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When starting a new company, choosing a business entity is the most important decision that the founders must make. For most businesses with more than one founding member, forming as an LLC is often the best option for a number of reasons.
An LLC is an uncomplicated business structure that affords business owners legal protection by separating personal assets from business debts. Moreover, LLCs often enjoy a lower tax rate than corporations. Nevertheless, creating an LLC can get complicated depending on where you are based, with the formation process, filing fees, and continuing legal obligations differing from state to state.
Texas is a good state to form an LLC in due to the many business opportunities the state affords as well as the lack of an annual report filing requirement. To avoid a misstep in the filing process, follow these steps to start an LLC in Texas, and refer to the checklist at the bottom of the post to familiarize yourself with the legal and financial requirements for LLCs in the state.
Starting an LLC in Texas step-by-step
1. Select a name for your Texas LLC
Follow naming requirements
There are 2 major guidelines to follow when naming your LLC in the State of Texas:
- An LLC’s name must be distinguishable from the names of existing business entities on file with the Texas Secretary of State.
- An LLC’s name must contain one of the following phrases or abbreviations: “Limited Liability Company”, “Limited Company”, “LLC”, “L.L.C.”, “LC”, or “L.C.” The abbreviations “Ltd.” and “Co.” may be substituted for the words “Limited” and “Company”, respectively.
Check the availability of the LLC name
You may confirm that the name you’ve chosen for your LLC is available in the state by performing a search with the Texas Secretary of State SOSDirect website. Each search requires the payment of a $1 fee.
Reserve your LLC name with the Secretary of State
Reserving your LLC name is a good idea since it prevents another Texas business entity from making use of it before you legally form your LLC in the state.
File an Application for Reservation or Renewal of Reservation of an Entity Name with the Texas Secretary of State online or by postal mail. There is a $40 name reservation filing fee.
2. Designate a registered agent
As in every U.S. state, forming an LLC in Texas requires the appointment of a registered agent service to handle state and federal legal documents and service of process on the business’s behalf.
The registered agent must either be a state resident or business entity with a street address in Texas OR if the individual or business is based out-of-state, they must have a business office in Texas.
3. File a Certificate of Formation
An LLC is formed in Texas through the filing of a Certificate of Formation for a Limited Liability Company with the Texas Secretary of State.
You can file the certificate online using SOSdirect or by mail. The filing fee is $300.
The Certificate of Formation must provide the following information:
- LLC’s name and chosen designation
- Registered agent name and address
- General purpose clause
- Whether the LLC is member-managed or manager-managed (include every managers’ and members’ names and addresses)
- The effective date of the certificate (if different than filing date)
- The name, address, and signature of the LLC organizer
Foreign LLC registration
An LLC formed in a state other than Texas intending to do business in the state must register with the Texas Secretary of State.
Complete these steps to do business in Texas as a foreign LLC:
- Comply with Texas LLC naming rules and confirm that the LLC’s name is available using the Secretary of State’s SOSDirect search tool (must pay $1 per search).
- Appoint a Texas registered agent.
- File an Application for Registration of Foreign Limited Liability Company with the Texas Secretary of State online or by postal mail. The filing fee is $750.
4. Draft an operating agreement
Although not a legally mandated step for forming an LLC in Texas, drafting a comprehensive LLC operating agreement is strongly recommended for all nascent limited liability companies.
The operating agreement should do the following:
- Describe the LLC’s business structure
- Establish the individual responsibilities and obligations of LLC members
- Detail how the LLC will be run
Without an operating agreement clarifying the specific duties of its members, an LLC may face significant legal and operational difficulties.
5. Obtain an IRS Employer Identification Number (EIN)
All newly formed LLCs in the United States must acquire an Employer Identification Number (EIN) from the Internal Revenue Service (with the exception of single-member LLCs).
The nine-digit EIN is like a social security number for a business and is necessary to pay income tax, file tax returns, open business bank accounts, and perform many other important functions.
You can apply for an EIN online on the IRS website without paying a filing fee.
6. Fulfill your Texas LLC’s additional legal obligations
Once an LLC is registered, its members must devote attention to fulfilling legal requirements that apply for the duration of the company’s existence.
Register with the Texas Comptroller of Public Accounts
LLCs active in Texas (including foreign LLCs) may be required to register with the Texas Comptroller of Public Accounts for the purpose of satisfying various state tax obligations. This includes LLCs that collect sales tax on retail goods and LLCs that have employees.
Obtain business licenses and permits
LLCs doing business in Texas may be required to obtain state or local business licenses, permits, or certifications depending on the nature of their business and location.
Check out the Texas Department of Licensing and Regulation website and the Texas Business Licenses & Permits Guide for information on occupational licenses and permits in the state. Although local business licenses are uncommon in Texas, you should contact a city or county clerk in the area where your LLC is based for confirmation that one isn’t required in your area.
Texas LLC checklist
A Texas LLC’s name must obey the following guidelines:
- Must be distinguishable from the names of existing business entities on file with the Texas Secretary of State.
- Must contain one of the following phrases or abbreviations: “Limited Liability Company”, “Limited Company”, “LLC”, “L.L.C.”, “LC”, or “L.C.” The abbreviations “Ltd.” and “Co.” may be substituted for the words “Limited” and “Company”, respectively.
Formational documents and filing fees:
- Application for Reservation or Renewal of Reservation of an Entity Name (not required but recommended) – $40 filing fee
- Certificate of Formation for a Limited Liability Company – $300 filing fee
- Application for Registration of Foreign Limited Liability Company (foreign LLCs only) – $750 filing fee
- An LLC is formed in Texas by filing a Certificate of Formation for a Limited Liability Company with the Texas Secretary of State.
Additional legal obligations:
- Register with the Texas Comptroller of Public Accounts – Required for certain LLCs active in Texas depending on business type
- Obtain business licenses and permits – Required for certain LLCs active in Texas depending on business type and location