.
The fee to reserve a business name is $40.

Where Do You Register an LLC in Texas?

You must register an LLC through the Texas Secretary of State’s office.
CorpNet can also register your LLC in Texas.

What Forms Do LLCs Need to Complete in Texas?

LLCs must file Form 205 Certificate of Formation.
LLCs need to fill out Form 501 form to reserve a business name for 120 days while filing for LLC formation with the Secretary of State.

Can I Form an LLC Online in Texas?

Yes, you can form an LLC through SOSDirect.
You can also form an LLC online through CorpNet.

Does Texas Require an LLC to Complete an Articles of Organization?

LLCs must file Form 205 Certificate of Formation. The Certificate of Formation acts as the Articles of Organization in Texas.

Does My LLC Need an Operating Agreement in Texas?

LLCs do not need an Operating Agreement in Texas, although it is highly advisable to have one. An Operating Agreement is a document that states the rights and obligations of the LLC’s members and the distribution of income. All members must sign the Operating Agreement for it to be considered effective and valid.

Will Texas Let Me Name My LLC Anything I Want?

An LLC in Texas must end with one of the following identifiers: LLC, L.L.C., Limited Liability Co., Limited Liability Company, Ltd. Liability Company.
The name cannot include words related to a government agency or other confusing words such as Bank, Attorney, University, Trust, Trustee, Incorporated, Inc., Corporation, or Corp.
A complete list of Texas’s naming rules can be found under the Secretary of State’s Entity Names

Do I Need an EIN for a Texas LLC?

A federal Tax ID number or Employer Identification Number (EIN) is not required if you operate an LLC with no employees (you can use your Social Security number for your Tax ID number). All other LLCs require an EIN.

You can apply for a Federal Tax ID Number (EIN) through the IRS website or CorpNet can also obtain an EIN for you.

Does Texas Require a Registered Agent?

You must name a registered agent as part of the LLC registration process. A registered agent, sometimes referred to as a resident agent or an agent for service of process, is a person or company officially recognized by the state who resides within the state of incorporation and is designated by the corporation or LLC to accept service of process on behalf of the company. It can be an individual or another business entity with a physical location in the state of incorporation.

You can name an individual (yourself or someone else) as your registered agent or a professional registered agent, such as CorpNet.

Does Texas Require an Annual Report?

LLCs must file an Annual Report on May 15 of each year in business.
LLCs operating in Texas must also file and pay an annual franchise tax on May 15 to the Texas Comptroller of Public Accounts (no tax is due during the business’s first year of operation). The franchise fee is a percentage based on the business’ revenue.

How Quickly Can You Set Up an LLC in Texas?

Currently, non-expedited documents sent by mail or fax are processed within 40 business days. Expedited documents are being processed within 4-5 business days. Electronic documents sent through SOSDirect are processed within 4-5 business days. [THIS IS FROM SEC OF STATE WEBSITE]
CorpNet can help you set you your LLC:
- Cost for the Standard complete package with initial and annual report: $588
- Cost for the Express complete package with initial and annual report: $703

How is an LLC Taxed in Texas?

Every LLC doing business or organized in Texas must pay an annual franchise tax based on revenue.
Texas has no state income tax, so, as an employer, you are not required to register for state taxes. You are still required to withhold federal income taxes and federal payroll taxes such as Social Security and Medicare.

Will I Need to Charge Sales Tax in Texas?

The Texas state sales and use tax rate is 6.25%, but local taxing jurisdictions may also impose sales and use taxes up to 2% for a total maximum combined rate of 8.25%. You will be required to collect state and local sales and use taxes.

You must pay the state’s sales tax to the Texas Comptroller. LLCs can apply for a seller’s permit through the Texas Online Tax Registration

Is Forming an LLC Right for Your Business?

Choosing a business entity type for your company has both legal and financial implications. We know there are lots of questions that come up and we’d like to provide a free resource to help you along your path to entrepreneurship.

Our free guide to forming an LLC is written by business attorneys at Corpnet.com. This guide answers the common questions for creating a Limited Liability Company for your new business.

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