Are you about starting a business in Texas and want to form an LLC? If YES, here are the exact requirements to start an LLC in Texas and how much it cost. LLC is short for Limited Liability Company. It is a simple business structure that offers much more flexibility than a traditional corporation, while at the same time providing your business a lot of benefits that you cannot get from other legal entities.
Forming your business as a limited liability company helps to protect you against lawsuits, it significantly cuts down on paperwork when compared to corporations and other legal entity types; it prevents your company from being taxed twice, and it helps to present your business as more credible.
LLCs in Texas are affordable and easy to form. As with other states, the State of Texas has some specific requirements that are common to them and you have to abide by these if you want to successfully form your LLC. If you want to form an LLC in Texas, this is how you can go about it, including the fees you would have to pay.
How to Start an LLC in Texas
- Name Your LLC
Choosing a company name is the first and most important step in starting your LLC. While going about this, be sure to choose a name that complies with Texas naming requirements and is easily searchable by potential clients. For your chosen name to be valid, it must follow the naming guidelines.
- First, your name must include the phrase “limited liability company,” or one of its abbreviations (LLC or L.L.C.).
- Second, your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
Again, restricted words such as Bank, Attorney, University, may require additional paperwork and a licensed individual, such as a doctor or lawyer, to be part of your LLC.
2. Reserve your name
Next, you have to make sure the name you have chosen is available in Texas. You can be quite sure that your name is still available by doing a name search on the Texas Comptroller of Public Accounts website. It is also recommend that you check to see if your business name is available as a web domain. Even if you don’t plan to make a business website today, you may want to buy the URL in order to prevent others from acquiring it.
You can verify your name by calling the Texas Secretary of State office at (512) 463-5555, then dialing 7-1-1 for relay services. You can also verify your name via e-mail by sending your inquiry to [email protected] Reservations can be made online 24 hours a day through the SOSDirect website. You can also fax your reservation and forms to the Secretary of State’s office at (512) 463-5709.
The reservation period lasts 120 days. If you need to renew your reservation, you may do so within the 30-day period before your reservation expires. There is no limit to the number of times a reservation may be renewed, and each reservation must include a filing fee of $40.
After registering a domain name, consider setting up a professional email account for your business (@yourcompany.com). Google’s G Suite offers a business email service that comes with other useful tools, including word processing, spreadsheets, and more.
3. Choose a Registered Agent
You are required to nominate a Registered Agent for your Texas LLC. A registered agent is a person or business that agrees to send and receive legal papers on behalf of your LLC. Such papers include service of process of legal action (if you are sued) and state filings. Your registered agent must be a resident of Texas or a corporation authorized to transact business in Texas. You may elect an individual within the company including yourself.
A Registered Agent must consent to the appointment in written or electronic form. The statement of consent should include:
The name of your LLC, an express statement that the person designated consents to serve as the LLC’s registered agent, the name of the person designated as registered agent, the signature of the registered agent, the date of execution, etc. The consent statement does not have to filed with the secretary of state.
4. File the Certificate of Formation
To register your LLC, you will need to file the Certificate of Formation with the Secretary of State. This can be done online or by mail.
When filing, you will need to state whether your LLC will be member-managed or manager-managed. You need to learn more about these two options before you file. If you’re expanding your existing LLC to the State of Texas, you need to form a Foreign LLC.
When filing the certificate of formation, you have two options. You can either do it online or by mail. State Filing Cost: $300, payable to the Secretary of State, and the fee is Nonrefundable. The processing time for the form is 3 business days for online, and 5 to 7 business days by mail.
5. Create an Operating Agreement
An operating agreement is a legal document outlining the ownership and operating procedures of an LLC. All Texas LLCs are not required to have an operating agreement so you have to find out whether your business needs it or not. This agreement can be in a verbal or written form.
An operating agreement is an important document because it ensures that all business owners are on the same page and reduces the risk of future conflict.
6. Obtain An EIN
The Employer Identification Number (EIN), or Federal Tax Identification Number, is used to identify a business entity. It is essentially a social security number for the company.
An EIN is required for the following:
- To open a business bank account for the company
- For Federal and State tax purposes
- To hire employees for the company
An EIN is obtained from the IRS (free of charge) by the business owner after forming the company. This can be done online or by mail. You should only apply for an EIN after your Texas LLC is approved. If you are a non-US resident or don’t have a social security number, you cannot obtain an EIN online. But you can mail or fax Form SS-4 and write “Foreign” on line 7b. If your LLC is owned by another LLC, you cannot obtain an EIN online. You must mail or fax Form SS-4 instead.
7. Texas LLC Annual Report
The LLC Annual Report in Texas is known as the Public Information Report (PIR) and Franchise Tax, and this is required by all Texas LLCs. Unlike most states where the LLC Annual Report is filed with the Secretary of State, the Annual Report in Texas is filed with the Office of the Comptroller.
Regardless of income or activity, your LLC still needs to file the Annual Report with the Comptroller each year. Depending on your business’ industry, the franchise tax is usually 1% of gross receipts, for gross receipts over $1M. Forms and instructions can be downloaded from the Texas Comptroller’s website. Texas Annual Reports are due by May 15th. The first one is due the year after the year of your LLC formation.
8. Business Licenses and/or Permits
To find out if you need a business license and/or permit, you need to contact the city, county, township or borough where your Texas LLC is located. These requirements will differ depending on the location of your business, and the industry your Texas LLC is engaged in.
Any business with one or more employees in the State of Texas is subject to state employment taxes. You will need to inform both the State of Texas and the Internal Revenue Service (IRS) of any hirings you make. Your company will also be subject to the state’s franchise tax.
You can register your business with the Texas Employer Portal at https://portal.cs.oag.state.tx.us/wps/portal/AccountRequest. This is where you will also report any employee hirings or terminations. The Texas franchise tax requires all LLCs in the state to pay either 0.25 percent of the company’s annual capital or 4.5 percent of the company’s earned surplus, whichever is greater.
LLCs are exempt from the state franchise tax if the LLC owes less than $100 in taxes, or if the gross receipts from the company’s taxable capital and taxable earned surplus are each under $150,000 in a given tax period. One of the advantages of an LLC is the flexibility in taxation as there are four ways an LLC can be taxed, compared with two ways for a corporation.
- Single Member LLC – An LLC with one member automatically becomes a single-member LLC with the IRS. The owner simply files their Schedule C with their 1040 at the end of the year. Filing as a single-member LLC means the entity does not pay sales tax and goes to the owner which is called pass-through taxation. The owner pays self-employment taxes on the net profit of the LLC, which while simpler to handle taxes, may be more costly.
- Partnership LLC – An LLC with two or more members is automatically considered a Partnership with the IRS and will file Form 1065. Like the sole-proprietorship as a pass-through entity, the LLC taxed as a Partnership pays no income tax and profit and losses flow to each member’s Form 1040s via Schedule K-1 of Form 1065.
- C Corporation LLC – An LLC can elect to be taxed as a C Corporation by filing IRS Form 8832. The major difference as an LLC that is taxed as a C corporation is that now the LLC pays tax on the profits and losses and they are not directly passed down to the members. Most, but not all will find filing as a C Corporation will cost more in taxes as now the LLC has double taxation where there is a tax on the profits and dividends.
- S Corporation LLC – To get S Corporation status, you will file Form 2553 with the IRS. What makes the S Corporation attractive unlike the sole proprietorship or partnership is that you can potentially shield some of the profits from being subject to self-employment taxes. Dividends aren’t typically subject to self-employment taxes which is a large potential savings. There will be more work in accounting for an LLC that elected S Corporation status.
Each of the four ways for an LLC to be taxed in Texas can have a major impact on the taxes that are charged depending on the business and the member’s personal finances. It’s a very good idea to work with an accounting professional to see which one is most efficient for the business and members.
10. LLC Bank Account
Keep your personal assets separate from your business assets by opening a bank account for your Texas LLC. Items needed to open an LLC bank account include; an approved Texas Certificate of Formation, Certificate of Filing, EIN, and Driver’s License. Know your options by calling and comparing banks in Texas (some charge a monthly rate, others don’t).
Your bank will issue a debit card when you open the account. You can equally get a credit card and start building business credit.
11. Business Phone Number
Instead of using your home telephone number or your cell phone, you can purchase an affordable “virtual business number” specifically for your Texas LLC. You can set this virtual business phone up to forward to your cell phone, go through voice prompts, or configure it any way you like. Getting a separate business phone number for your Texas LLC is also a good idea in order to keep your actual number private from those pesky “public record” websites.
Cost and Fees Needed to File an LLC in Texas
The primary cost of Setting up an LLC in Texas is the nonrefundable fee for filing the Certificate of Formation (Form 205), which is $300. If you want expedited processing, there is an additional $25 fee. The fee for filing the Acceptance of Appointment and Consent (Form 401-A) is $15 for a for-profit LLC and $5 for a nonprofit LLC. Filing a Name Reservation (Form 501) will cost $40.
Advantages of Forming an LLC in Texas
Texas LLCs have several benefits for business owners, and they include;
- You can set up a Texas LLC relatively quickly — complete all the paperwork online and start your company right now.
- Limit any personal liability — any liabilities created by your Texas business (debts, obligations and other liabilities) are legally considered to be completely separate from your personal assets.
- It’s easy to run a Texas LLC — LLCs are light on rules. You don’t need annual meetings, boards of directors or complex regulations. Texas LLCs are also simple to manage and you can a make changes with little paperwork.
- Tracking, filing and paying taxes is easy — any profit or loss your Texas LLC creates is reported on your personal tax returns. You won’t need to deal with the “double taxation” problems that larger companies have to.