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Guide to Forming an LLC in Texas

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Follow our free guide to form an LLC in Texas

Starting an LLC in Texas is a process with multiple steps. But our informative guide will show you how to form an LLC in Texas and walk you through the process.
 

Pros and Cons of Forming an LLC in Texas

how to form texas llc
 

Pros

Large Population Base
As the second most populous state in the nation, Texas offers businesses the opportunity to reach over 25 million potential customers. And with the generous population comes equally generous diversity in a rich customer demographic.

Ranks Among Top States for Businesses
For at least a decade, Texas has consistently remained within the top five spots of CNBC’s list of the ten best states for businesses. The Lone Star State is prized for its workforce and infrastructure, ranking number 1 in both areas. Forbes also ranks Texas amongst the “Best States For Business”.

Home to Top-Ranked Metro Areas
Texas is home to two of the largest metro areas in the United States. Dallas/Ft Worth/Arlington barely edges out Houston with almost 7,400,000 residents and an impressive $535 Billion GDP. Houston/Woodlands/Sugar Land still holds strong against the rest of the nation with almost 6,900,000 residents and a GDP that neared $500 billion in 2017.
 

Cons

Complex Franchise Tax Structure
The state’s franchise tax, sometimes called a business tax or gross receipts tax, is one of its few detractions. Business owners consider the franchise tax both complicated and unfair, as it is based on revenue instead of profit (making it eerily similar to income tax).

Competitive Market
Some of the best reasons for doing business in Texas, namely its large population and friendly business environment, can also work against some business owners. Since Texas is a popular place to do business, there may be more competition in some industries. Big cities with a lot of people mean more potential customers, but also more businesses to compete with.

Less Privacy for Business Owners
Texas is among the states that require full disclosure of an LLC’s members in the incorporation paperwork.
 

Cost of Doing Business

  • $300 filing fee/ $0 annual report
  • .75%  franchise tax rate
     

Phase One: Starting Your Texas LLC

Forming an LLC in Texas is not difficult, but there are a few steps to follow to ensure that you remain compliant with the state regulations:

Step 1: Name Your Texas LLC

The first step in forming your Texas LLC is to find a name. As with most other things related to starting a business, Texas has some regulations and restrictions concerning business names.

Tip: Use a free business name search tool to ensure your company’s desired name is available.

Business Name Guidelines

  • The official name of your business must end with: Limited Liability Company, Limited Company, LLC, or L.L.C.
  • Your business name cannot be intentionally misleading to consumers
  • The name of your new LLC must not be similar to another organization’s name/trademark

Business Name Restrictions
There are some state and federal laws that impose restrictions concerning the use of certain words in a business name.

A few examples include:

  • “Lottery” and “Bank” are ineligible for use (any state)
  • Terms that represent educational or Veterans’ organizations are restricted
  • Terms related to the Armed Forces or civil servants (police, EMT, fire)

LLC business names associated with government and/or financial entities are not always restricted - it depends on the state. Additional paperwork may be required.

URL Availability
In addition to naming your Texas LLC, creating a website is also important for your business. Check for domain name availability through an online web services site (i.e. Go Daddy).
 

Step 2: Establish Ownership

The owners of an LLC are considered to be either as members or managers. The difference depends on the management structure of the business.

LLC Management Structures:

  • Member-managed: All members participate in operating and making decisions for the LLC
  • Manager-managed: An appointed manager oversees the daily operations of the LLC and the members are not actively involved.

Texas LLC Member Guidelines:

Required Number of Members
There must be at least one member or manager to form an LLC in Texas.

Member Disclosure Requirements
All managers/members of the LLC must be included in the Certificate of Formation/Certificate of Formation.

Age Restrictions
LLC members in Texas may be of any age.

Residence Restrictions
There are no residency restrictions imposed on LLC members in Texas.
 

Step 3: Find a Registered Agent in Texas

The registered agent is a necessary part of starting an LLC in Texas. Your business cannot be official without this position.

What is a registered agent?
A registered agent can be a person or business whose function is to accept federal/state government and service of process notices on behalf of the LLC.

Why do you need a registered agent?
Texas law requires all business owners to appoint a registered agent so that the Secretary of State has a consistent contact person for the business.

What are the main requirements for a registered agent?

  • The registered agent must have a physical address — not a P.O. Box
  • The registered agent must be available during business hours

Who can be a registered agent in Texas?

  • A state resident with a physical address in Texas
  • An LLC or corporation that is licensed to conduct business in Texas

Can I be my own registered agent for my business?
You can be your own registered agent as long as you have a physical address in Texas.

Is being my own registered agent discouraged?
Since the registered agent’s name and address are publicly listed, LLC business owners are discouraged from being their own registered agent.

Tip: Avoid the hassles and choose Swyft Filings to fill the registered agent needs for small businesses in Texas. Find more information here.
 

Step 4: File the Certificate of Formation

Filing the Certificate of Formation with the Secretary of State is the most important step in creating your Texas LLC.

What is the Certificate of Formation?
The Certificate of Formation is a legally binding document that is required for official LLC formation and is filed with the state government.

Why do I need the Certificate of Formation?
Your Texas LLC will not be legally recognized by the Secretary of State without this document. Consider the Certificate of Formation as part of your business’s foundation.

What information is included in the Certificate of Formation?

  • The name and address of the LLC
  • The name and location of the registered agent
  • The names of the members/managers of the LLC
  • The name of the organizer filing the paperwork (if applicable)
  • The chosen LLC management structure
  • The statement of purpose
     

Additional Texas Filing Requirements — Professional Service Businesses

Texas permits professional service businesses to form a type of LLC known as a Professional Limited Liability Company (PLLC).

The following professions are allowed to form a PLLC:

  • Accountants
  • Attorneys
  • Physicians/Medical Professionals
  • Professional Counselors and Psychologists
  • Architects and Engineers
  • Veterinarians
  • Social Workers

A few points to consider:

  • All members of the PLLC must be licensed in the profession of the business.
  • The PLLC is only allowed to provide services for which the business was formed.
  • The members are still subject to whichever licensing boards govern the PLLC’s profession.
     

Step 5: Create an LLC Operating Agreement

Even though an LLC Operating Agreement may be not required by the state, it is still necessary for the continued success of your Texas LLC.

What is an LLC Operating Agreement?
The LLC Operating Agreement is a legally binding document that is used to define the roles of each member, his/her duties, and the level of initial financial contribution. The operating agreement is also key in detailing the operating procedures of the LLC.

Why do I need an LLC Operating Agreement?
Because the LLC Operating Agreement is necessary because it provides structure and direction for the members concerning the individual roles and rights regarding decision-making and voting procedures. This document ensures stability to the LLC and reduces future disputes among members.

Do I need to file the LLC Operating Agreement?
You do not need to file the Operating Agreement with the state; it is for the benefit of your LLC and remains in-house.

What goes into an LLC Operating Agreement?
Your  LLC Operating Agreement should be unique to your business; however, most documents include the following information:

  • List of the members/managers and their roles
  • Designation of authority in the LLC
  • Initial capital contributions of the members
  • Voting designations and percentages of the members
  • Member transfer/addition rules and restrictions
  • Distribution of profits
  • Meeting schedule

Tip: Get a customized LLC Operating Agreement for your small business with Swyft Filings. Add structure to your LLC now.
 

Step 6: Register for an EIN

The state of Texas requires an EIN for any business that has/will have employees. Additionally, most banks and financial institutions will ask for the EIN before opening any accounts.

What is an EIN?
EIN stands for Employer Identification Number and is a nine-digit number that the IRS assigns to your business. Also known as a Federal Tax ID, the EIN specifically identifies your business with the government.

Are all businesses required to have an EIN?
Federal law dictates that certain types of business entities register for an EIN:

  • Any business with employees (even if owned by one person)
  • Any business with more than one member
  • A partnership (LLC or C-corp)

Please Note: Although recommended, a sole proprietorship is not required to have an EIN.

Why does my LLC business need an EIN?
The more common reasons you would need an EIN are:

  • To hire employees
  • To open a bank account in the U.S.
  • To file your company’s taxes
  • To pay independent contractors

In short, if you make money through your business and it has employees, you must have an EIN.

Is the EIN publicly listed?
The EIN for your LLC will be part of public record.

Can I use my Social Security Number as the EIN?
If you are a sole proprietorship who wants an EIN for your business, you can elect to use your social security number; however, your EIN is part of public record.

Swyft Filings offers EIN services for small businesses in Texas. Find more information here.
 

Phase Two: Maintaining Your Texas LLC

The initial phase of creating your Texas LLC is complete — you are now ready for the next set of steps that focus on getting your LLC ready to do business.

Step 1A: Register for Texas State Taxes

Texas is one of the few states in the U.S. that does not have a state income tax or a corporate tax rate. Businesses are required to pay a franchise tax on the company’s total revenue — it can also be called a gross receipts tax.

2018-2019 Franchise Tax Rates/Threshold/Deduction Limit:

Franchise Tax Rates

The franchise tax is calculated from the business’s margin, which can be found by any of four methods:

  • [Total Revenue]  x 70%
  • [Total Revenue] - [Cost of Goods Sold/COGS]
  • [Total Revenue] -  [Compensation]
  • [Total Revenue] -  $1 million

Important to Remember:

  • The franchise tax report is due by May 15th
  • The late fee for filing after May 15th is $50
  •  You still have to file a report even if your LLC does not owe tax
  • Sole proprietorships and general partnerships are exempt from the franchise tax

Other taxes your LLC may need to pay:

  • 6.25% Sales Tax
  • 2% Use Tax
  • Employee Withholding Tax
  • Unemployment Tax
     

Step 1B: File the Public Information Report

The second part of filing the franchise tax form for your Texas LLC is also filing the Public Information Report - both reports are filed simultaneously with the State Comptroller’s office.

Fee: $0
Due Date: May 15th
Implications of Late Filings: $50 Late Fee

Please Note: The public information report is also known as an annual/periodic report. Find out more about annual reports here.

Swyft Filings helps you stay compliant by providing stress-free solutions. File your public information report with us today.
 

Step 2: Obtain Business Licenses and Permits

The licenses and permits required for an LLC in Texas can vary, depending on a number of variables:

  • Location (city and county)
  • Type of Business
  • Industry 

Any business in Texas that is selling goods will need a sales tax permit.

For example, if you’re opening a cupcake store in Texas, you may need a sales tax permit, retail food permit, waste permits, and a certified food manager license.

If you plan to open a clothing/gift store, the list of permits may include a sales tax permit and a certificate of occupancy (CO).

Swyft Filings has a team of business professionals who can help you figure out which permits or licenses your business will need. They can also help you with the applications for each permit/license at the federal, state, and local levels.

Click here for more information.
 

Step 3: Request a Certificate of Good Standing

There is one last step to making your Texas LLC ready and open for business — you need a Certificate of Good Standing.

What is a Certificate of Good Standing?
The Certificate of Good Standing is legal certification issued by the Secretary of State that confirms your business’s compliance with all state regulations.

Why do I need a Certificate of Good Standing?
Many businesses and financial institutions will expect documentation of your LLC’s good standing status with the state government. Some companies may refuse to conduct business if your LLC does not have this certification.

Additionally, some states require a Certificate of Good Standing before a business can apply for Foreign Qualification.

Does the Certificate of Good Standing have an expiration date?
The Certificate of Good Standing does not expire/does not need to be renewed.

Swyft Filings can create a Certificate of Good Standing for your Texas LLC. Click here for more information.
 

Additional Texas Resources

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