Texas LLC: Everything You Need to Know
Forming a “Limited Liability Company” LLC business in Texas involves a decision about business structure, including continuity, liability, management, operations, tax, and transferability.8 min read
Forming a “Limited Liability Company” LLC business in Texas involves a decision about business structure, including continuity, liability, management, operations, tax, and transferability. An accountant and attorney can assist in execution of the formalities. Once an investor has decided to form a business, the next step is electing a structure. Businesses in Texas are generally established as one of the following structures:
A single-owner entity is the most common business structure. The sole proprietorship does not demand formal organization. If business is conducted under an assumed name, a fictitious Doing Business As (DBA) registration should be filed with the Office of the County Clerk in the jurisdiction where the business is located. Sole proprietorship means that tax reporting of all income from the business is the personal responsibility of the owner in an individual tax filing. A LLC can be established as a sole proprietorship, yet protects the owner from liability for debts and contract negotiations should the business default.
Based on a partnership agreement, a general partnership establishes a business where two or more members are associated with a business for profit. In Texas, a general partnership is an operating agreement that does not require a written contract or state business license. The general partnership may operate under a fictitious name. In such case, a DBA registration should be filed with the Office of the County Clerk in the respective county where the partnership was formed and maintained.
Business incorporation is created by filing a Form 205 “Certificate of Formation” application with the Texas Secretary of State online via the state’s SOSDirect website. A corporation is a legal entity, offering business owner(s) the protections of limited liability, with the option of shareholder investment and transferability of ownership. Corporation status provides an organization federal tax election status for reporting of employee wages to the Internal Revenue Service. Federal law also provides for the option of S-Corporation tax election status for start-ups.
Limited Liability Company
The “Limited Liability Company” provides structural flexibility and tax treatment. A Form 205 “Certificate of Formation” filed with the Texas Secretary of State is required to establish a LLC. Registration of an LLC entity can be filed online via SOSDirect. The structure of a LLC will determine restrictions in tax reporting. Consult with the IRS to find out about the difference between a single-owner LLC and multi-owner LLC. The IRS provides that rules to tax reporting of sole proprietorships and partnerships applies to LLC entities.
IRS Tax reporting status of a LLC depends on type of business structure, and is dependent on number of owners or “members” and proportional distribution of earnings designated annually. Sole proprietors and members investing in a LLC partnership enjoy the benefit of this type of “pass-through” entity; enabling owner(s) to derive business income as personal income. With the exception of LLC filing for transfer of a entity to corporation or S-corporation status with the IRS, reporting of LLC income is not done by the company, but by the owner(s) in individual tax reporting. For LLC partnerships, company distribution of IRS Form 1065 record of owner(s) proportional income Is mandatory.
A limited partnership is an agreement between two or more owners to operate a business. In Texas, a limited partnership operates in accordance with rules to default LLC tax reporting of partnerships, and can be formed through written or oral agreement. e, of the partners as to the affairs of the limited partnership and the conduct of its business. While public record is not mandatory, a Form 205 “Certificate of Formation” must be filed with the Texas Secretary of State to meet the minimum state requirements for business operation and tax reporting.
Limited Liability Partnership
Official record of a “Limited Liability Partnership” or general partnership can be created by registering an entity with the Texas Secretary of State. Rules to governance and tax reporting are guided by IRS default LLC tax reporting requirements for partnerships.
LLCs in Texas are affordable and easy to form. As with other states, the State of Texas has some specific requirements that are idiosyncratic. Interested parties must register with the Secretary of State by filing the necessary forms, paying the necessary fees and meeting all naming and formation requirements.
To register a LLC or other business in Texas, file a Form 205 “Certificate of Formation” with the Secretary of State. Business name, address and resident agent address, along with a statement identifying the LLC’s management structure, the names and addresses of the members, and the purpose for which it was formed, as well as the dissolution, if applicable are required for completion of Form 205. LLC registration can be done online, by fax, or postal mail, and should be sent with a check, money order, or credit card payment of the filing fee to the Texas Secretary of State address listed on the government website: https://www.sos.state.tx.us/.
The timeline for processing of Form 205 applications and accompanying documents is 3 to 5 business days from date of receipt. Expedited processing service is available for an additional fee, and must be requested in writing. Federal rules to DBA business name requirements exist in Texas. Fictitious DBA requests should be distinguishable from the names of other entities in the state. Approval of a LLC name is based on verification that the name requested includes specific words meeting the Texas Secretary of State criteria to fictitious DBA business names
A registered agent responsible for the preparation and filing of legal documents on behalf of the LLC, must sign and submit a Form 401-A “Acceptance of Consent” to the Texas Secretary of State. It is recommended that LLC with more than a single member hold a limited liability operating agreement. An operating agreement expressly states the terms and conditions to legal contract between members, and proportional obligation to liability and distribution of income.
Name your LLC
The initial step in starting a LLC, naming an entity establishes the DBA fictitious name that the business will be operating with. A DBA should be unique, and readily searchable. According to Texas law, LLC fictitious name must contain the words the words "Limited Liability Company" or "Limited Company," or one of the following acronyms: "L.L.C.," "LLC," "LC," or "L.C." with "Limited" also abbreviated as "Ltd." or "LTD" and "Company" as "Co." Entities falling under restricted word criteria (i.e. “Attorney,” “Bank,” or “University”) require submission of additional paperwork and verification of the professional credentials or licensure of key stakeholders responsible for management of the organization. Texas prohibits authorization of LLC fictitious names with federal or state agency related nomenclature (i.e. CIA, Federal Reserve). DBA fictitious names, including Web domains, can be registered by a LLC with the Texas Secretary of State via the state’s SOS website. Online forms and information about filing fees is available on the site.
Choose a Registered Agent
Nomination of a Registered Agent is required for registration of a LLC in Texas. Registered Agent nominations can be submitted online, by mail, or in-person with the Texas Secretary of State. The party responsible for preparation and filing of legal paperwork on behalf of a LLC, the Registered Agent must be a resident of Texas, or a Company authorized to perform registration in the state. Appointees for Registered Agent may include a single-owner of a sole proprietorship, a member of a partnership, or an external party, and must consent to performing the process of registration on behalf of the LLC organization.
File the Certificate of Formation
Registration of the LLC is done by filing a Form 205 “Certificate of Formation” with the Texas Secretary of State. The Certificate of Formation must indicate if the LLC will be owner managed or employee managed.
Create an Operating Agreement
Although an operating agreement is not required to file for a LLC in Texas, it is a legal document that simplifies the process by outlining the terms to ownership, as well as the operating procedures of the business.
Obtain an EIN
Depending on the status of an LLC as an employer, or exclusively a single-owner or multi-owner entity, application for an Employer Identification Number (EIN), or Federal Tax Identification Number is required by the IRS for the reporting and payment of taxes. Banks often require an EIN to open a business checking account. New businesses can obtain an EIN through the IRS.gov website, or by mailing the printable form.
Choose a Name for Your LLC
Fictitious DBA names can be researched for availability at the Texas Secretary of State SOS Direct website. Reservation of a name requires filing an Application for Reservation or Form 501 Renewal of Reservation of an Entity Name can be done online, or by mail. Name reservations hold the name requested 120 days. The filing fee for a DBA name registration is $40.
File a Certificate of Formation
Filing a Form 205 “Certificate of Formation” with the Secretary of State requires the: LLC's name and address; Registered Agent’s name and address; Organizer’s name and address; Governing person(s) name(s) and address(es); Statement of owner or employee managed operations; and effective date of certification. Form 205 application can be filed online at the state’s SOSDirect website, or by mail. Filing fee for the certification process is $300.
Prepare an Operating Agreement
A Registered Agent can assist a LLC and its owners to create an operating agreement. While not required to file for LLC entities in Texas, written contract is recommended to guide management and tax preparation for the organization once established.
Comply With Other Tax and Regulatory Requirements
Texas Comptroller of Public Accounts imposes an annual franchise tax on most LLCs selling goods and collecting sales tax as part of their operations. Franchise tax account registration can be done online, by mail, or in person at a local Comptroller field office. Depending on type of business, additional tax and regulatory requirements may apply to a LLC operating in Texas. Some businesses are required to obtain state and local licensing and permits for operation. Texas law interprets federal IRS rules to bind multi-owner LLC to EIN registration. This includes organizations without employees. Single-owner LLC are not required to obtain an EIN. An EIN can be obtained for free by completing an online application at IRS.gov.
No Annual Reports
Texas does not require single-member (single-owner) LLCs to file an annual report with the Secretary of State. Annual franchise tax reporting is mandatory, however. Consult with the state’s Comptroller for details about reporting franchise tax.
Foreign LLCs Doing Business in Texas
To conduct business in Texas, all LLCs registered outside of the state, including foreign LLCs, must also register a Form 304 with the Texas Secretary of State. Appointment of a registered agent for service of process is required of foreign registered LLCs. The registered agent must be a business entity or resident of Texas to perform the registration of a foreign entity. Verification of availability of an entity’s DBA fictitious name is part of the application process. If a LLC’s name is not available in the state, a new name must be adopted to be eligible for official Texas LLC consideration. Form 304 can be filed online or by postal mail. The filing fee for registration is $750.Filing a Form 503 Assumed Name Certificate with the Secretary of State is also required. The fee for filing of the assumed name certificate is $25. Interested foreign LLC can obtain further information about registration requirements at the Texas Secretary of State’s website.
Limited liability company (LLC)
Once a LLC is established, limitations to personal liability of the owner(s) protects those parties from financial and legal detriments that may be incurred as result of the company’s business activities. Owners of LLC are solely accountable for investment in those companies. A relatively simple and inexpensive method of setting up a business in Texas, the LLC provides many federal and state tax advantages.
Consider trademarking your name
Once a LL entity is established, trademark registration of the organization’s DBA fictitious name distinguishes original products and services associated with the company name. Trademark registration protects a company from competitor infringement and enrichment, without the express permission of the owner(s). Texas LLC can register trademark of a DBA fictitious name online with the U.S. Patent and Trademark office. Filing fees for trademark registration range between $275 and $325, depending on entity.
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