Should you form your LLC in Texas? We’ve collected the relevant information that will help you make this decision.
Pros and Cons of Forming an LLC in Texas
Large and wealthy population base
As the second most populous state in the country, Texas offers businesses the opportunity to reach over 25 million potential customers. And with the generous population comes equally generous diversity in a rich customer demographic.
Unlike other states that burden business owners with high taxes and a mountain of compliance regulations, Texas offers businesses lower taxes and far fewer regulations to wade through. Based on recent surveys, Texas remains a favorite among small business owners.
Ranked amongst the top states for doing business
For at least a decade, Texas has consistently remained within the top five spots of CNBC’s list of the ten best states for businesses. The Lone Star State is prized for its workforce and infrastructure, ranking number 1 in both areas. Forbes also ranks Texas amongst the “Best States For Business”.
Home to two of the top 20 metro areas in the U.S.
Texas is home to Houston and Dallas, two of the top cities in the United States. As hubs for a number of top industries, Dallas and Houston offer abundant business opportunities. Two other rising metro stars in Texas are Austin and San Antonio, both ranking high on the list of 25 best cities to live.
Complex franchise tax structure
The state’s franchise tax, often called a business tax, is one of its few detractions. Business owners consider the franchise tax both complicated and unfair, as it is based on revenue and not profit (making it eerily similar to income tax).
Some of the best reasons for doing business in Texas, namely its large population and friendly business environment, can also work against some business owners. Since Texas is a popular place to do business, there may be more competition in some industries. Big cities with a lot of people mean more potential customers, but also more businesses to compete with.
Cost of Doing Business
- $300 filing fee / $25 periodic report
- About 4.5%
Owner is disclosed in original filing
Starting Your Texas LLC
Forming an LLC in Texas is not difficult, but there are a few steps to follow to ensure that you remain compliant with the state regulations. You will need to name your business, establish ownership, find a registered agent (in Texas), file the certificate of formation, create an LLC operating agreement, and obtain an EIN. Although it may seem like a long list, the steps can be fairly uncomplicated when you have the right help.
Step 1: Name Your Texas LLC
Your official name will need to end with one of the following signifiers (or abbreviation of): “Limited liability company”, “Limited company” “LLC”, or “L.L.C.” In addition, it is required that the name of your business is not intentionally misleading to consumers, for any reason. Your company’s new name must also be completely unique, and not deceptively similar to any other organizations name or trademarks. There are also restrictions on terms that would logically be used to represent educational or Veteran’s organizations. The word “lottery” is also ineligible for use in a business’s name.
Free Texas LLC Name Search
Use a free business name search tool to ensure your company’s desired name is available. If the name is unavailable, try a free business name generator to help ideate alternative names.
In addition to choosing a name for your LLC, creating an online presence is equally important in the current culture. You can easily check domain name availability at a number of online web services sites.
Step 2: Establish Ownership
The owners of an LLC are called “members.” The following information must be required regarding your LLC’s members:
Required number of members
Texas LLCs must have at least one member or manager listed in their incorporation documents.
LLC members in Texas may be of any age.
There are no residency restrictions imposed on LLC members in Texas.
What information needs to be included in the articles of organization?
LLC Members in Texas are required to list their name and address in their articles of organization.
Step 3: Find a Registered Agent in Texas
All Texas LLCs must have a registered agent on file and submit their Texas name and address (which cannot be a P.O. Box). This agent is required to be accessible during standard business hours and acts as the state’s point of contact with the company.
What is a registered agent?
A registered agent is a person who is authorized to accept official government notices (including the Secretary of State) and service of process notices on behalf of the LLC. The registered agent is required to be in the same state as the company.
Why do you need a registered agent?
The short answer is that you have to. Whenever you form an LLC in Texas, you are required to appoint a registered agent so that the state government has a steady contact person for your business. This person is especially beneficial for companies that do not have a physical address
Who can be a Texas registered agent?
Any person with a physical address in Texas can be a registered agent—the state does not allow agents to use a P.O. Box. It is even possible for you to be your own registered agent, as long as you use a physical address.
Why you may not want to be your own registered agent
The agent’s address is public record, meaning that you compromise your personal information. Additionally, as lawsuit notices are typically delivered to the registered agent, you risk process servers showing up at your home or business during inconvenient (and embarrassing) times.
Avoid the hassles that come with being your own registered agent and choose Swyft Filings to fill the registered agent needs for small businesses in Texas. Find more information here.
Step 4: File the Certificate of Formation
To officially register your LLC with Texas, a Certificate of Formation must be filed. The Certificate of Formation includes the name of the entity, the business address, the registered agent's name and address, the names of the manager, and whether the LLC is member-managed or manager-managed. When you form your LLC with Swyft Filings, we’ll handle filing the Certificate of Formation for you.
Step 5: Create an LLC Operating Agreement
When you form an LLC, it's good practice to have an LLC Operating Agreement. Even if you are on your own, it shows that you’re respecting the corporate formalities. The operating agreement also shows professionalism and helps prevent creditors from getting to your personal assets.
What is an LLC Operating Agreement?
The LLC Operating Agreement is a legal document that sets the ground rules for how the LLC is going to operate. Similar to a partnership agreement or a bylaws/shareholder agreement, the operating agreement defines the rights and responsibilities of each person involved in the LLC.
Why do I need an LLC Operating Agreement?
While the LLC operating agreement is primarily used internally (not filed with the state), the document provides structure to the business and helps protect all parties involved in the business from personal/individual liability. It also provides clear direction to those involved in how the business should run.
What goes into an LLC Operating Agreement?
There is no set rule that dictates what must/ must not be included in your LLC Operating Agreement - it should be tailored to fit your business. But, generally speaking, the operating agreement should probably cover:
- Initial capital contributions of the members
- Who gets to vote, how they vote and what percentage of votes are needed to do certain actions
- Restrictions on transfer of a member’s share or the addition of a new member
- How profits will be distributed
- Designation of officers or managers
Get a customized LLC Operating Agreement for your small business with Swyft Filings. Find more information here.
Step 6: Obtain an EIN
Texas requires an EIN (employee identification number) for all LLCs that will have employees. Most banks will require one to open accounts. Texas does not, however, require LLCs to obtain state tax ID numbers.
What is an EIN?
The EIN (Employer Identification Number), sometimes referred to as a Federal Tax ID, is a nine-digit number assigned to your business by the Internal Revenue Service (IRS) that identifies your business with the government. Many people compare the EIN to a personal social security number, except it is used specifically for business reasons.
What entities need an EIN?
If you are operating any type of entity other than a sole proprietorship, you will likely need an EIN to conduct business. The more common reasons you would need an EIN are:
- To hire employees
- To open a bank account in the U.S.
- To file your company’s taxes
- To pay independent contractors
If you collect revenue of any kind through a corporate entity, you will need an EIN.
Swyft Filings offers EIN services for small businesses in Texas. Find more information here.
Maintaining Your Texas LLC
Once you’ve completed the process of setting up your LLC, the next phase focuses on the steps needed to begin functioning as a bona fide business. You will need to register for taxes (since Texas uses a franchise tax system), apply for any necessary permits or licenses, obtain a certificate of good standing, and eventually file an annual report.
Step 1: Register for Texas State Taxes
Like most states, Texas has some complex taxation requirements—the state’s franchise tax system generally falls around 4.5%, although the percentage can sometimes vary depending on the company’s revenue. All businesses in Texas are required to pay the franchise tax.
If your business has/plans to have employees, you are required to register for Texas Unemployment Insurance Tax.
Additional state taxes may apply depending on your company’s industry.
Step 2: Obtain Business Licenses and Permits
The licenses and permits required for Texas businesses can vary depending on which county or municipality your LLC is located. Any business in Texas that is selling goods will need a sales tax permit.
For example, if you’re opening a cupcake store in Texas, you may need a sales tax permit, retail food permit, waste permits, and a certified food manager license. If you plan to open a clothing/gift store, the list of permits may include a sales tax permit and a certificate of occupancy (CO).
Swyft Filings has a team of business professionals who can help you figure out which permits or licenses your business will need. They can also help you with the applications for each permit/license at the federal, state, and local levels. Click here for more information.
Step 3: File an Annual/Periodic Report
While LLCs in Texas are not required to file a traditional annual report, they must file a Franchise Tax and Public Information Report before May 15th every year. This report is to be sent to the Comptroller of Public Accounts. The cost of this filing varies on the taxes that your LLC pays.
What is an annual report?
The annual report is a filing that most states require from companies on a specific periodic basis (usually annually) that is meant to update the state government with the company’s most current information. For Texas businesses, the PIR takes the place of the annual report.
What is included in an annual report?
The specific complexities of the annual report vary per state. Generally speaking, you must provide updated information regarding the location, owners, revenues, and employees of the business.
What happens if I don’t timely file my annual report on time?
In regard to filing your company’s annual report, timeliness is vital. States impose fines and penalties if you either file your annual report late or don’t file one at all. Even more important, many states will suspend or terminate your entity if you fail to make the proper filings.
Swyft FIlings not only helps you build your FT and PIR per state specifications but will also file the necessary documentation for you. Click here for more information.
Step 4: Obtain a Certificate of Good Standing
Many times, banks and other businesses (especially those with whom you are working) want an official assurance that your company is fully compliant with all regulations and all parties in the business have been properly vetted. A certificate of good standing is one of the most common and acceptable ways to verify your business.
What is a Certificate of Good Standing?
The certificate of good standing is an official notification from the government agency that confirms your entity has been properly filed and is still in compliance.
Why should I obtain a Certificate of Good Standing?
In the course of conducting business, there will be times when you will need to prove that your business is properly filed and fully compliant with the state. Many banks and businesses will request a Certificate of Good Standing as part of the due diligence process (especially during major transactions).
For the most part, any time you need to show your business is properly filed and fully compliant, you will likely need to present a Certificate of Good Standing.
Swyft Filings can create a Certificate of Good Standing for your Texas LLC. Click here for more information.