Forming a limited liability company (LLC) in Texas for your business is one of the fastest and easiest ways to get your operations off the ground. An LLC is a cost-effective structure for small to medium-sized companies. And it works well for growing operations too.
It provides the advantages and protections of corporations with less hassle.
LLCs are a type of business entity that provides limited personal liability for its owner. As a result, safeguarding your personal assets out of reach if your business should land in legal or financial trouble. And LLCs avoid double taxation through a concept called pass-through taxation.
Whether you’re starting a new business or already run a hustle, creating a Texas LLC is simple.
We’ll walk you through the process from start to finish and answer the most common questions about LLC formation in Texas.
Table of contents
- Step 1: Choose a name for your Texas LLC
- Step 2: Hire a registered agent
- Step 3: File the Texas LLC certificate of formation
- Step 4: Obtain an EIN (Employer Identification Number) from the IRS
- Step 5: Prepare an LLC operating agreement
- Step 6: Open a Texas business bank account
- Taxes, costs, and fees in Texas for LLC
- Business permits and licenses in Texas
- Pros and cons of forming an LLC in Texas
- Key takeaways
- Formation FAQs for an LLC in Texas
Step 1: Choose a name for your Texas LLC
Choosing a name for your LLC is the first step of registering a business. You will need to file a name registration application with the Secretary of State (SOS) as part of your company formation.
The name you choose should be recognizable by your clients, distinguishable from other businesses, and compatible with Texas’s state laws for business naming.
When choosing your LLC’s name, keep the following official requirements in mind:
- Must contain the phrase “limited liability company” or “limited company” or any abbreviation of these phrases like LLC, L.L.C., LC, Limited, Ltd.
- Avoid choosing a name that can be confused with a governmental entity (e.g., Secret Service, IRS, Homeland Security, etc.)
- Obtain permission to use certain restricted words (e.g., Olympic requires approval from the U.S. Olympic Committee and using college or university requires approval from the Texas Higher Education Coordinating Board)
- Foreign words won’t be translated (e.g., Casa Blanca Productions won’t be translated to White House Productions)
- Avoid words that can be deemed grossly offensive.
Next, check if the selected name is available. You can do so by running a name search with the Texas Comptroller.
If your business name is available, you can reserve it for up to 120 days while you finish the other steps to form your LLC. You’ll need to file an application and pay a $40 fee.
Finally, check if the domain name is available. Be sure to verify that your business name is also available as a domain name. Even if you don’t plan to create a website right away, you may want to snatch it anyway to prevent others from squatting it.
If you want to use an alternate name, file Texas Form 503, Assumed Name Certificate, with both the Secretary of State and the county clerk where your LLC is located.
Step 2: Hire a registered agent
Texas requires you to have a registered agent for your LLC.
In Texas, a registered agent can be:
- A Texas resident, or
- A business licensed to transact business in Texas with a physical street address. P.O. box addresses aren’t allowed.
You can act as a registered agent yourself, appoint an employee, or someone else in your company. Or you can use a professional service.
Regardless of who you appoint as your agent, you must get written authorization to show they consent to the decision. You can draft your own form or use Texas Form 401-A, Acceptance of Appointment and Consent to Serve as Registered Agent.
Registered agent: DIY vs. hire a registered agent service
The annual cost of a registered agent depends on the level of service they provide. Some will include the state LLC filing fees in their fee, while others will charge you a la carte for these things. You can expect to spend between $100 and $150 per year to hire a Texas-registered agent.
Step 3: File the Texas LLC certificate of formation
Filing the Certificate of Formation is what makes your LLC official. This application tells the Texas SOS necessary details about your company, including entity name, physical address, registered agent, members/owners and addresses, and general-purpose.
To start the LLC filing process, download and fill in Form 205, Certificate of Formation Limited Liability Company. Then mail it to the Secretary of State in Austin and pay a $300 state fee. You also have the option to file the Certificate online via the SOSDirect website.
Once the Secretary of State receives your Certificate of Formation, it can take as little as four or five business days to process it if you file electronically. But if you send the documents by mail, the LLC registration process can take up to four to five weeks.
After your certificate has been approved, you’ll receive a stamped copy, which means you’re officially allowed to do business in Texas. Congratulations!
But this isn’t the end of the road. There are a few more steps to take to get your LLC up and running.
Step 4: Obtain an EIN (Employer Identification Number) from the IRS
An EIN is the identification number the IRS uses for your business. Think of it as your business’s Social Security Number.
You need an EIN to report federal taxes. Also, it’s used on company tax returns and for paying employment taxes if you have employees. However, you will not need an EIN if you’re the only member of your new Texas LLC. That’s because the IRS disregards the business and sees you and the business as the same taxpayer. Therefore, you’ll use your Social Security Number on your LLC’s federal tax documents.
Still, getting an EIN for your single-member LLC is a good idea. You’ll need it to open a business bank account, and it can help prevent identity theft by keeping your Social Security Number off your business documents.
You can apply for your number online using the IRS’s Internet EIN application, and it’s free. You’ll answer a few questions about your business and instantly receive your EIN.
If you’d rather do things old school, you can use Form SS-4, Application for Employer Identification Number, and mail or fax it to the Internal Revenue Service. It’s still free, but it can take up to four weeks to get your EIN.
Step 5: Prepare an LLC operating agreement
Although Texas doesn’t require your LLC to have an operating agreement, it’s a best practice to put one in place to prevent any misunderstandings among the LLC members.
LLCs use an operating agreement to outline the rules, regulations, and procedures for how the business will operate and be managed. The agreement includes details on financial and operational decision-making. Think of it as a roadmap for preventing and resolving operational issues.
A standard operating agreement will address issues such as:
- Who has decision-making power? What happens if there’s a disagreement?
- What happens if one member wants to leave the business? What happens to his stake? How can the member leave?
- What if the LLC wants to bring on another member? How will the new member’s powers differ from the original members?
- What happens when the members want to end the LLC?
If you don’t create an operating agreement for your LLC, your business will be governed by the default Texas laws, which might produce unintended consequences.
So what should you include in an operating agreement?
There are operating agreement templates available online that you can use. But you’ll want to make sure it includes:
- Name of the LLC
- Duration of the LLC
- Principal place of business
- Name and address of the registered agent
- General statement about the LLC’s purpose
- Initial members
- Ownership interest/percentage
- Rules for additional contributions
- Procedure for adding members
- Process for dividing profits and losses between members
- Designation of the LLC’s manager
- Strategy for how members can leave
- Dissolution of the business
If you want your multi-member LLC to run smoothly, make sure the operating agreement is drafted correctly.
Online services offer customizable forms that can cost a few hundred dollars. Hiring an attorney can cost $1,000 or more.
Step 6: Open a Texas business bank account
Once you have your EIN, you can open a business bank account. Keeping your business finances separate from your personal is critical for an LLC.
Here’s why a business bank account is essential:
- Simplifies business record keeping
- Eases tax preparation
- Prevents comingling of funds. That’s a big no-no in the eyes of the IRS.
- Preserves personal liability protection
Since banks have different requirements for opening and maintaining accounts, it’s wise to call around to see who has the best propositions.
As you shop around, compare the following:
- Monthly service fees
- Miscellaneous fees (e.g., wire transfer fees, overdraft fees)
- Minimum required balances
- Minimum initial deposits
- Interest rates
You’ll also want to know what documents you’ll need to bring with you when you open an account. Most often, at a minimum, you’ll need:
- A file-stamped copy of your LLC’s Certificate of Formation
- A driver’s license or another type of ID with a photo
- Your EIN
Be sure to confirm with your bank what documents you’ll need to open your business bank account.
Texas LLC taxes, costs, and fees
There are three different “buckets” of taxes your LLC may need to pay in Texas.
One of the benefits of registering an LLC is its pass-through taxation. If you stay with the default tax classification, your LLC won’t need to pay tax on its profits. Instead, the member(s) will only pay personal income tax. However, you can also choose to report taxes as an S-corporation or a C-corporation. In that case, pass-through taxation will cease to work.
However, your company will need to pay federal payroll taxes, including FICA and federal unemployment tax, if you have employees.
Texas has two main types of state taxes — franchise tax and sales tax. Most LLCs are bound to pay these.
But depending on your industry, your business may be subject to other state taxes like the battery sales fee, hotel tax, or oyster sales fee. So be sure to verify that!
All LLCs registered in the state will need to file a Texas franchise tax return every year.
The good news is that many LLCs don’t end up paying annual state taxes because they fall below the $1,180,000 “no tax due” annual revenue threshold.
However, if you’re going to make above that, be ready to pay a progressive tax, ranging from 0.331% to 0.75%.
Keep in mind a “no tax due” tax return still needs to be filed online using the Texas Comptroller’s web file service by May 15 every year.
LLCs need to file an annual Public Information Report with the Comptroller’s office along with the franchise tax return. This report operates like an annual report that updates the LLC’s business address and owner information.
Depending on your business type, you may need to collect and pay sales tax.
State sales tax: Texas imposes a 6.25% state sales tax on retail sales, some leases and rentals, and several other taxable services.
Local sales tax: Some cities, counties, and municipalities in Texas may charge taxes on businesses operating in their jurisdiction. The local sales tax can be up to 2%.
And if you have employees, headcount or occupational privilege taxes may be charged. Check with your local tax authority for any business taxes your LLC may incur.
Applying for a sales tax permit: If you need to collect sales tax, apply for a sales tax permit online. There’s no fee to apply.
If you have employees, your business will need to pay state unemployment tax:
- Wage base: $9,000 per year per employee
- New employer tax rate: 2.7% or your industry’s average tax rate, whichever is higher, for the first four full calendar quarters
A qualified payroll professional can further clarify these for you.
Texas business permits and licenses
Texas doesn’t require a general business license or permit to start a business.
However, certain businesses may need a license to operate. For example, breweries will need a permit from the Texas Alcohol and Beverage Commission.
And your local city or jurisdiction may require a general or a specific permit or license. So check with your local authorities to determine if your business needs any type of license to operate.
Application and licensing fees vary depending on the industry and type of license required.
Pros and cons of forming an LLC in Texas
Choosing the correct legal structure for your Texas business is essential. Consider these pros and cons when considering forming a Texas LLC.
Texas LLC pros
- Provides legal liability protection for business owners
- Avoids double taxation
- Allows for flexible membership and management
- Pay no state franchise tax if revenue is below $1.18 million per year
Texas LLC cons
- Members pay self-employment tax
- Registration fees can add up
- Initial and ongoing paperwork obligations
- Increased recordkeeping to maintain personal/business separation
- If you’re operating as a sole proprietorship, consider forming an LLC.
- Most LLCs won’t pay Texas franchise taxes.
- Although Texas doesn’t require any general business license, certain businesses may need special permits or licenses to operate.
- You can form an LLC in Texas for as little as $300.
Texas LLC FAQs
Below are some of the most frequently asked questions (FAQs) about forming an LLC in Texas.