- Starting a limited liability company (LLC) in Texas may help to legitimize your small business, protect your personal legal liability as an owner, and organize your business structure.
- There are specific state laws and regulations you have to follow to start an LLC in Texas.
- See this step-by-step guide from Nav’s experts on how to start a limited liability company in Texas.
Why Start an LLC in Texas
An LLC is one possible business entity you can choose to open in the Lone Star State, along with others like a sole proprietorship, a partnership, or a corporation. Entrepreneurs and startups may want to open an LLC in Texas for a number of reasons.
First, LLCs offer personal liability protection (which is the “limited liability” part of the name) while sole proprietorships don’t. That means your personal assets aren’t at risk if the business goes under or gets sued. This separation between business and personal assets lowers your risk considerably as a business owner and can help ease stress about potential future issues.
You also don’t have to complete an annual report for your Texas LLC, which many other states require. This can reduce your yearly workload as a small business owner.
However, not every industry can start a standard LLC in Texas. You must instead form a Professional Limited Liability Company (PLLC) if you run a professional service that requires a license, like a:
A PLLC costs the same $300 filing fee as an LLC but operates under slightly different rules.
How Much Does It Cost to Form an LLC in Texas?
It’s always good to consider the cost before you start any venture. Initially, opening an LLC in Texas is pricier than in many other states — it costs $300 to file a certificate of formation in Texas. Meanwhile, Kentucky charges $40 for the same thing. Additionally, you’ll have to pay another $40 if you want to pre-register your Texas business’s name before you file.
Texan LLC owners may have to pay a franchise tax that most states don’t require for LLCs. In addition, you’ll have to pay state employer taxes if your Texas LLC has employees, along with sales and use tax if you sell goods.
One silver lining is that you won’t have any other ongoing fees each year to keep your Texas LLC in business aside from taxes. Most other states have at least a small charge each year — and in New York, you might pay up to $4,500 every year to operate an LLC. In the long run, it may not be more expensive to start an LLC in Texas than other states.
12 Steps to Starting an Texas LLC
The LLC formation process doesn’t have to be overwhelming, whether you’re in Austin, Houston, or Brownsville. We highlight the 12 steps to starting a limited company to simplify the process for all future Texas LLC owners.
1. Name your LLC
Decide on a business name. Then use the Texas Taxable Entity name search engine to see if your name is already registered. Reserve your LLC name if you’re not ready to file yet by filling out Form 501 and paying $40. You might also look into whether the domain name would be available for your business’s website before deciding.
A Texas LLC name must:
- Include the words “limited liability company” or “limited company” or an abbreviation: LLC, L.L.C., LC, or L.C
- Not be so similar to any existing business or reserved business name that the two could be confused.
- Not include the words “lotto” or “lottery.”
- Not make your business appear illegal.
- Not use words that make it seem like the LLC was formed by veterans or to benefit them.
- Not be possible to confuse with a government agency.
You can also get a doing business as (DBA) name, which is also called an assumed name, by filling out the assumed name certificate, or Form 503. But keep in mind that it doesn’t give you liability protection in any way.
2. Get a registered agent
You are required in Texas to have a registered agent during the LLC business formation process — and we do recommend taking advantage of their assistance when forming an LLC. You can hire a professional service or another individual, but the laws vary by state. According to the Business Organization Code, you can technically act as your own registered agent in Texas, as long as you meet their requirements and are a resident of the state. However, appointing someone else to be your registered agent can save you from the trouble of having to be available during regular business hours to receive legal documents.
Registered agent services receive legal documents on behalf of your business, and also may give you a business address to use for your LLC if you don’t have one. A registered agent must have a physical street address (rather than a P.O. Box) to be allowed to accept your business documents. Overall, a Texas registered agent service can make the process of starting an LLC much smoother and less stressful.
3. File a Certificate of Formation with the Texas Secretary of State
You’ll need to file a Texas certificate of formation, also called articles of organization, to start an LLC in the state. To file, use the form you can find on the online portal called SOSDirect and pay the filing fee. State fees in Texas are $300 to file.
Each LLC business owner is called a “member.” Your certificate of formation must state the management structure of your LLC — it’s fine for either managers or members to manage it.
Single-member LLCs only need the Social Security number (SSN) of the sole owner, but if you’re a partnership, you’ll need the SSN of everyone with ownership in the business.
Also, check to see if your industry requires specific business licenses and apply for them if so.
4. Create an operating agreement
An operating agreement highlights your business’s rules and regulations for its operations. It clarifies any uncertainties about the way the business will run. In Texas, you aren’t required to have an LLC operating agreement, but we highly recommend it. It can uphold your liability protection and help you avoid misunderstandings. We recommend you seek legal or professional help to finalize your operating agreement.
If you don’t define your business’s internal operations in your operating agreement, your LLC will simply defer to the current state law in Texas.
5. Get an EIN or Employer Identification Number
Your EIN is like your business’s Social Security number. It helps the government and lenders identify your business in tax forms and applications. Also, you avoid having to put your Social Security number on forms that many people may see. Whether or not your Texas LLC is legally required to have an EIN depends on your unique situation, but you’ll need an EIN to do things like open a business bank account and more. So it’s best to get it set up from the get-go.
You can apply for a free EIN quickly and easily through the Internal Revenue Service (IRS).
6. Select the right insurance for your Texas business
Your LLC protection is not foolproof, so you often need additional insurance coverage for your business. The kind(s) of insurance you need for your Texas LLC depends on factors like the type of business, your industry, and whether or not you have employees. You may have to provide one or all of the following:
- Commercial general business liability insurance: Covers a broad range of issues like bodily harm, personal injury, property damage, and even problems like defamation.
- Professional liability insurance: Also known as errors and omissions insurance, and covers professional mistakes like negligence or misrepresentation.
- Business owners insurance: Covers property and bodily damage, cost of defamation cases, and more.
- Workers compensation insurance: This insurance protects the business and the employees against workplace injuries, covering items like lost wages and medical bills.
- Various insurance: Check to see if there is any other insurance required by your industry or your type of business.
7. Learn about Texas tax and IRS tax requirements
Understanding your local and federal tax requirements is essential as an LLC owner. The Internal Revenue Service (IRS) may charge your LLC federal tax like:
- Income tax
- Self-employment taxes
- Employment taxes (if you hire employees)
- Excise tax
Texas law also may require you to file returns for state tax. Typically, an LLC is more flexible in terms of taxes than corporations, but that’s not necessarily the case in Texas. In most states, single-owner LLCs do not have to file their own tax returns. Instead, the owner’s income tax returns are enough. But LLCs in Texas have to file a franchise tax return with the Texas Comptroller of Public Accounts. Even single-member LLCs file this return for these states’ taxes.
But the good news is that you may not have to pay this tax. Your Texas LLC won’t have to pay the franchise tax until it makes more than $1.23 million (in 2022 and 2023). So this requirement may not be more costly for you — just more work.
Sales tax in Texas is also average, falling at 6.25%. Texas also doesn’t have an individual income tax, although you may have to pay the federal income tax.
8. Add annual filing dates to your calendar
Putting dates on your calendar with reminders helps you to fulfill your tax filing requirements. Although you don’t have to file an annual report, you do have to file an annual franchise tax report that’s due May 15 every year. Other due dates for Texas LLCs are listed here.
If you’re worried you won’t be able to remember these dates, use a professional service to help you stay on top of your tax returns.
9. Get a business bank account
A separate checking account is essential for an LLC to divide its personal and business expenses. Choosing a business checking account allows you to take advantage of specific business advantages that come with accounts designed for small business. You’ll need documents and information like your EIN, your certificate of formation, and any ownership agreements or business licenses.
Pricing depends on factors like the number of transactions, the monthly fee, and ATM fees. Set up your free Nav.com account to see the business checking options (including Nav Business Checking that targets small business owners) you’re most likely to qualify for — instantly.
10. Establish credit for your new LLC
Just like you have a personal credit score, your business also has one. But it’s not always automatic. Creating a credit history for your LLC will help you down the line when you go to apply for financing or try to get better vendors, so it’s smart to make sure you are working toward building business credit. For a detailed guide on how to establish business credit, check out this guide by Nav’s experts.
11. Create a system for managing your business finances
Staying on top of your business finances is one of the most vital parts of running a business, and it starts with choosing the right accounting software. Your accounting software should be easy to use, effective, and affordable. Even if you hire an accountant (which we recommend), using software to organize your finances in the meantime can automate your bookkeeping and free up your valuable time as a small business owner.
12. Secure financing for business growth
Forming your LLC is just the start. When you’re ready to take it to the next level, you may qualify for small business funding that can help you get there. And they can ease cash flow issues during times of heavy investment or a bad economy. Whether you’re looking for business credit cards or small business loans, financing your business can help you to expand and grow in ways that fit your dreams.
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