It might have taken you longer than you thought, but now you’re ready. You have the ideas and the means to make your own business a reality. A lot of new entrepreneurs, though, get stuck at this stage. The legal aspects of forming an LLC and starting your business can be scary. Even the pros often get lost in the maze of laws and regulations.
Don’t despair, though. You’ve done the hardest part by designing and planning your business. Compared to that, forming an LLC is simple. Lots of people have done it before you, and you just have to follow the rules, one step at a time. You’ll be done before you know it.
In this article, you’ll find all the tips you need to start an LLC in Texas, including:
- How to draft and file the documents you need for your Texas LLC formation
- Guidelines for staying within state and federal law
- The actual laws and rules you need to follow
Step 1: Name your Texas LLC
The first thing you have to do is name your company. After you’ve picked a good name, though, you must make sure that it’s a legal name that people won’t confuse with another company or entity. There are a few things to think about here.
Words You Have to Use
Section 5.5056 of the Texas Business Organizations Code has a very simple rule for naming your company.
A Texas LLC name must contain one of the following:
- Limited liability company
- Limited company
- An abbreviation of one of the two phrases above, like LLC, LC, or Ltd. Co.
Current Texas regulations do not let you use only the words “limited” or “company” by themselves to identify an LLC.
Words You Can’t Use
You’re not quite done yet. You also have to check the Texas Secretary of State’s rules to make sure your name is okay. The Texas Administrative Code on the Secretary of State’s website lists these extra rules.
Your LLC can’t have another company’s name. Nor can it have a name that would cause people to confuse it with other companies or government entities.
The naming rules forbid you from using the following words:
- Any words that might make people think your company is part of a government
- Any words implying that your LLC is doing something illegal
- “Grossly offensive” words
- “Olympic” or similar words
- “Bank” or similar words
- “College” or similar words
- “Veteran,” “Disabled, “Spanish,” or similar words if the name implies that the entity is for the benefit of war veterans and their families
- “Lotto” or “lottery”
A good rule of thumb when naming your LLC in Texas is that the name shouldn’t imply approval by anyone unless you have proof of that approval.
Research the LLC Name You Want
Before you submit your name to the Texas Secretary of State, you will also need to search current business names. As with most states, you can do this through the Secretary of State. However, you need an SOSDirect account from the Secretary of State. You’ll also need to pay a fee every time you search!
The easier, free way is to use the State Comptroller’s Taxable Entity Search. Use this website to search multiple names and word combinations for free. That way, you can submit your name with confidence that you have done all the necessary research, and it didn’t cost you a thing.
Different Types of LLC Names: Using an Assumed Name
After you’ve named your company, you can still use a different name by applying for an assumed name (also known as a DBA or “doing business as” name). These names can help you clarify who owns your business. You can also make it clear that you and other companies with a similar name have different owners.
Chapter 71 of the Texas Business and Commerce Code provides all the details about assumed business names. You will need to file your assumed name certificate with the clerk of the county or counties where you will do business.
Step 2: Appoint a Registered Agent for your LLC
Every Texas corporation, limited liability company, or other business entity must select a person to receive correspondence and service of process. Service of process is a legal term for letters or legal papers that must be delivered to your business.
These people, known as registered agents, are the points of contact between your company and the public. If the state needs to contact you about your business, this is the address it will use. And if your LLC is ever sued, your Texas registered agent will get the paperwork.
Picking a registered agent isn’t as simple as it seems. Some business owners do it themselves. More experienced people, though, hire companies to serve as their registered agents. Those agents then use their own offices for the service of process and correspondence.
It’s tempting to be your own registered agent for a lot of reasons:
- It’s cheap: You’re not paying someone for something you can do yourself.
- It’s simple: The only address and contact information you have to keep current is your own.
- It’s reliable: You will receive all important documents personally.
There are, however, some good reasons not to be your own agent:
- No privacy: You’ll have to make your address available to the public on the Comptroller’s and Secretary of State’s websites.
- Junk mail/spam: Public-facing addresses are swarmed by junk mail in addition to a small amount of legitimate mail.
- No breaks: Registered agents must be open for service during all business hours. They don’t get time off.
- Business interruptions: If your agency address is the same as your business address, your business and clients may be interrupted by your duties as an agent. If you are getting served with a lawsuit in front of customers, that could be embarrassing or even hurt your business.
- It’s your fault if you miss something: You always have to make sure your agency address is correct and up to date. If you make a mistake or miss something, that’s on you.
The best option, then, is to use a registered agent service. Their address, not yours, is the one that people see. Their sole job is to make sure you don’t miss anything. That way, you can focus on your business.
A registered agent service can also be useful if you plan on registering as a foreign LLC in a different state.
If you are looking for a professional registered agent service, take a look at our Best Registered Agent ranking for some of our recommendations.
Texas’s rules for naming and changing resident agents are in sections 5.200 to 5.208 of the Texas Business Organizations Code.
Step 3: File Your Texas LLC Certificate of Formation
Your LLC’s certificate of formation is one of the most important papers you will file.
Texas law says that the filing of the certificate is the act that brings your LLC into being. Before the filing, your company is just an idea. After the filing, it’s a legal entity that can sign contracts and do business.
What to Include in my Texas Certificate of Formation?
Under Texas Business Organizations Code section 3.005, your certificate of formation should include:
- The name of your LLC
- The purpose of your LLC (which can be stated as “any lawful purpose”)
- If you don’t want the company to last forever, how long it should exist
- The registered street and mailing addresses of the LLC
- The name and address of the LLC’s registered agent
- The name and address of each person forming the LLC
Before you file your certificate, it’s a good idea to ask the Secretary of State’s office about any new requirements that should be in there.
If you would like to avoid the hassle of handling your LLC filing yourself, you can also use a professional LLC formation service. Check out our Best LLC formation services article for some of our suggestions.
Texas LLC Filing Fee
When you file the certificate of formation, you will have to pay a $300 filing fee. Once your certificate is processed, the Secretary’s office will issue an acknowledgment of the filing. That acknowledgment is all you need that (1) your LLC exists, and (2) it can do business.
Texas LLC Processing Time (Normal or Expedited)
The Secretary’s office estimates a normal processing time of 5-7 business days. If you need it sooner, you can request expedited processing for $25 per document.
In Texas, “expedited processing” is supposed to mean the document will be processed by the end of the first business day following the day the Secretary of State receives the document. That isn’t always the case, though.
The way you send your certificate to the Secretary of State may affect your processing time. Non-expedited documents sent by mail or fax can take as long as 40 business days to process! Expedited service on documents sent this way takes 4-5 days.
On the other hand, non-expedited documents that are sent to the Secretary of State electronically (through the SOSUpload system, for example) are processed in 4-5 days.
The office advises that these timeframes are subject to change due to their workload. So, make sure you ask about the turnaround time when you are ready to file.
If you need expedited service, the Secretary of State’s office asks that you include a cover letter with your certificate specifically requesting expedited processing. The cover letter should include your name and a phone number where you can be reached during business hours.
Step 4: Draft your Texas LLC Operating Agreement
Operating agreements are contracts between you and the other members of your LLC.
They are the rules to which you all agree. Texas law doesn’t require you to have one, but we strongly urge you to consider it. The time it takes to draft the contract is more than made up by its value to you and your business.
If you’re forming your own LLC, chances are you’re a good planner and you think things through. But not even the smartest business owner can predict everything that can happen in the future. An operating agreement is designed to help you deal with those unexpected situations before there’s a problem.
Your operating agreement should have all the important facts about the LLC. For example, your company might have six LLC members (LLC owners), but those people probably won’t all do the same thing. One of you might be the one that puts up most of the money, and another manages the business.
The operating agreement lists each person and how they are expected to work. If the company needs more money, it might make sense for a passive investor member to pay more. The manager, on the other hand, might instead have a duty to reduce business spending.
The great thing about these contracts is that you can make them as specific as possible for each member of the LLC. You can also specify how new members can buy into the company, or current members can leave.
One of the most important functions of the operating agreement is to say what happens when somebody fails at their job. Can they be fired or kicked out of the company? If you have an operating agreement, you get to make the decision. If not, you are leaving the question to state law, which might not give you the result you want.
Those are only a few of the uses for LLC operating agreements. An operating agreement can also specify:
- Which members can sign contracts or checks for the LLC
- How members can leave the LLC
- How new members can join
- How and when profits are paid to members
- How to hire and fire managers
- Procedures for annual company meetings and votes
- How the LLC should be taxed
- What happens when the business ends (dissolution)
Unlike the certificate of formation, you don't file your operating agreement with the state. It's your contract. Once all the members have signed it, keep the original safe and make plenty of copies. You should be able to use a good operating agreement as a reference while you run your business.
Step 5: Get an EIN (Employer Identification Number) for Your Texas LLC
EINs are numbers that the IRS uses for keeping track of companies that pay taxes. Think of an EIN as a social security number for your LLC. Not all LLCs need one, but many do. It’s important to understand when you need to get one.
Here are the most common times when you need an EIN:
- Does your LLC have more than one member?
- Does your LLC have any employees?
- Is your LLC taxed as a C corporation or S corporation?
If the answer to any of the above questions is yes, you will need an EIN for your company.
If you have to get an EIN, please know that it is not a difficult process. The IRS has a detailed website on the topic and allows you to apply online. The entire application will take around five minutes.
You should never pay anyone to do this for you unless it is part of a larger service package.
First Tasks After Registering your Texas LLC
Congratulations! You’ve formed your own company. It may seem like a small step, but it puts you much closer to your dream. Don’t stop now. There are a few more things you need to do to protect yourself and your business.
Open a Business Bank Account
Your company must have a separate bank account for several reasons:
- Accounting: You’re in business to make money. You can’t tell if you’re making money unless you know exactly how much your company spends and deposits every month.
- Credit: Even successful companies need to borrow money. You don’t want to use your personal credit, though, for a business expense. Keeping your company’s money separate helps build up company credit that it can use for business purposes.
- Personal Asset Protection: Keeping your company’s money separate from your own is the whole point of even forming an LLC. Without a business bank account, you risk losing that protection.
The third point is the most important. Keeping a separate account for your company is critical for protecting yourself from legal liability. If your company is financially separate and somebody later sues it, your personal assets will not be at risk.
Lawyers call this company/individual separation the corporate veil. (Even though an LLC is different from a corporation, the concept is still the same.) You run the risk of the veil being “pierced” if you treat your company’s assets like they are your assets.
Let’s say you use a company car to pick your kids up from school. That shows that you are using the company’s assets for yourself. It’s the same idea if you put the company’s money in your own bank account. In that case, it’s hard to argue that you are keeping your business and personal finances separate.
If you have legal trouble, a court will look at these things. If it decides that you have been treating the company’s assets as your own, it will “pierce the veil.” The other side can then ignore any legal protections you get from the LLC. Of course, that defeats the purpose of even forming a limited liability company.
So, this is an important step. Get your new LLC a bank account as soon as possible.
Get Business Insurance For Your Texas LLC
When you are so mired in the legal details of starting your business, it can be easy to forget simple things. You must remember to protect your business by getting the proper insurance policies. The nature of the insurance you need will depend on your business, but some policies you may want to consider are:
- General liability insurance: You’ll need this if there's an injury on your property. The insurance pays for damages and legal representation.
- Commercial automobile insurance: This works like your own automobile insurance. It covers drivers and vehicles for your business.
- Workers compensation insurance: Workers’ comp policies pay for on-the-job injuries suffered by employees. Unlike many states, Texas law does not require companies to have these policies. It is smart to get it, though, because having it protects you from injury lawsuits by your workers.
- Commercial property insurance: This protects your property in the event of damage. Keep in mind that flood insurance is often a separate policy.
- Professional liability insurance: Lawyers, doctors, architects, and other professionals need this insurance. It provides coverage and legal defense in the event of a malpractice complaint.
Keep Your Texas Company Compliant
Once your Texas limited liability company is formed, you still need to make sure you are following the law. If you fail to meet legal requirements, the state can stop you from doing business. You could also have to pay fines or tax penalties.
Texas Business Permits and Licenses
The state of Texas does not require a general business license or permit. Your certificate of formation serves that purpose. Keep in mind, though, that city and county governments may have their own rules. You should check with them to see whether they require a permit or license for your business.
Certain types of businesses also require professional licensing or regulation. (Think doctors, lawyers, and architects.) To see whether your business has any professional licensing requirements, inquire with the Texas Department of Licensing and Regulation.
Texas Tax Requirements
The state imposes a franchise tax on LLCs . This franchise tax is based on the “net surplus” of the company, a number that is hard to calculate but can be roughly described as the assets of the company minus members’ contributions. The state comptroller's website contains forms designed to help you calculate that amount when tax time rolls around.
You may also have other tax obligations to the state. If you have workers, you may need to pay employment taxes. If your business sells goods, you will also have to collect and pay sales taxes to the state. You should consult with a business accountant to make sure that all of these issues are taken care of as soon as possible.
Federal LLC Tax Filing Requirements
The IRS will treat your single-member LLC or multi-member LLC as a pass-through entity, meaning that your company does not pay taxes directly. Instead, income will come through the LLC to you, and you will pay taxes on that income. Profits or losses from your LLC should be on a Schedule C for your personal federal tax return.
Annual Report and other Filing Requirements
The Texas Secretary of State does not require you to file an annual report for your LLC. You will, however, have to file annual reports with the comptroller about your Texas franchise tax, discussed above.
Texas Business Formation Quick Links
- Texas Comptroller’s Taxable Entity Search (Free Business Search)
- Texas Secretary of State Business Start-Up Information
- Texas Secretary of State Filing FAQs
- Texas Secretary of State Fee Schedule
- SOSUpload System for Business Filings
- Texas Business Organizations Code Chapter 3 (Business Formation)
- Texas Business Organizations Code Chapter 5 (Business Names)
- Texas Business Organizations Code Chapter 71 (Assumed Business Names/DBAs)
- Texas Administrative Code Chapter 79, Subchapter C (Additional Name Regulations)
- IRS Employer Identification Number Application
- IRS information regarding the federal tax treatment of LLCs
Texas LLC FAQs
How much does it cost to start a Texas LLC?
It costs $300. This is the filing fee to the Secretary of State, filed with your certificate of formation.
What is the processing time to form my Texas LLC?
The Texas Secretary of State estimates 5-7 business days. However, if you mail or fax your application, processing time may take as long as 40 days. You can pay for expedited service (end of next business day, or 4-5 days by mail) or use the SOSDirect System to upload your certificate of formation electronically for a faster turnaround time.
What are the benefits of a Texas LLC?
A Texas LLC protects your personal assets while giving you favorable tax treatment. It also requires less paperwork and reporting than other entities, while giving you the flexibility to customize your company and business structure to fit members’ needs (for example, with an operating agreement).
Where do I check if my Texas LLC name is available?
The best place to go for a free search of Texas Businesses is the Comptroller's Taxable Entity Search. You can also search business through the Secretary of State, though this option will cost you money per search.