How to Start an LLC in Texas (May 2024 Update)

Forming a limited liability company (LLC) can be one of the best decisions an entrepreneur makes when starting a business. An LLC combines the liability protection and tax flexibility of a corporation with the simplicity and affordability of a partnership or sole proprietorship. There are nearly one million LLCs registered in Texas, making it a popular choice for business structure in the Lone Star State.

While an LLC has many advantages, there are also drawbacks to consider along with legal requirements you’ll need to fulfill when establishing your company. This comprehensive guide will walk you through the key steps involved in forming an LLC in Texas.

Choosing a Name for Your Texas LLC

The first task when starting a Texas LLC is picking the perfect name for your business. You’ll want a name that is memorable, descriptive, and available for use in Texas.

LLC Naming Requirements

Your company’s name must adhere to Texas naming laws for LLCs:

• It must contain words like “Limited Liability Company”, “Limited Company”, or abbreviations like LLC or LC.
• The Secretary of State cannot approve names too similar to existing businesses that would mislead the public. Your LLC’s name must be distinguishable.
• You cannot use restricted words like “Bank”, “University”, or “Treasury” without consent.
• The name cannot be offensive or misleading.

Check Name Availability

Before deciding on the final LLC name, confirm no other company has rights to that name in Texas. Use the Business Entity Search to explore names. If your desired name passes the search, consider reserving it by filing Form 501 ($40 fee).

Secure a Domain

Registering a domain name related to your LLC name establishes an online presence and prevents others from acquiring domains similar to yours. Even if a website isn’t in your current plans, buy the domain now so you have it for the future.

Appoint a Texas Registered Agent

A registered agent is a person or company designated to receive service of process and official documents on behalf of your LLC. Texas requires all LLCs to have an agent.

Registered Agent Requirements

Your registered agent must:

• Consent to serving in that capacity
• Have a physical street address in Texas
• Be available during normal business hours to accept legal documents in person on your LLC’s behalf

You have a few options:

• Appoint yourself or a company representative
• Hire a Texas resident
• Use a professional registered agent service for a fee

Many LLCs choose route #3 for convenience, reliability, and privacy. The registered agent address becomes part of public record when you form your LLC. Using a service keeps your home or office address private.

Filing the Certificate of Formation

Now comes the official process for registering your LLC with Texas. You’ll need to file a Certificate of Formation (Form 205) with the Secretary of State. This step establishes your business as a legal entity in the state.

Filing Certificate of Formation in Texas

Visit SOSDirect to file online and receive faster processing. You can also print Form 205 and mail it with payment. Include:

• Your LLC’s name and type of entity
• Registered agent’s name and address
• Management structure
• Business purpose
• Organizer name and signature
• Effectiveness date

The filing fee is $300. Once approved, the state returns a stamped copy of your certificate. Keep this for your records along with any future changes like amendments.

Creating a Texas Operating Agreement

An operating agreement isn’t legally required, but it’s extremely beneficial for businesses to have one. This document describes the operating procedures, ownership details, voting processes, and profit/loss distribution for your LLC.

Drafting an Operating Agreement

Even single-member LLCs can gain protection from a solid operating agreement. Include these key components:

• Member responsibilities
• New member admission procedures
• Rules for membership transfers and terminations
• Distribution of profits and dividends
• Tax classification of the LLC
• Voting procedures
• Rules for dissolving the LLC

Work with an attorney or use an online legal service to ensure you create a detailed document that meets Texas compliance standards and covers all aspects of operations unique to your LLC.

Obtaining an Employer ID Number (EIN)

Apply for your EIN directly through the IRS website to receive immediate processing. An EIN serves as a taxpayer identification number for your business to be used for federal tax purposes.

Reasons for Needing an EIN

While single-member LLCs can use their Social Security Number, there are a few key reasons you may want an EIN instead:

• Hiring employees
• Opening business bank accounts
• Applying for business licenses and permits
• Filing separate tax returns for partnerships

Having an EIN adds further separation between your personal and business finances, preventing legal risks.

Next Steps for New LLCs in Texas

Congratulations, your LLC is officially registered in Texas! As you begin operations, stay on top of these next steps:

Open a Business Bank Account

Keep your LLC finances separate from personal funds by opening dedicated business bank accounts. Deposit all earnings into the business account and pay for company expenses from there.

For more information, take a look at our article on the key benefits of business checking accounts.

Secure Necessary Licenses

Research if your industry requires special licensing or permits in Texas, which are filed separately from forming your LLC. Common examples include liquor licenses, commercial building permits, and insurance licenses.

Purchase Business Insurance

Review risks that could financially impact your LLC and discuss insurance options with an agent. General liability coverage helps protect against property damage, bodily injuries, personal injuries, and advertising injuries caused by your Texas business.

Understand Tax Obligations

As a newly formed LLC, you’ll have some new tax duties such as filing an annual public information report and possibly the franchise tax. While Texas has no personal state income tax, you still must handle federal income taxes for your business. Consider hiring a tax specialist to ensure you remain compliant.

Pros and Cons of a Texas LLC

LLCs balance simplicity and affordability with liability protections better than most entity structures. However, they aren’t perfect. Let’s explore some key advantages and potential limitations.

Pros of a Texas LLC

• Personal asset protection if your LLC is sued
• Increased credibility with customers
• Pass-through taxation simplicity
• Operational flexibility

Cons to Consider

• Self-employment taxes on earnings
• Public information displayed through state filings
• Extra paperwork and record-keeping needs
• Difficulty obtaining business financing

Alternative Business Entity Options

Sole proprietorships, general partnerships, and corporations represent other structures to consider before filing your certificate of formation. Here’s how they compare:

Sole Proprietorships

Simplest option but no liability protection for personal assets. Business losses and gains are filed with your individual tax return.

General Partnerships

Equally simple but also exposes owners’ personal assets. Must file a DBA to operate under a business name and partners pay taxes as individuals.

Corporations

More expensive to create than LLCs and require stricter record-keeping. But they can attract investors more easily thanks to share selling and have better permanency.

Conclusion

Forming your small business as a Texas LLC can be completed fairly quickly if you follow our guide. Take time upfront to pick the right name, set up a strong operating agreement, and handle licensing before diving into sales and services. Stay proactive with annual filings and understand your federal income tax obligations. With a little diligence, your Lone Star State LLC will thrive for years to come!