Have you been told that forming an LLC in Texas for your company would be a smart move? There are plenty of reasons to consider a Texas LLC formation as a business owner, but you may have no clue where to start.
This article will explain the benefits of the limited liability company business entity, walk you through the steps to form one, and even explain why you might want to hire a registered agent for the process.
Why and When a Texas LLC is Best for Your Business
You have many choices when it comes to the business entity you choose for your company. But some, like a sole proprietorship, limited partnership, or partnership put your personal assets at risk. If you are sued or can’t pay business debt under one of these business structures, your personal funds, vehicles, or other assets could be seized to cover the debts.
On the other hand, some business entities like a Texas corporation or Texas LLC provide personal asset protection. You as an individual are considered separate from your business and therefore are not responsible for business debts.
Another benefit of the LLC is how federal income tax is treated. The LLC itself doesn’t file or pay taxes. Instead, they are passed through (thus the term “passthrough taxes”) to your personal income tax return.
Types of LLCs
Not to complicate things, but there are actually several types of limited liability companies. If you are the only owner (called a member), you have a traditional LLC or single-member LLC. If you have business partners, you would form a multi-member LLC.
If you form your LLC in the state where you do business, that’s a domestic LLC, in contrast to a foreign limited liability company. A foreign LLC is formed in a state other than the one it does business in.
Then we have the Texas series LLC or SLLC, which provides liability protection across multiple series, or divisions, of the company. This is common in real estate.
And finally, there is the professional LLC, which is for certain types of highly-regulated industries like law and medicine.
How to Set Up an LLC in Texas
Filing paperwork for your limited liability company in Texas is just one step in the process:
- Register Your LLC with the Texas Secretary of State
- Apply for an EIN
- Create an Operating Agreement
- Open a Bank Account for Your LLC
- Hiring Employees? Register with the Texas Workforce Commission
- Complete Your Online Tax Registration Application
- Comply with County and/or City Tax Requirements
Register Your LLC with the Secretary of State
You’ll need to input information like your company’s physical location and mailing address as well as details on the governing individuals (members) within the LLC. If you are working with a registered agent, there is a section to fill out their contact information.
The filing fee for your Texas LLC is $300.
Apply for an EIN
Once you’ve completed the LLC filing for your company, get your free EIN (employer identification number) from the IRS. Just like you as an individual have a Social Security number, your business also needs an identification number when you fill out tax documents, hire staff, or open a business bank account.
Create an Operating Agreement
Next, you’ll need to create a limited liability company Operating Agreement. This LLC agreement outlines the purpose of your business, any members who have fiduciary duties, and other important details on how your LLC will be operated.
Open a Bank Account for Your LLC
Every company, whether it’s run as a sole proprietorship, corporation, partnership, or LLC, should have a separate business bank account. Filing taxes for your individual tax return is much simpler if you keep business expenses separate from personal.
Hiring Employees? Register with the Texas Workforce Commission
If you will be hiring employees in your business, you’ll first need to create an account with the Texas Workforce Commission, where you can register a new unemployment tax account, file and pay unemployment taxes, and learn about employment law from this Texas governing authority.
Complete Your Online Tax Registration Application
To do business with your Texas LLC, you will need a sales tax permit. The online application covers:
- Sales and Use Tax
- 911 Surcharge and Fees
- Sales Tax Surcharge on Diesel Equipment
Comply with County and/or City Tax Requirements
In addition to the sales tax permit, there may be other business licenses or permits required by your city or county, so do your homework to find out what you need to be compliant.
What is a Texas LLC Operating Agreement?
I briefly covered the Texas LLC Operating Agreement you should draft, but wanted to cover it more in-depth.
While the state of Texas does not require an LLC Operating Agreement, it’s still a good document to have, especially if you have other LLC members who have fiduciary duties and responsibilities within the company.
This company agreement outlines standard operating procedures as well as lists all LLC members. You can use an online template for your LLC Operating Agreement.
Should any information in your Texas LLC change, such as a change of address or change of ownership, be sure to update your Operating Agreement.
Should You Hire a Registered Agent Service?
While it’s certainly not difficult to file your own Texas LLC, you may want to consider hiring a Texas registered agent service. A registered agent acts on your behalf to file the paperwork to form your LLC, and can also manage filing your annual franchise tax reports and paying your fees.
Texas registered agent services do charge to manage your LLC, but if you are too busy or don’t want to risk missing a deadline, it may be worth it to pay someone else to handle it.
Costs of Maintaining an LLC in Texas
The initial filing fee for your Texas LLC is $300. Beyond that, you will need to file an annual franchise tax report by May 15 to the Texas Comptroller. You will also owe your franchise taxes, which are based on a percentage of your annual revenues, per Texas law.
If you miss the May 15 deadline for your annual franchise tax report, there will be a $50 penalty fee. If you pay your taxes 1-30 days late, there will be a 5% penalty, and for taxes paid 30 days or more after the due date, there’s a 10% penalty fee.
If you need to make changes to your Articles of Organization, there may be a filing fee for your amendment of $150.
Importance of Forming an LLC to Qualify for Financing
One final point to discuss with regards to your Texas LLC business entity is financing. Should you decide, down the road, to apply for business loans for small business or seek investors, know that they may only want to do business with you if your business is an LLC or corporation. Sole proprietorships and partnerships present more risk to investors, so investors like the asset protection that these two business structures provide.
Nav’s Verdict: Creating an LLC in Texas
If you’re looking for a way to limit your personal liability and protect your assets while running the business of your dreams, forming a Texas LLC may be the way to go.
This article was originally written on September 30, 2020 and updated on July 18, 2022.