How to Start an LLC in Houston, Texas

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Understanding the Basics of an LLC

A Limited Liability Company (LLC) is a business structure that combines corporation and partnership features. It provides limited liability protection – protecting personal assets such as your home and savings account from being used to satisfy your business debts – while also giving you the flexibility to pay taxes on business income on your personal taxes.

LLCs also offer significant management and organizational flexibility compared to corporations. Unlike corporations, which must have a board of directors, hold regular meetings, and maintain detailed records of corporate decisions and minutes, LLCs have fewer formalities and regulatory requirements. This flexibility allows LLC owners to choose between managing the business directly or appointing managers to handle day-to-day operations.

Benefits of an LLC for Small Businesses and Startups

Opting for an LLC offers several advantages, particularly for small businesses and startups. Here are a few of the key benefits:

• Flexibility in Tax Treatment: LLC owners can choose to be taxed as sole proprietorships, partnerships or corporations. This allows them to choose whichever taxation best suits their financial situation, potentially leading to significant tax savings.
• Easier to Manage: LLCs are easier to manage than corporations due to fewer administrative requirements and formalities. This structure also allows for pass-through taxation, where owners report the business’s profits and losses on their personal tax returns, avoiding the double taxation that corporations face.
• Credibility and Professionalism: Your LLC demonstrates a commitment to the business and can help attract investors, secure loans, and establish credibility with clients and partners. It also gives owners the foundation they need to open a business bank account and use other financial tools reserved for businesses.

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Step 1: Choose a Business Name

Under Texas law, specifically Section 5.053 of the Texas Business Organizations Code (BOC), your LLC's name must be unique and distinguishable from any other names or entities already registered in the state. In other words, you need to ensure your LLC’s name doesn’t match any existing business names, foreign entities or restricted or trademarked words.

To check if your name is available, you can refer to the Texas Administrative Code, Title 1, Part 4, Chapter 79, Subchapter C, which offers more specific guidelines and some examples of prohibited terms.

Then, call the Secretary of State's office at (512) 463-5555 for a preliminary check on name availability or email the Corporations Section. Remember that a preliminary clearance is not a final approval, and you should wait for the official confirmation before making any decisions or investments.

Step 2: Designate a Registered Agent

A designated agent, also known as a registered agent, is a person or entity officially appointed to receive legal documents and government correspondence on behalf of your business. They play a key role in maintaining the business’s good standing by ensuring that all legal and regulatory documents are properly managed and any deadlines are met.

As such, it’s important to choose a designated agent who will be reliable and prompt – missed documents or delayed responses can lead to legal or compliance issues. Many businesses choose a professional registered agent service to ensure that they handle all correspondence professionally and accurately. 

Lastly, Texas state law requires that the designated agent have a physical address in Texas.

Step 3: File the Certificate of Formation

To form an LLC in Texas, you must file a Certificate of Formation (Form 205) with the Texas Secretary of State. Follow these steps to ensure a smooth process:

• Start by preparing your documents, including information on your registered agent and their physical address in Texas. 
• Provide the LLC’s name and the registered agent’s details, and specify whether the LLC will be managed by its members or appointed managers.
• Include a brief description of the LLC’s purpose, whether it will be perpetual or has a set duration, and the organizer’s contact information. You may also specify an effective date if you want the LLC to be established on a date other than the filing date.

You can file the Certificate of Formation online through the Texas Secretary of State’s SOSDirect system, where you will complete the form, submit it, and pay a $300 filing fee electronically. Alternatively, you can mail a completed form with a $300 check or money order, payable to "Secretary of State," to the Secretary of State’s Corporations Section. For in-person filings, deliver the form and payment directly to the Secretary of State’s office in Austin. 

After submission, confirm receipt and processing either through an immediate online confirmation or by monitoring your mail for official confirmation from the Secretary of State. Once processed, you will receive a Certificate of Formation, which is crucial for various business activities, including opening bank accounts and applying for licenses.

Step 4: Create an Operating Agreement

Operating Agreements are a foundational document for LLCs. They outline the company's management structure, operational procedures, and financial arrangements. Operating Agreements specifies whether the LLC will be managed by its members or appointed managers, details voting rights and procedures, and sets capital contributions and dissolution guidelines. 

Although Texas law does not mandate an Operating Agreement, it’s still likely a good idea. By defining these elements, an Operating Agreement helps reduce potential conflicts and ensures smooth day-to-day operations.

Step 5: Obtain an EIN (Employer Identification Number)

Obtaining an Employer Identification Number (EIN) from the IRS is an important milestone for your LLC,  it is required for tax purposes, opening bank accounts, and hiring employees.

First, ensure your LLC is eligible for an EIN and gather the necessary information, including the LLC’s legal name, address, and the registered agent’s details. You will also need the names and Social Security Numbers (SSNs) or Individual Taxpayer Identification Numbers (ITINs) of the LLC members or managers and the reason for applying.

You can apply for an EIN online by navigating to the IRS’s EIN Online Application. Complete the application, which is available Monday through Friday, and receive your EIN immediately upon submission.

Alternatively, you can download Form SS-4, fill it out, and either mail it to the IRS or fax it. Mailing the form takes up to four weeks to process, while fax applications are usually handled within four business days.

Step 6: Register for State Taxas and Permits

In addition to securing your federal EIN, you’ll need to register for state taxes and obtain necessary permits for operating in Houston. First, obtain your Texas State Tax ID Number from the Texas Comptroller of Public Accounts, online through the Comptroller’s website or by submitting a paper application. You’ll use this number to pay your sales, franchise, and employment taxes.

Depending on the nature of your business, you may also need to register for specific state taxes, such as sales and use tax if you sell taxable goods or services, or the Texas Franchise Tax (which applies to most LLCs, not just franchises).

In addition to state tax registration, you must obtain any permits and licenses for your business activities. For example, a food establishment permit from the Texas Department of State Health Services may be required if your business involves food service. Other common permits include signage, zoning compliance, and professional licenses, depending on your industry.

Step 7: Open a Business Bank Account

Opening a business bank account is your first step toward financial accountability for your new venture. It helps to separate personal and business finances, establishing better financial management and legal protection. More importantly, it reinforces the legal protection of your personal assets by separating personal and business liabilities, ensuring that personal assets are not at risk in the event of business-related legal issues or debts.