When starting a new business, one of the first big decisions is which type of business entity to form. Many entrepreneurs choose a limited liability company (LLC) because of its many benefits. An LLC provides personal liability protection, for example, so that your assets are not at risk if your business is sued or cannot pay its debts.
Also, an LLC is a “pass-through entity” in taxes, meaning income passes through the company to the LLC owners or members, who report it on their tax returns.
LLCs also offer flexibility in management and tax status, yet another reason it’s popular in Texas.
Here are the steps that you need to take to form an LLC in Texas.
1. Name Your Texas LLC
Naming your business can be challenging. You need a name that’s unique and easy to remember and conveys what your business does. To choose a name, you can try a few different methods:
- Decide on a Business Concept: Before you name your LLC, you need to have a clear idea of what your business will do.
- Ask People You Know for Suggestions: Reach out to people whose opinions you value and trust. Explain your business concept and ask for their thoughts on a name.
- Do a Web Search: Once you have a few name ideas, check their online presence. Is the domain name available? Are there companies with similar names that could create confusion?
- Use an Online Business Name Generator: They can provide inspiration and help you think about your business from different angles. Keep in mind, though, that these generators can’t replace human creativity and may not understand the nuances of your business as well as you do.
Your business name is your business identity and the first impression people will have of your company, so be sure to take your time with this step and get it right.
Once you have a few business name ideas, you’ll want to ensure they’re available. First, do a business name search on the Texas Comptroller’s website. Here’s how to conduct a Texas LLC name search and check the availability of your desired entity name.
Also, check your Texas’ LLC naming regulations to ensure you comply.
In Texas, your LLC name must include the phrase “limited liability company” or one of its abbreviations (LLC or L.L.C.). In addition, your LLC name cannot have words that could confuse your Texas LLC with any government agency or other business in the state or imply that you are engaged in unlawful activity.
Your business name cannot imply that the LLC was created by or for the benefit of war veterans or their families. Therefore, the following words are prohibited: veteran, legion, foreign, Spanish, disabled, war, and world war. It also cannot include “lotto” or “lottery.”
Next, check with the US Patent and Trademark Office to ensure the name is not trademarked and is thus available nationally.
Here are additional tips and suggestions provided to assist in the process of choosing a name for a Texas LLC.
Once you’ve confirmed these, it’s a good idea to reserve the name with the state using its name reservation form.
2. Select a Registered Agent
Texas requires LLCs to appoint a registered agent, a person or company authorized to accept and respond to official business correspondence, such as legal, tax, or financial documents.
The registered agent ensures all important notices and documents are received. In Texas, the registered agent can be an LLC member, individual, or entity that meets state requirements. In Texas, a registered agent must:
- Be 18 years or older
- Have a physical address in Texas
- Be available during regular business hours
- Be registered to operate in Texas, if it’s a business
Many business owners hire a registered agent service to ensure their LLC stays fully compliant and for convenience.
If you choose to be your registered agent, you must be at your registered agent’s address for all business hours. A registered agent service allows you to be wherever you need to be to run and grow your business.
Learn how to designate a registered agent for your Texas LLC.
3. Determine Your Management Structure
Members or managers can manage LLCs. In a member-managed LLC, members handle all management duties. In a manager-managed LLC, non-member employees oversee operations and management duties.
Note that with a manager-managed LLC, a member can be a manager, but only in cooperation with another manager who is not a member.
Member-managed LLCs generally work best for LLCs with few members, all of whom can take an active role in day-to-day operations. Conversely, manager-managed LLCs are best for LLCs with multiple members, some of whom want to be “silent” or passive members and not involved in day-to-day operations.
Most LLCs are member-managed, as they are small businesses that cannot afford a management team. In Texas, your LLC is considered member-managed if it’s not otherwise specified in the Certificate of Formation.
Discover the difference between member-managed and manager-managed LLCs, and gain insights on selecting the appropriate management structure for your LLC.
4. File a Certificate of Formation with the Texas Secretary of State
To start, visit the Secretary of State’s website and create an account to access the articles of the organization online.
In Texas, the certificate of formation requires the following information:
- LLC name
- Registered agent information
- Registered office address
- Governing authority information
- Business purpose
- Mailing address
- Organizer contact information
- Effective date
Once you’ve created your account, log in and enter your payment information. You’ll need to do so to proceed to the online filing, and you will not be charged until you’re finished entering all of your information. When finished, click Continue.
Once you’ve entered your payment information, click “SOSDirect-Business Filings” and “Let’s Do Business” from the dashboard page. Next, click “Use SOSDirect for Online Business Filings and Searches” and the “enter site” button.
From the Business Organizations Menu, scroll down to Web Filings, select Domestic Limited Liability Company from the drop-down menu, and click File Document. Then, select certificate of formation.
You’ll first be prompted to look up your desired business name to confirm it’s available. Next, you’ll enter all the information in the bulleted list above. Once complete, you’ll have a chance to review your entries before confirming and moving to the payment screen.
You can also complete and submit a paper form if you wish to file by mail. The filing fee is $300, and you should receive confirmation of formation within 5-7 business days.
Contact Information for the Texas Secretary of State
Texas Secretary of State Website
Phone: (512) 463-5555
Mailing Address:
Business & Commercial Section
Secretary of State
P.O. Box 13697
Austin, TX 78711-3697
5. Draft an Operating Agreement
An Operating Agreement is a legal document that outlines the ownership and member duties of your Limited Liability Company (LLC).
Texas does not require an operating agreement, but it’s still a good idea to have one, even for single-member LLCs, as it can provide legal protections and more established operating procedures.
Here are the elements an LLC Operating Agreement should typically include:
- LLC’s name and principal address (primary location where business is registered)
- Duration of the LLC
- Registered agent name and address
- Membership Information
- Management and voting
- Financial matters (e.g. the way profits and losses will be divided)
- Changes and amendments (e.g. procedures for adding or removing members)
- Disputes, legalities, and policies
- Record keeping and communication
You can find operating agreement templates online, but it’s best to have them drawn up or reviewed by an attorney. The language of an operating agreement is crucial and can often help determine how member disputes will be resolved. For more information about the operating agreement, refer to our comprehensive guide on the Texas LLC operating agreement, and you can also obtain a free template.
6. Get Your Employer Identification Number (EIN)
The IRS uses an EIN to identify your company for tax filing purposes. An EIN is required if your LLC has more than one member or if you are hiring employees.
Obtaining an EIN simply requires applying on the IRS website, as detailed here:
All EIN applications (mail, fax, electronic) must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the true principal officer, general partner, grantor, owner or trustor. This individual or entity, which the IRS will call the ‘responsible party,’ controls, manages, or directs the applicant entity and the disposition of its funds and assets. Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity.
Learn how to get a Texas Tax ID (EIN) for an LLC.
7. Obtain Business Licenses and Permits
Depending on the nature of your business, you may need to apply for various licenses and permits at the federal, state, and local levels.
At the federal level, licenses and permits are generally industry-specific and may include health licenses and permits from the Occupational Safety and Health Administration (OSHA). Check the SBA guide for specific licenses required for your business.
Texas doesn’t require a general business license. However, your business may need a state-level licenses, permits, certifications depending on your industry.
For information on the appropriate statewide licenses, head to the Business Permit Office’s Texas Business Licenses & Permits Guide or directly to the Texas Department of Licensing and Regulation website.
If you sell tangible goods or services subject to sales tax, you’ll need a sales tax license, also known as a seller’s permit.
To find out more about local business licensing, visit your city or county clerk’s website or office.
Here are some standard licenses and permits you may need:
- Industry-specific licenses for certain professions and industries, such as construction, plumbing, electrical, childcare, food handling, liquor, architecture, and finance
- Building and zoning permits
- Doing business as (DBA) permits using a name other than your LLC.
- Health licenses and permits at federal, state, and local levels
- Fire permits
- Sign permits
This is a significant step in the LLC formation process, so make sure that you check with your state and local government offices to find out all the licenses and permits you need.
You could face steep fines and penalties if you operate without the proper licenses and permits.
Here are the steps to follow when obtaining business licenses in Texas.
It’s a good idea to consult with a business attorney to make sure you’re in full compliance. You can also use a service like MyCorporation to do the research and provide you with all the forms you need to license your business entirely.
8. Determine Your Tax Status
By default, an LLC is a “pass-through” entity, which means the business itself does not pay income taxes. Instead, the business’s profits or losses are passed through to the members’ individual tax returns. The taxes are then paid at each member’s individual tax rate.
- Single-Member LLCs: If the LLC has only one member, it’s taxed like a sole proprietorship by default. This means the income from the LLC is reported on the member’s personal income tax return on Schedule C, and they’re responsible for paying self-employment taxes (Social Security and Medicare taxes) on that income.
- Multi-Member LLCs: If the LLC has more than one member, it’s taxed as a partnership by default. The LLC must file an informational tax return (Form 1065), but the income and deductions are passed through to the members. Each member reports their share of the income and deductions on their personal tax return. As with single-member LLCs, members must also pay self-employment taxes on their share of the profits.
An LLC can also choose to be taxed as a corporation by filing an election form with the IRS (Form 8832 for a C-Corp and Form 2553 for an S-Corp). This can be beneficial under certain circumstances:
- C-Corporation Taxation: Electing to be taxed as a C-Corporation can offer benefits to an LLC, particularly if the members want to retain earnings in the company. The corporation pays tax on its profits at the corporate rate (which was 21% as of 2022). If the profits are distributed to the members as dividends, the members must report these dividends on their tax returns and pay tax on them. This is known as “double taxation.” However, members aren’t subject to self-employment taxes on their dividends.
- S-Corporation Taxation: Choosing S-Corporation status can also be beneficial for an LLC. Under this scenario, the LLC does not pay corporate income tax. Instead, the income, deductions, and credits pass through to the shareholders, who report them on their individual tax returns. However, unlike a standard LLC, an S-Corp is required to pay its members a “reasonable” salary for the work they perform for the company. This salary is subject to payroll taxes, but any additional profits distributed to the members aren’t subject to self-employment taxes. This can result in significant tax savings, especially for businesses with high net income.
Other Requirements
Open Your Business Bank Account
When you have an LLC, it’s important to keep your business and personal finances separate for accounting and tax purposes. Commingling your business and personal funds can threaten your liability protection since the line between business and personal assets will not be clear.
Most banks offer business bank accounts, so check with your local bank. You’ll need your EIN and a copy of your Certificate of Formation. Your bank may require other documents as well.
Apply for a Business Credit Card
A business credit card can help establish business credit so that if you apply for a business loan or line of credit in the future, you’ll have a better chance of getting approved. A business credit card can also help pay startup expenses, reducing out-of-pocket costs.
Get Business Insurance
Insurance is the right choice to protect the investment you’ve made in your business. There are several different types of insurance you may need.
- General liability: A comprehensive type of insurance covering many business elements. It includes coverage against bodily injury and property damage.
- Professional liability: Protects against claims from a customer who suffered a loss due to an error or omission in your work. It’s also known as errors and omissions (E&O) insurance.
- Workers’ compensation: Provides compensation to employees injured on the job.
- Property: Covers your physical business space.
- Business Property: Covers equipment and supplies.
- Equipment Breakdown Insurance: Covers the repair or replacement of broken equipment due to mechanical issues.
- Commercial auto: Covers your company-owned vehicles.
- Business owner’s policy (BOP): This option combines the above insurance types.
LLC Records
You’ll want to keep copies of your formation documents and operating agreement in a safe place. Any other official documents, such as vendor contracts and legal or financial documents, should also be kept in your records.
Annual Reporting
In Texas, LLCs must file an annual report to keep their business in good standing.
The report is due each year on May 15th. The filing fee is based on the total revenue of the business. For more information, visit the Texas Comptroller’s website.
How Much Does It Cost to Start an LLC in Texas?
| Requirement | Cost |
| LLC Registration Fee | $40 |
| LLC Registration Fee | $300 |
| Business License Fees | Vary by localities and type of business |
| Assumed Name Fee | $25 |
| Annual Report Fee | $0 |
