How to Form an LLC in Texas

Still on the fence about the best business structure? Consider these benefits of starting an LLC:

Step 1: Selecting a Name for Your LLC

Choosing the right name for your business is important not only for your company’s identity but also for adhering to Texas’ LLC naming regulations. If your name doesn’t meet the state’s requirements, it may delay securing your LLC status. To avoid this situation, make sure your name meets the following conditions:

• LLC Designation: Your business name must include "Limited Liability Company" or the abbreviations "LLC" or "L.L.C."
• Distinguishable: The name must also be distinguishable from existing business names in Texas and cannot contain prohibited terms like “bank” or “insurance.”

Use the Texas Secretary of State's Taxable Entity Search tool to check if your desired name is available. Enter the name to see if it’s already in use. If it is, you’ll have to explore other options for naming your LLC.

If the name is not in use, you can proceed with forming your LLC or reserve the name until you’re ready to file officially. To do so, you’ll need to submit the Name Reservation Form 501 and pay a $40 reservation fee. Reservations are valid for 120 days. While this step is optional, it can give you peace of mind while preparing your formation documents.

Step 2: Appoint a Registered Agent

Your LLC’s registered agent is an individual or entity that you designate to receive legal documents – such as lawsuits and official government correspondence – on behalf of your business. They’re a crucial component to not only forming your LLC but also in ensuring ongoing compliance. As such, it’s important to choose a reliable party who is aware of their ongoing responsibilities to your business.

In Texas, a registered agent must have a physical address within the state and be available during regular business hours. You have the option to appoint yourself, an employee or hire a professional registered agent service.

Many LLC owners opt to hire a professional service to protect their privacy. Registered agents' names and contact information are public information to ensure transparency and ease of contact. Additionally, a registered agent ensures compliance with state laws by receiving important documents promptly, allowing you to respond in a timely manner.

Step 3: File the Texas Certificate of Formation

Filing the Texas Certificate of Formation (Form 205) is a crucial step in officially creating your LLC. This document serves as the foundational legal paperwork that establishes your business in Texas.

You can file the Certificate of Formation in several ways: online through the Texas Secretary of State’s website, by mail or in person at their office. The filing fee is $300, which is a one-time cost.

To complete the form, you'll need to provide the following details:

• Your LLC's compliant name
• Your registered agent's information
• Information on your management structure (e.g., whether your LLC will be member-managed or manager-managed)
• A description of the general purpose of your LLC (e.g., the business activities you intend to engage in)

Step 4: Create an LLC Operating Agreement

Texas law doesn’t require an Operating Agreement to grant LLC status, but creating one for your business is still a good idea. Your Operating Agreement defines your LLC's ownership structure, member roles and profit-sharing arrangements, fostering clear communication among members. This clarity can help prevent disputes by outlining how decisions will be made and what happens in various scenarios, such as member departure or business dissolution.

Key elements to include in your operating agreement are:

1. Ownership Percentages: Specify each member’s share in the LLC.
2. Voting Rights: Outline how decisions will be made, including special voting requirements.
3. Profit Distribution: Define how you will share profits and losses among members.
4. Management Responsibilities: Identify who manages the day-to-day operations — members or appointed managers.
5. Dissolution Procedures: Describe the process for ending the business if necessary.

Step 5: Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a federal tax ID number the IRS assigns to your business. You can apply for one through a free application on the IRS website, which typically takes just a few minutes to complete.

Federal law requires you to get an EIN if your business has employees, operates as a corporation or partnership or files certain tax returns. Even if you aren’t legally required to get one, it can still be a good idea. An EIN is a common requirement to access business services, like opening a business bank account for your LLC. 

Step 6: Comply with Texas Tax Requirements

While Texas has fewer regulations than other states, small business owners must still comply with various requirements. We’ve detailed some of the primary tax obligations for small business owners in the Lone Star State, but it's best to check with your local government or a tax professional to ensure that you’re up-to-date on the latest regulations.

• Texas Franchise Tax: All Texas LLCs must file an annual report and pay a franchise tax, regardless of whether they generate revenue. The state calculates your tax based on various factors, such as margin, total revenue, cost of goods sold and compensation. Even if your LLC earns below the taxable threshold, you must still file to remain compliant.
• Sales and Use Tax Permit: If your LLC sells products or services that are subject to sales tax, you must register with the Texas Comptroller of Public Accounts for a Sales and Use Tax Permit. This registration allows you to collect sales tax from customers and remit it to the state. You’ll also need to file regular sales tax returns, typically on a monthly or quarterly basis, depending on your sales volume.

Staying on top of these obligations is crucial for your LLC’s legal compliance and financial health. Regularly review deadlines and consider consulting with a tax professional to ensure that you meet all state requirements efficiently.

Ongoing Compliance and Maintenance for Your Texas LLC

As a Texas LLC, you are responsible for filing the Annual Public Information Report by May 15th each year. This report provides the state with updated information about your LLC, including its management structure and contact details, and is also used to calculate your franchise tax liability. Failure to file the report can result in penalties or even the forfeiture of your LLC status.

In addition to filing this report, you must also fulfill your franchise tax responsibilities by filing the appropriate Franchise Tax Forms. The specific amount and filing requirements depend on your LLC’s income level, with various thresholds for exemptions. Even if your LLC earns below the threshold, you must still file the annual report to avoid penalties.

Staying organized and tracking these deadlines will help you maintain compliance and avoid potential fines, ensuring your Texas LLC continues to operate smoothly.

Maintain a Registered Agent

You must maintain a registered agent for your business as long as your LLC is operating. The agent must also continue to meet the state’s requirements throughout that time — like maintaining a physical address in Texas and being available during business hours — or you’ll need to find a new one.

If your registered agent changes their address or if you decide to switch, you must update this information with the Texas Secretary of State immediately. Penalties for non-compliance can be severe. If your registered agent cannot be reached, your LLC may face fines and the potential for administrative dissolution.

• No State Income Tax: Texas does not impose a state income tax, allowing LLC owners to retain more of their profits.
• Business-Friendly Environment: The state offers strong legal protections and a supportive infrastructure, making it easier for businesses to thrive.
• Flexible LLC Management Options: Owners can choose between member-managed or manager-managed structures, providing flexibility in how the business operates.
• No Minimum Capital Requirement: Texas LLCs don’t require a minimum capital, allowing entrepreneurs to start their businesses without worrying about raising money.

Common Mistakes to Avoid When Forming an LLC in TexasAlthough starting an LLC in Texas is a straightforward process, it’s possible to make mistakes. Look out for these common mistakes when forming your company:

• Using a Non-Compliant Name: Ensure your LLC name meets Texas naming regulations, including proper suffixes and distinguishability from existing businesses.
• Failing to Designate a Registered Agent: Not having a registered agent can lead to administrative dissolution and legal complications for your LLC.
• Not Having an Operating Agreement: While not legally required, an operating agreement is crucial for outlining member roles and responsibilities and promoting long-term success.
• Missing Tax Deadlines: Keep track of franchise tax filing deadlines to avoid penalties and maintain compliance with state requirements.

Additional Resources for Texas LLC OwnersIt may be called the Lone Star State, but you’re not alone as a Texas LLC owner. The state provides ample resources for small business owners who need guidance on anything and everything from compliance to small business financing. Below are some to get you started:

• Texas Secretary of State Business Filings Division: This division oversees the registration and management of business entities in Texas. It provides essential services such as filing the Certificate of Formation, maintaining official business records and ensuring compliance with state regulations. LLCs can contact the Business Filings Division for guidance on formation processes and legal requirements.
• Texas Comptroller of Public Accounts: The Comptroller’s office manages the state’s finances, including tax collection and compliance. It offers resources for registering for various state taxes, including sales and franchise tax. The office provides clear guidelines for filing and paying taxes, ensuring that LLCs remain compliant and avoid penalties. Their resources help businesses understand their tax obligations and make timely payments.
• Small Business Resources in Texas: Various state and local programs, including SBDCs and economic development offices, offer support to small businesses. These resources provide free consultations, grants and legal aid. Entrepreneurs should reach out to these resources for personalized guidance on business planning, access to funding opportunities and legal assistance.