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by Benjamin AronsonWe are going to go over the simple steps that you need to follow when creating an LLC in Texas and what you need to do in order to keep your business compliant.
In this guide, you will find recommendations and detailed steps to help you form your LLC in Texas. There is a reason for the selected order of steps, make sure you follow accordingly.
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Before we go through our comprehensive guide on creating a business in Texas, have you asked yourself if Texas is the best state to form your LLC? Make sure you take a second to read that before continuing.
Okay, forming an LLC in Texas is quite easy. You must file your Texas Certification of Formation (AKA Articles of Organization) to properly set up your limited liability company. The cost to set up an LLC in Texas is essentially $300, which accounts for the Certificate of Formation.
Before you start filing forms, start thinking about your LLC name. It is very important that you follow the Texas LLC naming requirements. Below are curtail points to be aware of:
Your LLC name must include Limited Liability Company in one of the following ways:
In addition to that, you cannot choose an LLC name that will confuse your business with a government agency (EX: Homeland Security, CIA, FBI, etc.). Also, keep in mind that if lack a professional trade like a lawyer, bank, or doctor, then you can’t just add professional-based terms in your LLC name ( EX: bank, attorney, MD, etc.).
Note: DLLC stands for domestic LLC. This is a business that is registered and operating in your home state.
To ensure that your LLC name is available check out Texas Entity Search. If you’re nervous about this process, give them a call or shoot them an email.
Nowadays every business is on the web, and you should be right up there as well. Even if you’re not planning on building your business website immediately, you should grab the domain.
Take your time choosing your LLC name. Make sure to write down a few variations as your first choice may be taken. Texas used to be very strict about LLC names and their availability. In fact, the majority of LLCs that are rejected are due to names issues so make sure you follow the steps above and set out a few options.
If you decide to get in contact via phone or email, we recommend double-checking the LLC name to ensure that it’s really approved. As mentioned most rejections are based on the LLC name so it’s a good idea to play it safe and double-check.
According to Texas state law, you must appoint a registered agent if you decide to form an LLC in the state.
A Registered Agent is a person or company that agrees to receive legal notice (“Service of Process”) and maintain good compliance with the state. For example, if your LLC is involved in a court case, your Registered Agent will be summoned. This is a law in all states.
There are many services like Incfile, ZenBusiness, and Northwest Registered Agents that offer registered agent services for your business. Check them out after the article.
Well, not exactly.
For your LLC, a Registered Agent must be a resident with an address in Texas. You can be your own Registered Agent or ask a friend/family member if they have an address in Texas.
If you don’t live in Texas and you don’t know anyone there, you can hire a Registered Agent. The cost ranges from $100-$300 a year.
If you need a hand check out the best-registered agents. They can save some serious time and money especially if you get stuck with the LLC formation process. Once you hire an agent you’re not married to them, and if you’d like to change your registered agent, you may do so.
To file your LLC you’ll need to fill out form 205 – Certificate of Formation for a Limited Liability Company. The certificate of formation (aka “Articles of Organization”) is a document that outlines the initial statements required by the Texas secretary of state.
At this point, you’ll need to disclose whether your company will be manager-managed vs member-managed. You will also need to disclose if this is a domestic LLC or a foreign LLC. If you’re unsure about those terms circle back to those posts after this guide.
You have a few options to file the form with the secretary of state:
Submitting form 205 is very easy online. Simply Log into SOSO Direct Systems to pay the filing fee. You need to first give your credit card information. It’s weird that they require your credit card information before you do anything but that’s the way they do it. It’s simply to prevent fraud filing.
If you decide to mail in your certificate of formation download Form 205. below is the mailable address.
Corporations Section Secretary of State, PO Box 13697 Austin, TX 78711
If you decide to walk in and hand file the forms be sure to download form 205 above and submit it in person. the address is:
James Earl Rudder Office Building, 1019 Brazos Austin, TX 78701
The LLC filing price varies from state to state, but it costs $300 to file in Texas. Note that If you are a Veteran and you’d like to form an LLC in Texas there is no fee at all.
Setting up an LLC takes time, but on average it takes 5-7 business days to receive approval by mail and 2-3 business days online. If you decide to walk in, you will get an answer on the spot.
Upon approval, you will receive a Certificate of filling along with a stamped Certificate of Formation. If you mailed your Certificate of Formation, then you’ll receive it back in the mail stamped (if approved). If you sent it online, you’ll get an email.
When setting up an LLC in Texas an operating agreement actually is not required. But if you plan on opening a bank account or raising capital, you’re not going to get very far without it.
An Operating Agreement is a legal statement that outlines the purpose of the Texas business and how the company will be managed. Whether you are plan on setting up a single member or a multi-member LLC, we highly recommend creating an Operating Agreement.
It is critical to add how your LLC is controlled and operated in your Operating Agreement. Key subjects to go over are:
In Texas, the Operating Agreement is called an “Internal Document” meaning that the secretary of state does not request it upon filing.
Once you receive note from the Texas secretary of state that your LLC has been filed you should obtain your EIN with the IRS.
An Employer Identification Number (EIN) is a 9 digit identification number that is given to your LLC. The EIN is directly connected to your LLC by the Internal Revenue Services (IRS) to identify taxpayers.
It is important to apply for your EIN only AFTER your LLC is approved. If you apply for an EIN before you are LLC approved, your EIN will be connected to your personal ID.
This will result in having an EIN attached to a non-existing LLC. It’s not the end of the world, you can always cancel your first EIN and apply again.
Texas requires an EIN Responsible Party when applying for an EIN for your LLC.
An EIN Responsible Party is basically a contact person who is the go-to guy if the IRS needs something from your LLC.
If you are a single member of a Texas LLC, you are the EIN Responsible Party. If you are a multi-member of a Texas LLC, one of the members will be the EIN Responsible Party.
An Employer Identification Number (EIN) is free and issued by the IRS. It does not take long to get an EIN and you have two main options to get your EIN from the IRS:
If you decide to Mail in your EIN request the address is :
Internal Revenue Service Attn: EIN Operation Cincinnati, OH 45999
And if you would like to fax in the information the number is (855) 641-6935.
Once you’ve completed steps 1-5, you’ve legally established an LLC in Texas! Now we are moving to the permits licensing and Texas tax requirements.
Depending on the city in Texas and the industry that you are involved in you may or may not need Texas business permits for licenses.
There are three governmental levels that you may end up needing a Texas license or business permit.
Texas doesn’t have a statewide general business license. Be sure to check what you need specifically for your industry.
Texas.gov is a website that offers a list of business licenses, permits, and personal licenses. You can also renew any of your licenses online through the website.
Municipalities in Texas require specific licenses for businesses but it depends on your industry, so be sure to check that out.
For this reason, we recommend you get in touch with the borough that your LLC is located in.
The nature of your business and where it is geographically located play a large role in how your business is going to be taxed. Just as there are three levels of license or business permit, there are three levels of taxes as well.
Most LLCs in Texas are Tax Reporting entities (as opposed to Tax Paying). Let’s have a quick understanding of the two before we continue:
Tax Reporting basically means that information is sent to the IRS but no money/taxes are requested.
Tax Paying means money is requested to the IRS and find must be sent.
If your Texas LLC is a single or multi-member, you are Tax Reporting.
LLCs are “pass-through” entities. LLC owners report and pay taxes to the IRS on their personal income tax returns. If you are forming a single-member LLC you will need to file the 1040 Schedule C form and if you are a multimember LLC you’ll need to file the form 1065 with a Schedule K-1.
Taxes can get complicated and we definitely recommend hiring an accountant for your LLC. It’s absolutely important for business owners to have an overview of what’s going on with taxes and to be involved.
One of the reasons so many entrepreneurs are so eager to file an LLC in Texas is because there is no state income tax. Texas is one of seven states in the US that have no personal income tax.
If your LLC sells/leases personal property or provides taxable services in Texas, you will be required to obtain a Sales Tax Permit and pay Texas sales tax which is very different from tax on your personal income.
The Texas state-level sales tax is 6.25%. Unprepared food, prescription drugs, pharmaceutical drugs, and more are exempt from sales tax so if your business deals with any one of those industries you don’t have to worry about sales tax.
Depending on the municipality that your LLC is located you will be required to pay an additional sales tax (on top of the 6.25%). Local jurisdictions impose a tax of up to 2%. The maximum combined state and local tax rate in Texas could reach 8.25%.
It’s important to note that each municipality system works slightly differently from the next. Make sure you speak with your accountant as it really depends on where your LLC is located.
Whether you LLC in texas makes a profit or not, you are required to file an annual franchise report with the Texas Comptroller.
Franchise tax is a levy that must be paid to the Texas Comptroller. This tax pays for the protection and limited liability that business owners have in Texas. The vast majority of limited liability companies are not required to pay this tax, how every almost all entities need to file the report.
The franchise tax is based on your LLC’s taxable income only if revenues are above $1,180,000 for that year. Meaning that if your LLC made $1,000,000 in sales then your business would not be subjected to Texas franchise tax.
Once you fit in the category of paying franchise tax (sales greater than $1.18 million) you may calculate your taxable income based on the accepted accounting principles.
Starting a limited liability company in Texas is easy, just follow the steps below.
Make sure you take the time to read and understand the steps above. That will help save a ton of time and potential mistakes down the road.
The LLC application that is required in order to form a Texas LLC is called Form 205 – Texas Certificate of Formation. In order to file the Texas LLC application you must provide the following information:
Once all that information is filled out, you’re all set. For a more in-depth and thorough process, go through steps 1-5 above.
Texas Secretary of State changes a one-time filing fee of $300 to form an LLC. The filing fee is for form 205 aka articles of organization to be filed and processed by the state. You will also need to appoint a registered agent each and every year while your business is operating. The cost is for an agent is approximately $150 a year, unless you choose to fill that role yourself.
The Texas Certificate of Formation is the required document in order to set up a business in Texas. This document can be filed online, by mail or fax, and even-handed in person.
There are two kinds of Tax IDs that you’ll need for your limited liability company (LLC) in Texas.
Employer Identification Number – Your EIN is a 9 digit number supplied by the IRS and is easily obtained on their site. You will need to file Form SS-4 and there are fees involved.
Texas Tax Payer number – This is an 11 digit number that starts with a 3 or a 1 and is provided by the Texas Comptroller. You must obtain this number in order to file a return or make a payment.
Once you file the required paperwork, it usually takes 5-7 business days to receive an approved LLC from the Secretary of State.
Other LLC members do not need to change their documents or update the State of Texas unless you decide to change a registered agent.
An EIN number is completely free when applying with the IRS. In order to obtain an EIN free of charge, you must file Form SS-4 and send the information to the IRS.
Benjamin is the Co-Founder and CEO of FinancePond. He worked at a private accounting firm before he created FinancePond. Benjamin is an entrepreneur at heart and firmly believes in strong personal finance and investing education. He has a passion for finance and his goal is to cut out the fluff and make personal finance simple for everyone.
