The Complete Guide to Forming a Texas LLC

Reading Time: 8 minutes

Are you a sole proprietor or small business owner evaluating which state is best to form your LLC? If you’re considering Texas, you’ve come to the right place. In this guide, we’ll provide you with a complete overview of forming a Texas LLC, including the benefits, costs, and steps involved.

What is an LLC?

Before we dive into the specifics of forming a Texas LLC, let’s first define what an LLC is. An LLC, or limited liability company, is a type of business structure that combines the liability protection of a corporation with the tax benefits of a partnership. LLCs offer personal liability protection for their owners, meaning that their personal assets are protected from the company’s debts and legal liabilities.

What is a Texas single-member LLC?

A Texas single-member LLC is a limited liability company with only one owner. This type of LLC is popular among small business owners who want to protect their personal assets while maintaining complete control over their business.

What is a Texas multi-member LLC?

A Texas multi-member LLC is a limited liability company with multiple owners. Further, this type of LLC is popular among businesses with more than one owner who want to protect their personal assets while sharing control and profits.

Why is Texas a good state to form an LLC?

There are several reasons why Texas is a good state to form an LLC. First, Texas has a business-friendly climate with no state income tax. Second, the state has a well-developed transportation infrastructure, making it easy to access markets across the country. Third, Texas has a large and diverse economy, with opportunities in a variety of industries, including energy, technology, and healthcare.

Texas LLC Benefits

If you’re considering forming a Texas LLC, here are some benefits to keep in mind:

Personal liability protection for owners

One of the key benefits of forming a Texas LLC is the personal liability protection it provides to its owners. In the event of a lawsuit or other legal action against the LLC, the personal assets of the owners are generally protected from seizure to satisfy any judgments. This means that the owners’ personal assets, such as homes, savings, and investments, are shielded from any liabilities incurred by the LLC. This protection extends to all members of the LLC, regardless of their ownership stake or level of involvement in the business.

No state income tax

Another major advantage of forming a Texas LLC is the lack of state income tax. This means that the LLC is not required to pay state income tax on its profits, which can help reduce the overall tax burden of the business. This can be particularly beneficial for small businesses and startups that are looking to maximize their profits and reinvest in their operations.

Affordable filing fees

Texas LLCs also benefit from affordable filing fees, making it easier and more cost-effective to form and maintain a business in the state. The filing fee for a Texas LLC is $300 for online filings and $308 for paper filings. This is significantly lower than the fees charged by many other states, making Texas a more attractive option for entrepreneurs and small business owners.

Business-friendly climate

Texas is known for its business-friendly climate, with a pro-business regulatory environment and a low cost of living. The state has a strong tradition of entrepreneurship and innovation and offers a range of resources and support services for new and established businesses. This makes it an ideal location for startups and small businesses looking to grow and thrive.

Access to a large and diverse economy

Texas is home to one of the largest and most diverse economies in the United States, with a wide range of industries and sectors. This includes energy, technology, healthcare, finance, and more. The state is also home to many Fortune 500 companies and has a thriving small business community. This provides Texas LLCs with access to a large and diverse customer base, as well as a range of opportunities for growth and expansion.

Well-developed transportation infrastructure

Texas has a well-developed transportation infrastructure, with a network of highways, railroads, airports, and ports that connect the state to the rest of the country and the world. This makes it easy for Texas LLCs to transport goods and services to customers and suppliers, and to access new markets and opportunities. The state also has a high-quality telecommunications infrastructure, with access to high-speed internet and other digital technologies.

Flexible management structure

Texas LLCs offer a flexible management structure, allowing owners to choose between a member-managed or manager-managed structure. In a member-managed structure, all members of the LLC have equal say in the management of the business. In a manager-managed structure, one or more managers are appointed to manage the day-to-day operations of the LLC. This flexibility allows Texas LLCs to tailor their management structure to their specific needs and preferences.

Texas LLC Cost

When it comes to forming a Texas LLC, there are several costs to consider, including initial filing fees and ongoing expenses. Here’s a breakdown of the costs:

Initial Costs:

• Filing fee: $300
• Name reservation fee: $40 (optional)
• Registered agent fee: Varies

Ongoing Costs:

• Annual report fee: $0
• Franchise tax: Varies (based on revenue)

How are single-member LLCs taxed in Texas?

Single-member LLCs in Texas are treated as pass-through entities for tax purposes. With that said, this means that the LLC itself is not taxed, but the profits and losses are passed through to the owner’s personal tax return.

How are multi-member LLCs taxed in Texas?

Multi-member LLCs in Texas are also treated as pass-through entities for tax purposes. Like single-member LLCs, the profits and losses are passed through to the owners’ personal tax returns.

How to Start a Texas LLC

If you’re ready to start a Texas LLC, here are the steps you’ll need to follow:

Step 1: Pick a name for your Texas LLC

Choosing the right name for your Texas LLC is an important first step in the formation process. Your LLC name should be unique and not too similar to existing business names. It should also be memorable and easily recognizable to your customers. Keep in mind that your LLC name will be used on all legal documents, including your Certificate of Formation and Operating Agreement. 

When choosing your LLC name, it’s important to do your research and ensure that it’s available for use. You can check the availability of your desired name through the Texas Secretary of State’s website. If your desired name is already in use, you’ll need to choose a different name or file a “Doing Business As” (DBA) name.

• Choose a name that is unique and not too similar to existing business names
• Check the Texas Secretary of State’s website to make sure your desired name is available

Step 2: Choose a Texas registered agent

A registered agent is a person or entity that is authorized to accept legal documents on behalf of your Texas LLC. In Texas, your registered agent must have a physical address in the state and be available during normal business hours. 

Choosing the right registered agent is an important decision, as they will be responsible for receiving important legal documents on your behalf. When selecting a registered agent, consider their reliability, reputation, and cost of services. You can choose to act as your own registered agent, but this can be time-consuming and may not be practical for all businesses.

• A registered agent is a person or entity that is authorized to accept legal documents on behalf of your LLC
• Your registered agent must have a physical address in Texas

Step 3: Get a Texas Business License

Depending on the nature of your business, you may need to obtain a state or local business license in Texas. The requirements for a business license can vary based on your industry, location, and other factors. 

To determine what licenses you need, check with the Texas Secretary of State’s office or your local county clerk. You may also need to register with other state agencies, such as the Texas Department of Taxation or the Texas Division of Environmental Protection. 

• Depending on the nature of your business, you may need to obtain a state or local business license
• Check with the Texas Secretary of State’s office to determine what licenses you need

Step 4: File a Texas Certificate of Formation

A Certificate of Formation is a legal document that establishes your LLC in Texas. To file a Certificate of Formation, you’ll need to provide basic information about your LLC, including its name, address, and registered agent. You’ll also need to designate whether your LLC will be member-managed or manager-managed, and provide the name and address of your LLC’s organizers. 

You can file your Certificate of Formation online or by mail with the Texas Secretary of State’s office. There is a filing fee of $300 for online filings and $308 for paper filings. 

• A Certificate of Formation is a legal document that establishes your LLC in Texas
• You can file the Certificate of Formation online or by mail

Step 5: Get a Texas LLC EIN 

An EIN, or Employer Identification Number, is a unique nine-digit number assigned by the IRS for tax purposes. Your LLC will need an EIN if it has employees or if it is taxed as a corporation or partnership. 

To apply for an EIN, you can complete an online application through the IRS website or submit a paper Form SS-4. You’ll need to provide basic information about your LLC, including its name and address, as well as the name and social security number of its owner or responsible party. 

• An EIN, or Employer Identification Number, is a unique nine-digit number assigned by the IRS for tax purposes
• You can apply for an EIN online through the IRS website

Step 6: Create a Texas LLC Operating Agreement

An Operating Agreement is a legal document that outlines the ownership and management structure of your Texas LLC. While not required by Texas law, an Operating Agreement can help protect your business and prevent disputes among owners. 

Your Operating Agreement should include the following information:

• The LLC’s name and purpose
• The names and addresses of the LLC’s owners
• The LLC’s management structure
• The LLC’s financial and accounting procedures
• The process for adding or removing owners
• The process for dissolving the LLC

By creating an Operating Agreement, you can establish clear guidelines for how your Texas LLC will operate and avoid potential disputes down the line. It’s recommended that you work with a qualified attorney to draft your Operating Agreement to ensure that it meets your specific needs and complies with Texas law. Additionally, Texas law requires that the Operating Agreement is kept on record with the LLC’s official records.

How to Choose a Texas LLC Registered Agent

When choosing a registered agent for your Texas LLC, there are several factors to consider. First, make sure the agent has a physical address in Texas and is available during normal business hours. Second, choose an agent who is reliable and has a good reputation. Finally, consider the cost of the registered agent’s services, as fees can vary widely.

What needs to be included in a Texas State LLC Operating Agreement?

While not required by Texas law, an Operating Agreement is a recommended document for any LLC. An Operating Agreement should include the following information:

• The LLC’s name and purpose
• The names and addresses of the LLC’s owners
• The LLC’s management structure
• The LLC’s financial and accounting procedures
• The process for adding or removing owners
• The process for dissolving the LLC

What needs to be included in the Texas State Articles of Organization?

When filing a Certificate of Formation in Texas, you’ll need to include the following information:

• The LLC’s name and purpose
• The name and address of the LLC’s registered agent
• The name and address of the LLC’s organizers
• The LLC’s management structure
• The LLC’s duration, if not perpetual
• The signature of the organizer

Articles of Organization vs Operating Agreement

While both Articles of Organization and an Operating Agreement are important legal documents for an LLC, they serve different purposes. Articles of Organization are filed with the state to formally establish the LLC, while an Operating Agreement outlines the ownership and management structure of the LLC and is not filed with the state.

Do I need a new EIN to convert to an LLC from a sole proprietorship?

If you’re converting your sole proprietorship to an LLC, you will need to obtain a new EIN from the IRS. This is because an LLC is treated as a separate legal entity from a sole proprietorship for tax purposes.

Do I need to open a new business bank account if I convert to an LLC from a sole proprietorship?

Yes, you will need to open a new business bank account if you convert your sole proprietorship to an LLC. This is because an LLC is a separate legal entity and requires its own bank account.

Conclusion

Forming a Texas LLC can be a smart choice for small business owners looking for personal liability protection and a business-friendly climate. By following the steps outlined in this guide and consulting with a qualified attorney or accountant, you can establish a strong foundation for your Texas LLC and set your business up for success.