How to Form an LLC in Texas: The Affordable Way

Doing business in Texas can have many advantages. However, you need to first decide on the structure of your business. Forming a Limited Liability Company, or LLC can be an excellent choice for the business you are trying to form.

An LLC helps protect personal assets from business liabilities, involves less filing costs and paperwork compared to a corporation, and is more flexible operationally.

Income taxes in Texas are lower than in most other states. This encourages various businesses to settle here, attracting talented working class. In addition, the franchise tax (Texas will impose a yearly tax for the privilege of doing business in the State) is much lower than in other states.

You can plan to start your LLC efficiently once you know what to expect.

Name Your Texas LLC

Naming your LLC is the very first step in forming your company. Your LLC’s name is how customers come to know you. Therefore, make sure that you have a unique name that captivates your customers.

Texas has certain guidelines that you must follow while naming your LLC.

Naming Guidelines

The name of your LLC must be unique. It cannot be a name already being used by another business entity in the State of Texas. You must search for a business entity name to find out if the name you are planning to use is available.

The name must not be similar to the name of another existing entity. This means that in addition to being unique, your name should not be such that it can be confused with another existing name. For instance, ‘Facebuk’ is different from ‘Facebook.’ But ‘Facebuk’ can be confused with the name ‘Facebook.’ Therefore, even though ‘Facebuk’ is unique, it cannot be chosen as a name for your LLC. 

Things that superficially differentiate a name from another cannot be used in your name to make it different from another. This includes, but is not limited to, suffixes like ‘co,’ ‘inc,’ ‘corp.’ etc., conjunctions such as ‘and,’ ‘&’ etc., singular or plural forms, abbreviations, punctuations, etc.

So, for example, the name ‘Facebooks’ or ‘Facebook!’ would be considered similar to ‘Facebook’ and, therefore, would not be permitted.

It is mandated that all LLC names must include the words Limited Liability Company,’ ‘LLC,’ or ‘L.L.C.’

The name you select for your LLC should not give the impression that your entity is a government agency. Therefore, you cannot use terms like “F.B.I.” or “Treasury.”

Similarly, the name of your LLC is not allowed to mislead the public into thinking that you are a different type of enterprise than what you are. For example, you cannot use words such as ‘attorney,’ ‘bank,’ ‘academy,’ etc., if your LLC does not deal in these professions.

You would be required to file paperwork with the concerned professional body if you deal in such a profession and want the same in your name. You may even be required to have the relevant professionals working with, or for, your LLC.

Does Your Business Require a DBA?

DBA is short for ‘Doing Business As’ and refers to a Doing Business As Certificate. To conduct business under a name different from the name you are formed under, you would be required to file a DBA.

The name filed under your DBA is the name that your LLC is conducting business under. For example, if your LLC’s legal name in the documents of formation is ‘ABC LLC,’ but you want to conduct trade under the name ‘XYZ,’ then you would list XYZ under your DBA filing. A DBA is more commonly referred to as an ‘assumed name’ in Texas. You would be required to file an assumed name certificate to set up a DBA.

Doing a Name Search and Name Reservation

A Name Search is required to be done while deciding on the legal name of your LLC and the name for your DBA filing if you are opting to obtain an assumed name. In addition, a name search is done to ensure that your name is unique and not similar to any other existing name, as mandated by the State (refer to the ‘Naming Guidelines’ section). 

Texas allows you to reserve a valid name for 120 days. In the meantime, you can prepare for the formation of your LLC with the assurance that the name of your choice will not be taken by anyone else. There is also an option to renew your reservation 30 days before it expires.

Registering Your Business Domain

Having a domain name adds professional credibility to your business, makes it easy for potential clients to find or know more about you, and makes your business look modern.

You would want a domain name that matches your business name. So before you select a name for your LLC, it is recommended that you ensure that the domain name you need is also available. 

You can check currently available domain names.

Choose a Registered Agent in Texas

A registered agent is a person, or any other legal entity, that serves as a point of contact for your LLC for all official correspondence.

A registered agent shall be responsible for receiving critical communications from the Texas Secretary of State, such as tax notices, certificates of good standing, reminders for annual reports, etc., on behalf of your LLC. Texas law requires you to have a registered agent.

Who Can Be A Registered Agent?

Your LLC’s registered agent can be a natural or legal entity. For example, you can pick a family member or a friend as a registered agent, be your own agent, or hire a registered commercial agent.

A registered commercial agent provides the specific service of acting as a registered agent for businesses. Such a service would accept correspondence on your behalf and duly send it to you. The following requirements need to be met by your registered agent, as mandated by the State of Texas:

• The registered agent, if an individual, must be over 18. 
• The agent must have a street address in the state of Texas. It cannot be a PO box address or a mailbox rental service.
• If the registered agent is a natural person, they must have an office in Texas.
• The registered agent must be allowed to conduct business in Texas if the registered agent is another entity.
• Your registered agent must be available at the provided address during business hours.

Individual v. Registered Agent Service

Hiring a registered agent service can have several advantages over choosing an individual as a registered agent. A registered agent service becomes your only option if neither you nor your relatives or friends have a street address in Texas.

If you hire a registered agent service, you would not have to furnish a personal address for Texas. This way, your personal address would not go on the public record. It would thereby protect your privacy.

A professional registered agent service ensures that you don’t fail to duly respond to any notice or other communication that may be sent to your LLC. In addition, they remind you when your returns and other filings are due and help ensure you don’t miss any deadlines. On the other hand, an individual agent may fail to be present at the registered office when documents are being served, thereby losing valuable information. Moreover, professional help lets you focus your energy and time on core business areas.

A registered agent service charges a recurring fee, while having an individual registered agent is much cheaper. When selecting a registered agent, you must weigh the pros and cons of all options and then make a call according to your LLC’s needs.

File the Articles of Organization with Texas

Articles of Organization refers to a form you must fill out and submit to the Secretary of State of Texas to establish your LLC. Articles of Organization are called a ‘Certificate of Organization’ in Texas.

Once you file the document with the Secretary of State of Texas, your LLC is registered and recognized by the law. There is certain information that you need to fill out in your Certificate of Organization:

• Name of the LLC
• Address and name of the Registered Agent
• Address and name of the organizers of the LLC
• Reason for forming the LLC
• Management structure
• Names and addresses of the managers
• If applicable, names of people responsible for the company’s debts and to what limit.
• Signature of all the organizers

Expedited Filing

Texas provides an expedited filing service, also known as an SOS service. This service gets your articles approved much quicker than ordinary filings for an additional fee.

The exact time frame of an SOS filing would depend upon various factors such as demand for SOS service etc. You can access the SOS Direct website for expedited filing.

Publish Notice of Formation

The state of Texas does not require you to issue a public notice regarding the formation of your LLC.

Create an Operating Agreement for Your Texas LLC

An operating agreement is a document outlining roles and relationships within your LLC. It includes information about the LLC management and ownership. An operating agreement acts as a guiding force in matters of the day-to-day functioning of the LLC. Typically, an operating agreement contains the following details:

• Organization Details 
• Ownership 
• Duties of Members and Managers
• Management and Voting 
• Capital Contributions
• Division of Profit and Losses
• Bookkeeping Procedures
• Procedure for adding new members
• Requirements concerning Meetings and Procedures thereof
• Dissolution

Texas does not legally require you to have an operating agreement. However, having one is strongly recommended because it reduces the risk of conflict within the LLC. 

Writing The Operating Agreement Yourself v. Hiring a Service

You can either write the operating agreement yourself or find a commercial service to write it for you. Both methods have their pros and cons. A commercial service would ensure you do not have to invest too much time in this. A professional’s experience would also be helpful because they would know the important things that must be covered in an operating agreement.

Writing an agreement yourself would give you more flexibility for the terms of the agreement. It would also be much cheaper to write an operating agreement yourself. Almost all commercial registered agents also offer drafting services. Discuss the other services they offer if you are engaging a registered agent service.

Limits of Operating Agreement

There is no fixed format for this agreement. You have all the freedom to include the terms of the agreement you feel are necessary for your LLC. However, the terms are limited to the law. You cannot include something prohibited by the laws of Texas. 

Obtaining an EIN for your Texas LLC

EIN stands for ‘Employee Identification Number.’ The Internal Revenue Service issues it as a business identification number. An EIN is to businesses what social security number is to citizens. You must have an EIN to complete most of the essential steps of forming an LLC.

The designated agencies ask for it while applying for a license, opening a bank account, or applying for business loans. You should apply for an EIN only after your LLC is approved. Otherwise, you might find yourself in a position where you have an EIN for an LLC that does not even exist. Getting an EIN is a straightforward process and is entirely free of charge.

File Annual Reports in Texas

An annual report is a document used by the authorities to get the latest and updated information about all the business entities operating in the State. Texas requires its LLCs to submit annual reports and franchise tax by May 15th.

The primary purpose of filing these reports is to update your business information regularly in the public records. In addition, this makes it easy for interested parties such as creditors to contact you if needed.

You can file the annual report and the franchise tax using the Texas Comptroller website.

You may also download the forms and file them via mail to the Texas Comptroller of Public Accounts, P.O. Box 149348 Austin, TX 78714-9348.

There are no filing charges involved. If your LLC’s revenue is below $1,130,000 in a year, you do not need to pay any franchise tax but must file a “no tax due report.”

If you miss the deadline to file the report, your LLC will be charged a $50 penalty. Additionally, there is a 5% penalty fee if you miss the deadline. The penalty fee rises to 10% if you pay 30 days after the due date.

You may visit the Texas Comptroller website for more information.

Tax Liability For Your Texas LLC

Paying taxes is another important part of staying compliant with all the legal requirements. Therefore, getting a decent idea of the taxes that would be levied after your LLC has been established is essential. Your LLC can be taxed in four ways:

• Sole proprietorship: a single-member LLC
• Partnership: a multiple-member LLC
• A C-Corporation: the LLC and its members are taxed separately
• An S-Corporation: the members of the LLC are taxed separately

Federal Tax Liability

Your LLC’s tax liability depends on how you represent your LLC to the IRS, as mentioned above. 

To have your LLC taxed as a sole proprietorship, you’ll have to file your taxes with the IRS under Schedule C, Schedule E and/or Schedule F of Form 1040. 

For your LLC to be taxed as a partnership, along with filing Form 1040, you’ll have to file your taxes under Form 1065 and provide information in the K-1 of each partner. 

To have your LLC taxed as a C-Corp or S-Corp, file your taxes under Form 8832 and Form 2553, respectively.

State Tax Liability

You might be required to register for State taxes depending on the nature of your LLC’s business. 

A Sales Tax is levied on the sale of specific goods and services. Therefore, you would be required to register for a seller’s permit if you fall in the taxable category under the sales tax.

Texas also requires its businesses to pay a Franchise Tax. It is a tax on the right to exist as a legal entity in the state.

Miscellaneous Tax Liability

All businesses employing workers in Texas are required to register for the Unemployment Insurance Tax through the Texas Workforce Commission.

To stay compliant with all the tax requirements, we strongly suggest that you hire a professional and take their help in doing taxes for your LLC.

Permits & Licenses

Your LLC would be required to procure various licenses and permits before it can legally conduct business. Your business may be subject to three licensing jurisdictions: Federal, State, and Local. Building permits and zoning permits are a few common examples of such licenses.

Federal Licensing requirements will depend on the business activity carried on by your LLC. If your company is engaged in any area of business regulated by the Federal Government, you will be required to obtain relevant Federal Licenses and Permits.

Some business activities requiring Federal Licenses and Permits are:

• Agriculture
• Alcoholic beverages
• Aviation
• Firearms, ammunition, and explosives
• Fish and wildlife
• Commercial fisheries
• Maritime transportation
• Mining and drilling
• Nuclear energy
• Radio and television broadcasting
• Transportation and logistics

At the State level, your LLC will be required to obtain a seller’s permit if you intend to sell any product or service subject to sales tax. Additionally, certain professions are also required to obtain specific State Licenses. You may read the Business Permits and Licenses Guide of the Texas Business Permits Office to understand the licensing requirements for your LLC.

Depending on where you operate your business, you may also be required to get the local government’s license and permit. For example, in San Antonio, certain businesses selling items door to door need to get a Peddler’s License. To know more about local licensing requirements, get in touch with the office of your city or county government.

For more information regarding;

• Federal Permits and License
• Texas Department of Licensing and Regulation website 
•  Business Permits and Licenses Guide
• The State of Texas’ Work Section

Business Bank Account & Phone Number

You must open a new bank account for your LLC that is separate from your personal bank account. To open an account, all banks require your EIN and formation documents, such as your LLC’s Certificate of Organization. While selecting the bank in which you would be opening a new account, you should look for a place that caters to your needs in terms of rate of interest, minimum balance requirements, and credit facilities.

Using your phone number for your LLC can prove to be very inconvenient. It threatens privacy by putting your personal contact information in the public domain. You might end up missing essential calls on account of being busy elsewhere.

It is best to either get a separate phone number for your business or hire a phone answering service. Doing this would protect your privacy, look professional and reduce the risk of missing important calls. Most network carriers offer various business plans; check and confirm the plan that best suits your LLC.

Final Thoughts

There are a lot of advantages of having an LLC in Texas. The State’s favorable economic environment attracts top talent from and beyond the country. It is home to some of the biggest industries, which proves the economic well-being of the State.

To add a cherry on top, the State also has various incentive programs that you can use to get a head start in your business.

The Texas Enterprise Fund, or TEF, is a financial incentive that involves giving a cash grant to new projects that promise significant job creation and capital investment.
Keep an eye out for more such incentives, and ensure that your LLC stays compliant with all the legal requirements after it is established.

We wish you and your brand new LLC all the best!