How to Start an LLC in Texas in 2024

• Personal Liability Protection: Owners' personal assets are safe from being used to pay for business debts with the limited liability protection of an LLC.
• Pass-Through Taxation: LLC owners can claim business income and expenses on their personal tax return, reducing their overall tax burden.
• Credibility: The added legal protection LLCs offer over sole proprietorships or partnerships adds credibility to its operations. This makes it an ideal designation for small businesses and startups seeking a blend of simplicity and security.

Series LLCs

One unique aspect of LLC formation in Texas is the option to create a "Series LLC." This structure allows a single LLC to establish multiple "series" or divisions, each with its own assets, liabilities, and members while maintaining a centralized management structure. This can be especially useful for businesses with multiple product lines or real estate investments, as it can provide enhanced liability protection between the series.

Step-by-Step Guide to Starting an LLC in Texas

Forming an LLC in Texas takes about 1 to 2 weeks. To avoid delays, applicants should be mindful of choosing a unique name, correctly filing the required documents and understanding ongoing compliance requirements.

Step 1: Choose a Business Name

Like many states, Texas requires that business names meet specific requirements. For LLCs, your business name must be unique and distinguishable from other businesses. You can check if your desired name is already in use through the Texas Secretary of State’s Taxable Entity Search tool.

You must also ensure that your chosen name is not misleading or suggests affiliation with government agencies. For example, you cannot include words like “Trust,” “Bank” or “Insurance” in your name unless you meet the requirements to use protected terms.

Lastly, you will need to include “Limited Liability Company,” “L.L.C.” or “LLC” in your name to clearly designate your business to the state, vendors and customers.

If you have a name in mind but aren’t ready to form an LLC, you can reserve your business’s name. Submit the Name Reservation Form 501 and pay a $40 reservation fee to hold the name for 120 days. While this step is optional, it can give you peace of mind while preparing your formation documents.

Step 2: Designate a Registered Agent

Texas law requires that LLCs maintain a registered agent who is responsible for receiving legal documents and official correspondence, such as lawsuits and state notifications, to ensure that important communications are handled promptly.

In Texas, a registered agent must be at least 18 years old, a state resident, and have a physical address (not a P.O. Box) in Texas. They must also be available during business hours and comfortable adding their personal contact information to the public record.

While you may choose to act as your own registered agent, hiring a professional service can provide privacy, convenience, and reliability. A registered agent service will handle all correspondence and ensure you receive critical documents. This option is especially beneficial for busy entrepreneurs or those operating remotely, as it allows for better focus on growing the business.

Step 3: File the Certificate of Formation

When you’re ready to formally establish your LLC, file a Certificate of Formation with the Texas Secretary of State. To do so, complete Form 205  and pay the one-time processing fee of $300.

You can submit Form 205 online through the SOSDirect portal or mail a completed paper form to the Secretary of State. It typically takes the state one to three business days to process online applications and two to three weeks to process mail applications. Once processed, you’ll receive a Certificate of Formation confirming your LLC's official status.

Step 4: Create an Operating Agreement

An Operating Agreement outlines the operations of an LLC, detailing member roles, ownership percentages, and operational procedures. While not legally required in Texas, it is best practice to draft one. Your Operating Agreement helps protect the interest of the LLC by establishing guidelines for operation and managing disputes.

Key elements to include are:

1. Ownership Percentages: Clearly define each member’s share in the LLC, which is vital for profit distribution and decision-making. This can also come in handy if one member decides to sell their shares later on.
2. Member Responsibilities: Specify the duties and powers of each member to prevent conflicts and ensure smooth operations.
3. Profit Distribution: Outline how profits and losses will be shared among members, creating transparency.
4. Dissolution Procedures: Describe the process for ending the business if necessary.

Step 5: Obtain an EIN (Employer Identification Number)

An Employer Identification Number (EIN) is a unique identifier the IRS grants your business. It’s required for filing taxes, hiring employees, and opening a business bank account, although some single-member LLCs may not need one. Without an EIN, your LLC may face difficulties with payroll, tax reporting and securing financing.

To apply for an EIN, you can do so through the IRS in several ways:

• Online: Use the IRS website for immediate processing.
• By Mail: Complete Form SS-4 and send it to the IRS; processing typically takes four to 6 weeks.
• By Fax: Fax your completed form to the IRS, which is usually processed within four business days.

Step 6: Register for State Taxes and Permits

In Texas, LLCs must navigate several state tax requirements, including sales tax and franchise tax:

• Sales Tax: If your LLC sells tangible goods or certain services, you must collect and remit sales tax to the Texas Comptroller of Public Accounts. The current state sales tax rate is 6.25%, but local jurisdictions can add additional rates, so it’s crucial to check local rates as well. For example, Austin, Texas, has an 8.25% combined city and state sales tax rate.
• Franchise Tax: Texas imposes a franchise tax on most LLCs. This is essentially a business income tax based on your gross revenue, with different rates and thresholds depending on your income level.

Additionally, depending on your business type and location, you may need to obtain local permits and licenses. This could include zoning permits, health permits, or industry-specific licenses. For example, salons need to display a state-issued cosmetology license. Check with your city or county government for specific requirements, as regulations can vary widely based on your business activities and location.

Step 7: Open a Business Bank Account

Keeping personal and business finances separate is vital for any LLC: It reinforces your limited liability protection, simplifies bookkeeping and ensures compliance with tax laws. A simple and easy way to build a fence between your business and personal finances is to open a business bank account.

This account will serve as your primary financial hub for all business transactions, making it easier to track income and expenses. Additionally, a dedicated business account enhances your professionalism and can help establish credit for your LLC.

Follow these steps to open a business bank account:

1. Choose a Bank: Research the best banks for small businesses in Texas. These banks will offer dedicated business accounts with low or no fees and services tailored to your needs.
2. Gather Required Documents: Opening a specialized account requires documentation of your business. Typically, you’ll need your EIN, operating agreement, certificate of formation, and a personal ID for all authorized signers.
3. Apply Online or In-Person: Schedule an appointment to complete the application or apply online. Once your account is open, make an initial deposit.

• Franchise Tax Filings: Most Texas LLCs are required to file an annual franchise tax report with the Texas Comptroller of Public Accounts. This report is due on May 15 each year and includes financial information to calculate your tax burden.
• Annual Reports: The franchise tax report is the only annual report that state law requires you to file for your LLC. However, you must file this report even if your LLC falls under the franchise tax threshold.
• Registered Agent: You must maintain a registered agent with a physical address in Texas. If the agent or their contact details change, you must update the Secretary of State immediately.
• Business Licenses and Permits: Your business may be subject to additional local and state permits and licenses. You must maintain these certifications by renewing them when necessary.

If your LLC hires employees, you’ll need to comply with additional regulations:

• Employment Laws: Familiarize yourself with federal and state employment laws, including the Fair Labor Standards Act (FLSA) for wage and hour regulations, the Family and Medical Leave Act (FMLA), and anti-discrimination laws under the Texas Workforce Commission (TWC).
• Workers’ Compensation: While Texas does not require most private employers to carry workers’ compensation insurance, it is highly recommended. This insurance protects your business and employees from the costs associated with workplace injuries. If you opt-out, ensure you inform employees and provide alternative coverage.
• Payroll Tax Obligations: As an employer, you must withhold federal income tax, Social Security, and Medicare taxes from employee wages. Additionally, you must pay unemployment insurance taxes to the Texas Workforce Commission.
• Employee Forms: Collect necessary documents from all new hires, including Form I-9 (employment eligibility verification) and Form W-4 (employee withholding allowance certificate).
• Posting Requirements: You must display required labor law posters in a visible area in the workplace.

Resources for Texas Entrepreneurs

As a part of the business-friendly environment, Texas provides a number of incentives and support organizations to help small business owners thrive.

Local Business Support Organizations

• Texas Economic Development Corporation (TEDC): The TEDC is a state agency promoting economic growth and development across Texas. They offer a variety of resources and support for business owners, including access to incentives, grants, and funding opportunities tailored to stimulate business expansion. 
• Dallas Entrepreneur Center (DEC): The DEC is a community-driven organization focused on supporting startups and entrepreneurs in the Dallas area. They provide a wealth of resources, including mentoring, networking opportunities, and access to workshops that can help LLC owners refine their business strategies.
• Small Business Development Centers (SBDCs): Small Business Development Centers (SBDCs) are a network of centers that provide free or low-cost consulting services and training for small business owners. Entrepreneurs should contact their local SBDC for personalized assistance, mentorship and training to enhance their business skills and knowledge.

State and Local Incentives

• Texas Enterprise Fund (TEF): This cash grant program is designed to attract new businesses to Texas and encourage expansion by providing financial incentives to qualifying projects. Companies must submit an application detailing their project and its potential economic impact to apply.
• Local Economic Development Programs: Many cities and counties in Texas offer local economic development programs, including tax abatements and grants designed to attract new businesses. Contact your local chamber of commerce or economic development office to explore these incentives.
• Small Business Administration (SBA) Programs: The Small Business Administration (SBA) provides a variety of loan programs and support services for small businesses across the country, including those in Texas. Texas-based entrepreneurs can apply for SBA loans through local lenders and find resources and assistance on the SBA's website.