If you’re looking to start a business in Texas, then you might be feeling a little overwhelmed about how the process works. A lot of entrepreneurs choose to create an LLC (short for Limited Liability Company).
Here’s why: compared to a corporation, an LLC is simple to run—no complicated bylaws, shareholder regulations, board meetings, and so on. But, an LLC still gives you personal asset protection, which means you won’t lose your house or savings if something goes wrong with your business. That’s a win-win.
But to get the advantages of an LLC, you’ll need to form one officially. That’s where this guide comes in. We’ll walk you through all the steps you’ll need to complete to create your LLC in Texas. Once you’ve finished, you’ll be all set to succeed!
Before we jump in: know that you don’t have to do this alone! Paperwork can be tedious and overwhelming (especially at the start). Thankfully, there are many fantastic LLC formation services that can form your LLC on your behalf. And with the top registered agent services, you can keep your business in good standing, worry-free.
These convenient online business services offer a lot of bang for your buck, allowing you to focus on what matters: running your business.
Creating a Texas LLC
Creating a Texas LLC is exciting, but it’s also a legal process. Thankfully, though, there’s not a whole lot of “legalese” involved. Follow these steps, and creating your Texas LLC will be a cinch:
1. Name Your LLC
Your business’s name is a big deal—it goes on all of your official documents, your advertising, and it’s how your customers will get to know your business.
Name recognition goes a long way, right? And when it comes to what name you pick, the sky’s the limit…mostly. There are a couple general best practices to follow, and of course, there are a couple Texas-specific restrictions, too.
For example, a business name should be…
- Easy to say and spell
- Tell customers what good or service you offer
- Something you like!
Every name must also include the words “Limited Liability Company,” the abbreviation “LLC,” or some variation of the business type designation.
One last note: if your name includes specific words like Education, Academy, Bank, or something similar, you may need to get additional approval from the state’s banking division or Department of Education.
Beyond that, there are a few Texas-specific rules you’ll want to follow. Most importantly, you cannot use a name that’s already been claimed by another business in Texas. Thankfully, you can check if your desired name is still available by running a Name Availability Search. If you’d like additional information about the specifics of naming rules, check out the Texas Name Filings FAQs.
If your desired name is available, you shouldn’t hesitate to claim it! Ultimately, you’ll officially claim the name when you file your Certificate of Formation (see Step 3). But if you’re not quite ready to file the Articles, you can reserve your name with the state. Simply fill out the Application for Reservation or Renewal of Reservation of an Entity Name form and pay the applicable $40 fee. This will protect your chosen name for 120 days, giving you time to prepare anything else you need.
2. Choose a Registered Agent
In your Certificate of Formation, you’ll be required to list the name and address of your registered agent. “Registered agent” sounds fancy, but don’t let the name overwhelm you: an agent acts as your primary contact for all official communications.
A registered agent accepts what the state calls “service of process” on your behalf. Basically, if your business ever falls out of good standing (or something similar), the state will send an official alert to your registered agent. Because of that, the registered agent needs to be available during all regular business hours.
In Texas, you can serve as your own registered agent, but we don’t recommend it. You’d be tied down to your listed address, or worse, you might run the risk of missing an important letter. Plus, appointing someone else keeps your personal address private and cuts down on junk mail.
If you’d like to hire a registered agent, we have a few recommended services.
3. File the Formation Documents
Once you’ve chosen your name and appointed a registered agent, you’re ready to file your Certificate of Formation. This all-important filing is what will legally create your business in the state of Texas, so it’s important to fill it out carefully.
Texas needs a lot of important information from you, including:
- Your chosen business name
- Name and address of your registered agent
- Management structure of your LLC
- Name and address of each governing person
- Purpose for which your LLC is organized
- Any additional provisions you wish to include
- Name and address of organizer
- Effective date of your filing
- Signature of organizer
You can file your Certificate online or by mail. Either way, you’ll need to pay the $300 filing fee. You can pay by check, money order, or by credit card (but card payments will be subject to a 2.7% convenience fee). All checks should be made payable to the Secretary of State.
Congratulations! Your LLC is now officially recognized by the state of Texas.
After You Set Up an LLC in Texas
Your LLC is now an official entity in Texas, but don’t get too comfortable. There’s still plenty of work to be done if you want to set yourself up for long-term success. Of course, this isn’t an exhaustive list, and you may need to address some requirements that are unique to your industry.
1. Get an Employer Identification Number (EIN)
If you have one or more employees (or expect to in the future), you should get an EIN from the IRS. This filing is actually pretty simple, and it’s completely free. You do need to complete the application in one sitting (you can do it online here), so be sure to have your valid Taxpayer Identification Number on hand.
If you file the form online, you’ll receive your number almost immediately.
2. Obtain any needed licenses and permits
Depending on your industry and location, you may need to obtain licenses and permits for your business.
Texas does not have a statewide general business license that every business in the state needs to obtain. And for the most part, individual cities and counties do not have general business license requirements, either. You should check with your local county clerk just to be sure that they don’t require one, though.
The bulk of Texas’s licensing requirements come in the form of professional and occupational licenses. Most importantly, Texas upholds all federal-level licensing requirements. For example, business owners in industries like alcohol and agriculture need to get licenses from the Alcohol and Tobacco Tax and Trade Bureau and U.S. Department of Agriculture respectively.
There’s also a good chance that your industry is regulated by a statewide or local board, too. For example, Texas requires licenses for dietitians, midwives, barbers, and more. Unfortunately, you’ll have to do some digging to learn about these requirements. The Texas Department of Licensing & Regulation’s TDLR Programs page is a good place to start.
3. Meet zoning requirements (if you have a physical location)
Cities and counties across Texas have careful regulations regarding how land and property is used.
For example, some properties can only be used for residential purposes, not commercial. It’s vital to check the zoning requirements for your physical location (or before building on your property) to ensure that you’re not violating zoning requirements.
To learn more about zoning requirements in your area, we recommend checking out your county and city websites.
4. Draft an Operating Agreement
An operating agreement is almost as important as your Certificate of Formation, but you don’t have to file it with the Secretary of State.
Here’s why the Operating Agreement is so important: it details just how your LLC is going to succeed. For example, the Operating Agreement will describe how profits are distributed to members of the LLC, how members can join (or leave), ownership policies, the rights and responsibilities of each member, and more.
Even if you’re a single-member LLC (you’re the only one running it), you should draft up an Operating Agreement. Who knows? Your business might grow, and an Operating Agreement will ensure you’re ready to bring new members into the game.
On top of that, a lot of banks request to see your Operating Agreement before you can open a business bank account.
You can hire a business attorney to help you draft your Operating Agreement. But if you’d like to save money, there are plenty of free templates online that you can customize to meet your LLC’s needs.
5. File federal and state taxes
Nobody likes taxes. We get it. But it’s part of life while running a business. Every year, you’ll need to pay taxes on the federal, state, and local levels. And on top of that, you’ll need to make reports of your business income.
We’re not accountants, so we won’t go into a ton of detail about taxes here. But we do want to give you a good idea of what you’ll be up against in terms of taxes.
First off, it’s important to note how you’ll pay taxes. By default, members of LLCs will report the profits they get through distributions on Schedule C of their individual tax forms. They then pay individual tax rates on those profits. However, LLCs can also elect to be taxed as corporations, and if they do, the LLC itself will pay taxes at the corporate income tax rate.
Taxation in Texas is unique; there is no individual or corporate income tax rate. That’s not to say that you won’t owe any taxes on your business income, though. Instead of income taxes, Texas levies a franchise tax. This tax applies to every business in the state whose income exceeds the tax-due threshold of $1,300,000. LLCs with less than that will not owe any franchise tax. But if you do owe tax, you’ll pay at a rate of 0.75% of your taxable margin. You can learn more about Texas’s franchise tax at the Comptroller of Texas.
If you’re in retail, you’ll also be expected to collect and pay the state sales tax (6.25% plus local fees). Texas requires a permit for the sales tax, though. Employers in Texas are also required to make regular contributions to the state unemployment insurance fund. (Technically speaking, it’s not a tax; but it acts like one, so we’ve listed it here).
Last but not least, you may need to pay some industry-specific taxes. For example, Texas has unique taxes for crude oil, hotels, cigarettes, and more. You can find out more about these taxes at the Texas Comptroller of Public Accounts.
6. File your annual report
In addition to filing your annual franchise taxes (or reporting your income as insufficient to be taxed), you are also required to file an additional document in order to update the state about the current standing of your business.
In Texas, this document is known as the annual report. You must file it each year by May 15. Thankfully, the due date is really all you’ll need to worry about. There’s no filing fee for the report, which isn’t true for other states. You can file it online here.
7. Understand business insurance requirements
Texas has one primary insurance requirement for businesses.
Normally, all businesses with employees must get worker’s compensation insurance. Texas, however, does not require you to have coverage. It’s still a good idea, though. A policy protects you and your employees if someone ever gets injured on the job. If you’d like to learn more about the state’s policies regarding worker’s compensation, check out the Texas Workforce Commission.
Second, if you have any company-owned vehicles, you must get a commercial auto insurance policy.
Beyond that, you can pick and choose what insurance policies you’d like to get. Which policies you choose depend on a lot of things: your own risk tolerance, how dangerous or risky your industry is, how much capital you have, and more. In general, it’s a good idea to get a general business insurance policy. Accidents, while (hopefully) rare, happen. Insurance will help protect all the time and money you’ve invested in your business.
8. Start a business bank account
Even before you have your grand opening, you’ll want to set up a bank account that’s unique to your business. A business account presents several advantages. Most importantly, these accounts keep your personal and business finances separate (mixing them is a major legal no-no).
Plus, a business bank account gives you credit and debit cards and checks under your business’s name. For some customers, writing a check out to a business (instead of a person) is more comfortable. The business name feels more legitimate.
Most banks will request to see your Operating Agreement before they’ll give you a business bank account, so be sure to tackle Step 4 (Draft an Operating Agreement) before you go!
Setting up an LLC can seem overwhelming, but if you follow the right pre- and post-formation steps, you’ll set your business up for success. We hope this guide has helped take out some of the scariness of creating your business.
These steps are the do-it-yourself route to forming an LLC. It’s completely legal to complete the process yourself, and it can save you a lot of money. But if you’d rather enlist some help to get your business up and running, you’re not alone.