This guide is intended to help you with the necessary steps in knowing how to form an LLC in Texas. There are several forms and steps included towards forming your Texas LLC. Though Texas has taken several steps to be business-friendly, there are a few requirements that must be adhered to.
Setting up a Texas LLC is simple and most of the related forms are available online. The filing cost for the Texas Certificate of Formation to set up an LLC is $300. However, there are a few other associated forms and necessary steps to consider.
1. Deciding On The Name Of Your Texas LLC
Choosing a name for your LLC is the first step and perhaps the most important. The name you choose will be relevant to your business/company throughout the duration of the operation. So take your time in deciding a name that will define your LLC. For any company that intends to be customer-facing, this will have a huge impact on their marketing as well.
Before you file, it is good practice to do a search and see if the desired name is available. There are several ways to go about this:
- Check online using the Texas Comptroller’s Taxable Entity Search page
- Email to firstname.lastname@example.org
- Phone call to 512-463-5555
- Other methods, as mentioned on this page of the Secretary of State website
Naming Conventions For Texas LLC Formation
Texas law restricts the use of some words in the name of an LLC. These words might be deemed confusing or likely to mislead the public. As such, an LLC in Texas cannot have a name that is similar to a government agency. These include terms like FBI, Treasury, and several others.
Any words that could have a false implication of government affiliation or false implication of purpose are blocked. The use of offensive words in the name or certain restricted words is blocked as well. Texas Secretary of State guidelines have more information on entity names.
Moreover, any name must include the words “limited liability company” or it’s legally accepted variations. The acceptable terms are:
- LC or L.C.
- Ltd. Co.
- Limited Company
- Ltd. Liability Co.
- Ltd. Liability Company
- Ltd. Company
- Limited Liability Company
Application For Reservation Of An Entity Name (Optional)
Reserving a name is a great choice in case you have a great name in mind but aren’t prepared to start your LLC yet. You don’t necessarily have to do this when you start an LLC in Texas, but it is useful if you want the name reserved for future endeavors.
You can submit a name reservation request to the Texas Secretary of State. This needs filling the Application for Reservation or Renewal of Reservation of an Entity Name (Form 501). It is also possible to submit the form online through SOSDirect.
The filing fee for the application is $40 and it reserves the name for 120 days. It is possible to renew the name within the last 30 days before its expiry. You’ll need to submit the same form (501) and a $40 fee for renewals too.
See That The Name Isn’t Infringing Any Trademarks
It’s a good idea to make sure the name you choose isn’t infringing on existing trademarks. Checking the USPTO website and doing a search is helpful.
Using An ‘Assumed Name’ After You Create An LLC In Texas (Optional)
Once your LLC is registered and ready for action, you can choose to use an ‘assumed name’ for your business. Simply put, you don’t necessarily have to use your entity’s registered legal name for business. Instead, you can use an assumed name, also called DBA (doing business as).
To achieve this, you’ll have to file Form 503 (available on the SOS website) with the Secretary of State. Filing the form requires a fee of $25. The assumed name is valid for a maximum of 10 years.
Changing the name of your LLC is possible by filing an amendment. However, that requires a different form and costs $150.
2. Appoint A Registered Agent
Texas requires that any LLC have a registered agent. This person will be included in the LLC Certificate of Formation.
A registered agent is an individual or business entity who agrees to receive the “service of process” on behalf of an LLC. This includes things like government correspondence, tax forms, legal documents, subpoenas, etc.
Note, an entity cannot be its own registered agent. Simply put, your LLC can’t function as a registered agent for itself.
A registered agent must be a person living in Texas or an entity authorized to do business in Texas. The registered agent must have a physical street address in the state of Texas where the “service of process” can be conducted. The address of a registered agent cannot be a PO Box or a mailbox rental service.
Who Can Be The Registered Agent For Your Texas LLC?
In Texas, the following may serve as registered agents:
- You can be the registered agent for your LLC.
- Any friend or family member can serve as a registered agent.
- You may hire a registered agent company for this role. Apart from the ease of use, this may also be good for privacy purposes. The address and contact information of the registered agent is a matter of public record, so you could keep your information private by hiring a company instead.
Of course, all of this still requires that the registered agent fulfill the address requirements. Additionally, the registered agent must consent to the appointment in writing or electronically. Consent must include:
- The name of the LLC.
- Express consent to function as the registered agent.
- Name and signature of the registered agent.
- Date of signing.
All of this is usually covered under form 401-A. It’s not necessary to file this form with the Secretary of State. This document serves as the evidence of consent by the registered agent.
3. Texas LLC Certificate Of Formation – How To Set Up An LLC In Texas?
Texas LLC Certificate Of Formation is the key document in setting up your LLC. The filing fee is $300, and this document forms the basis on how to set up an LLC in Texas. An LLC can be formed by completing Form 205 and filing it with the Secretary of State.
It’s possible to file this document:
- By mail
- By walking in (in-person)
- By fax
The $300 fees can be paid via check, money order, LegalEase debit cards, or American Express, Discover, MasterCard, and Visa credit cards. Cash is not accepted.
If you use a money order or check, it must be payable through a US bank or financial institution. Using credit cards attracts a statutory convenience fee of 2.7%. Checks and money orders must be payable to the secretary of state.
The most convenient and useful way to submit this form is to do it online through SOSDirect. It might be necessary to use a regular SOS Direct Account for filing. You can request it online.
If you choose to submit the form by mail or walking-in, include a duplicate copy of the form. In case you submit the document through fax, it must be accompanied by Form 807 (payment details).
In case you’re expanding an existing LLC to the State of Texas, it will be formed as a Foreign LLC. This requires the submission of Form 304 and has a fee of $750.
Some Requirements For Texas LLC Certificate Of Formation
Here are a few things needed for the Texas LLC formation document. This list is not exhaustive, but these are some of the more important points.
- Name of the LLC and its chosen designation
- Name and address of registered agent (must be Texas street address)
- Address of registered office (must be Texas street address)
- Whether the LLC is member-managed or manager-managed
- Name and address of each initial member or manager (depending on the type of management)
- Name, address, and signature of the LLC’s organizer
The usual approval time of a form filed online is 2-3 business days. Forms filed through mail may take 5-7 business days. Keep in mind, these timings are tentative, rather than absolute. They may vary depending on the filing season and other considerations.
4. Operating Agreement and Management Structure For Texas LLC
LLCs don’t need to have an Operating Agreement. This document doesn’t need filing with any government agency either. However, it is a good practice to have this agreement in place to prove the separation of legal entities of the owners and the LLC.
Whether the LLC is multi-member or single-member it should have an Operating Agreement. This agreement spells out the distribution of profits and losses, how the management of the LLC works, taxation, and other details.
Operating Agreement for an LLC is an internal document. There is no need to file it with any government agency. It should, however, be available to all members of the LLC. The availability of this document also ensures that all LLC members are on the same page. That way, there is a clear method of conflict resolution, should the need arise.
Management Structure For Your Texas LLC
An LLC must decide if it will be managed by members or managers. Hiring of the managers and included compensation, as necessary, should be agreed upon by members of the LLC.
5. Getting A Federal Tax ID (EIN) For Your Texas LLC
Once the state has accepted your LLC, you should get an EIN. This is a federal tax ID. The EIN (Employer Identification Number) is also known as Federal Employer Identification Number (FEIN) and Federal Tax Identification Number (FTIN). It is a 9-digit number issued by the IRS.
There is no fee for issuance of the EIN. All you need to do is to submit an application with the IRS, which can be done online.
If it’s not possible to apply online, you can use Form SS-4. It is possible to submit this form via mail or fax.
Form SS-4 is useful if the owner of the LLC is another LLC or company. Currently, these entities can’t use the online application. The form is also applicable for people who don’t reside in the USA and thus don’t have an SSN.
While taxation is the most visible use of the EIN, it’s also necessary for other services. The use of banking services by the LLC, for example, requires an EIN. It’s also needed in case your LLC needs to hire employees.
Once you have your Texas LLC and the EIN, it is a good idea to get a bank account for the LLC. Shop around and see which banks offer the best deals for your use. While most banks will immediately offer debit cards with the account, it’s advisable to look into credit cards too. They can help build credit for your LLC.
6. Texas Franchise Tax And Public Information Report
All LLCs in Texas must file the Texas Franchise Tax and Public Information Report (PIR) annually. Both of these are submitted together. The Franchise Tax is a ‘privilege tax’ for doing business in Texas. This ‘privilege’ includes the liability protection afforded by the state to the LLC.
While most states require this submission to the Secretary of State, Texas does things a bit differently. The annual report of the LLC (Franchise Tax and PIR) must be filed with the Texas Comptroller’s Office.
Texas allows some laxity for the first year of the formation of the LLC. As such, the Franchise Tax Report is not due until the year after your LLC is formed. So if you formed an LLC in the financial year 2021, the report won’t be due until 2022.
The due date for filing the report is May 15. Again, the report must be filed every year.
The Welcome Letter And Franchise Tax Questionnaire
Soon after your LLC is approved by the state, you’ll receive a “Welcome Letter” from the comptroller’s office. Well, technically, it will be the registered agent that receives this letter. This letter is also called the Franchise Tax Responsibility Letter (Form 05-280).
In this letter, you’ll also find your 11-digit Taxpayer Number and FQ Number. Please note, the taxpayer number is a Texas taxpayer number, not the Federal tax number.
The FQ Number will be used to complete the Franchise Tax Questionnaire. You can use WebFile for this part. Once the questionnaire is done, you’ll get an XT Number. You’ll use this number and the taxpayer number together to file your Franchise Tax and PIR annually.
More On The Texas Franchise Tax
As you might have noticed, filing the Texas Franchise Tax can get a bit convoluted. Even so, more than 90% of the LLCs in Texas don’t pay any Franchise Tax. The “no-tax due threshold” in Texas is at $1,180,000 in gross annual revenue.
This is a fairly generous number, which means most LLCs in Texas don’t have to pay any Franchise Tax. The No Tax Due report should still be filed, along with the PIR.
For companies that do exceed the threshold, taxation depends on their specific sector and work.
Please remember, all this applies only to the Texas Franchise Tax and not other taxes.
7. Local Laws, Licenses, And Permits
Once an LLC is approved, it is good to start business. However, it should still obtain relevant licenses and permits from authorities involved. There is no statewide general business license in Texas. Therefore, you’ll need to check local laws in the county, city, or town where you intend to do business.
8. Local, State, And Federal Taxes
Once you have the Texas LLC operational, it is useful to check for taxes at the local, state, and federal levels.
Your Texas LLC might need a sales tax permit in the following scenarios:
- The LLC sells a taxable service
- The LLC sells tangible personal property
Local taxes can vary and depend on your city/county of operation.
State taxes include franchise tax and sales tax (as applicable). Texas LLCs don’t pay a state income tax. Other taxes may be applicable depending on the type of business your company engages in.
Federal taxes are applicable and depend on how your LLC is set up and managed. Generally speaking, Texas LLCs are tax-reporting entities, not tax-paying entities. That’s because most LLCs are pass-through entities.
This means the LLC owners report and pay taxes on their personal income. Your income or losses through the LLC can be reported when filing taxes. Federal taxation can vary depending on how the LLC is set up.