Posted by: Apr 21, 2020

How to Form an LLC in Texas

Many small business owners ask about Texas LLC formation. An LLC, also known as a “limited liability company,” is a type of business structure. Many smaller businesses are attracted to LLCs for the protections they provide.

One of the biggest benefits to a LLC, including a Texas LLC, is that the LLC is a distinct legal entity separate from its owners. That means that the money or property of an LLC belongs to the LLC.

Creditors cannot attack the LLC’s assets for the personal debts of its members. Similarly, if an LLC has any financial debts or legal liabilities, the owners will not be held personally liable to any of the LLC’s creditors.

An experienced business formation attorney can help you determine whether an LLC is the right structure for your business and assist you in setting one up.

How to Create an LLC in Texas

In Texas, an LLC is regulated under the Texas Business Organizations Code Title 3 Section 101. There are several steps to setting up a LLC in Texas:

  1. Picking a name for your LLC,
  2. Designating a registered agent,
  3. Creating and filing a certificate of formation,
  4. Drafting an operating agreement,
  5. Complying with other tax and regulatory requirements, and
  6. Filing annual reports.

These steps are discussed in more detail below.

Picking a Name for Your LLC

In forming a Texas LLC, a name is one of the first things to consider. The company name must be unique, since it cannot be a name similar to any other business already registered with the Texas Secretary of State.

In order to check if a name is available, the Texas Secretary of State allows you to run a free search through the state’s SOSDirect website or by calling (512) 463-5555. 

Texas allows you to register for a free account so you can run any name search and also file any required business forms electronically. Also, it’s best to avoid using one’s personal name for the company, for example, “Debbie Jones Investments LLC.” Using personal names makes it easier for potential plaintiffs to know who runs the company.

Texas also requires every LLC to include an identifying term at the end of the name. These include, “LLC,” “Limited Co.,” “Ltd.,” or some other combination that identifies it as an LLC. Prohibited terms include “Inc.,” “Bank,” and any other word that may mislead the public.

Once you have determined that your name is available, you might want to reserve it. A name can be reserved for 120 days by filing an Application for Reservation or Renewal of Reservation of an Entity Name (Form 501) with the Texas Secretary of State. The reservation may be filed online at the SOSDirect website or filed by mail.

Designating a Registered Agent

Texas requires every LLC to choose a registered agent. The registered agent will receive and forward official company mail from the Secretary of State, the Comptroller, and anyone who puts the company on formal legal notice. If the company is sued, the registered agent is the person who will accept service of legal papers.

The registered agent may be a Texas resident or a business authorized to do business in Texas. The registered agent must provide a physical street address in Texas. A P.O. Box, or other obvious indicator that the address is not a physical office or residence, will be rejected by the Secretary of State.

For privacy reasons, the use of a physical office address is a better alternative than disclosing a home address. Also, the LLC cannot be its own registered agent.

Creating and Filing a Certificate of Formation

  • The name of the LLC;
  • The name and address of the LLC’s owners/members;
  • The name of the LLC’s registered agent;
  • Whether the LLC is managed by members or managers; and
  • The termination date.

There may be other basic information needed. For example, if the LLC elects to be managed by a manager as opposed to members, it must choose who those individuals are going to be. The Certificate of Organization can be filed with the Secretary of State electronically or by mail. There is a one-time fee of $300.

Drafting an Operating Agreement

An operating agreement is not required under Texas state law, but it is highly advisable. An operating agreement is a document that lays out the rules and procedures for the day-to-day operations of the business.

In other words, it is a document that establishes how the LLC will be run. The operating agreement can include the responsibilities of all the owners, their financial contributions, a process for adding or removing members, how often to have annual meetings, etc.

Having an operating agreement in place preserves your limited liability because it shows that the LLC is truly a separate entity. Without an operating agreement in place, Texas LLC law will dictate how your LLC operates.

Complying with Other Tax and Regulatory Requirements

There are tax and regulatory requirements that may apply to your LLC. These include an IRS Employer Identification Number (EIN), Business Licenses, and Comptroller of Public Accounts.

EIN

An EIN is generally required to file taxes as an LLC because it identifies the business entity for tax purposes. In some instances, an EIN may also be required to open up a bank account.

An LLC with only one member is not required to obtain an EIN. However, without an EIN, the business must be taxed as a sole proprietorship; you will not have the option to be taxed as a corporation.

You may obtain an EIN by completing an online EIN application on the IRS website. It is a free service, and an EIN can be provided immediately after you complete the application.

Business licenses

Even though the State of Texas does not require a general “business” license, some types of business will need state-wide licenses. You can check with your city or county government website to determine your local requirements. The Texas Department of Licensing and Regulation, as well as the Texas Business Licenses & Permits Guide, are great resources.

Comptroller of public accounts

If your business is selling items and collecting sales tax, you will need to register with the Texas Comptroller of Public Accounts.

Filing Annual Reports

Texas imposes an annual franchise tax on most LLCs. It also requires LLCs to file annual franchise tax reports. The details for computing the tax can be complicated. The Comptroller of Public Accounts is a great tool for further information.

Setting Up an LLC

There are many pre-designed forms available to set up a LLC. However, using a form can undermine the effectiveness of an LLC. The creation of each LLC warrants comprehensive advice on how to structure the business to ensure asset protection. 

If you are starting a new business and would like to learn more about whether an LLC is the right structure for your company, contact Adam Curley at the Curley Law Firm today. Mr. Curley has experience forming both large and small businesses. He can help your new company start off on the right foot by helping you select the structure that best fits the needs of your business.