The article discusses the requirements for establishing a LLC in Texas, including choosing a suitable business name, appointing a registered agent, creating an operating agreement, filing a Certificate of Formation, obtaining an EIN, submitting annual tax and information reports, and acquiring necessary business licenses and permits.
Depending on their needs and preferences, entrepreneurs in Texas may choose between several business structures for their companies. Many opt for a limited liability company (LLC) because of the benefits it offers to the owners compared to other available options.
However, if you decide to establish an LLC, you must become familiar with federal and state requirements for its formation and operation. Therefore, we will explore prerequisites currently in effect in Texas and help you gain the official LLC status.
What Is an LLC?
A limited liability company, or LLC, is a business structure in the United States that protects entrepreneurs from personal liability for the company’s debts and responsibilities. Essentially, the owner and the business are legally considered two separate entities, thereby preventing the creditors from seizing the owners’ personal assets in case of a lawsuit.
In addition to asset protection, LLCs offer unmatched management structure and tax flexibility, which cannot be found in corporations. A limited liability company can be a single-member business, a partnership, or a multi-member entity. As a result, it can benefit from the pass-through taxation model or elect to be taxed as a corporation, depending on its structure and the owners’ needs.
An LLC also offers several advantages compared to a sole proprietorship and partnership. Although both structures are more flexible than a corporation, they cannot choose their preferred taxation model and always classify as pass-through entities. In addition, partnerships are limited to a maximum of a hundred members; by contrast, no such limits are imposed on LLCs.
What Is Required of an LLC in Texas?
Every LLC in Texas must meet specific federal and state requirements in order to legally operate and conduct business. Those requirements, along with the necessary documentation, are outlined below.
Before filing the required documents, you must choose a suitable name for your business. However, to ensure approval, the name must comply with rules and guidelines stipulated by the Texas Secretary of State. Otherwise, your application for the formation of an LLC will be rejected, further prolonging the process.
Some of the general naming regulations for Texas LLCs include the following:
- The name must include organizational designation (“Limited Liability Company,” “Limited Company,” “LLC,” or “L.L.C.”);
- Business owners aren’t allowed to use the names of already existing entities. To confirm availability, enter the chosen name into the Taxable Entity Search online;
- The name can only contain symbols available on a standard English language keyboard;
- Professional terms, such as “attorney,” “dentist,” and “bank,” are allowed only if the business owner has the required licenses proving their competence in the respective fields;
- A company name cannot imply false government affiliation by including words such as “Treasury,” “FBI,” “Real Estate Commission,” and similar;
- The name cannot contain offensive words or terms.
To reserve a specific name before making a final decision, file the Application for Reservation or Renewal of Reservation of an Entity Name (Form 501) to the Secretary of State. Submit a $40 filing fee along with the document, and the name will be put on hold for 120 days. If you want to prolong your reservation period, send in the same document once again.
A registered agent is a person or entity responsible for the correspondence between the company and the state. In other words, the individual or organization performing this role is authorized to receive legal documentation and notices on behalf of the business.
In Texas, all LLCs are required to select and maintain a registered agent as long as they conduct business. Failing to meet this requirement may result in the LLC’s involuntary dissolution. Therefore, it’s important to choose a qualified registered agent and notify the Secretary of State of any changes in their name or address.
A registered agent can be any person or entity that meets the following criteria:
- Provide registered agent services;
- Have an address in Texas;
- Be available on-site during business hours to accept documents and correspondence.
It’s important to note that an LLC cannot serve as its own registered agent. However, you can appoint any individual working at the company as your registered agent, including yourself. Usually, selecting a person with prior experience in the role is advisable, as they will have a better understanding of their duties.
Although signing an operating agreement is not required, Texas LLCs can certainly benefit from this document. Namely, the operating agreement outlines the LLC’s internal structure, governs its internal operations, and acts as a contract between the members. Whenever a dispute arises among the owners, they can consult the document to determine the most suitable course of action.
In addition, an operating agreement gives the owners greater control over profit and share distributions and LLC’s internal structure. Without this agreement, the state's general rules automatically apply upon formation, regardless of the company's specific needs.
From a legal standpoint, there are no specific requirements regarding the provisions included in the operating agreement. However, most agreements contain the following information:
- LLC’s name and designator;
- Members’ names, addresses, titles, and ownership percentages;
- Procedures for profit distribution;
- Members’ rights and responsibilities;
- Voting rights and decision-making procedures;
- Statement of purpose;
- Regulations relating to ownership transfers;
- Business meetings frequency and policies;
- The dissolution process, including the division of remaining assets and obligations;
- The procedures for modifying the operating agreement.
Once the operating agreement is written, each member must sign it before it’s stored safely. As an internal document, it doesn’t have to be submitted to any governing entities. However, you should consider providing a copy to all signing members in case the original document is misplaced.
Certificate of Formation
Unlike the operating agreement, the Certificate of Formation (known in other states as Articles of Organization) is an official document filed to establish an LLC. Once submitted and approved, the new company is formally authorized to conduct its business.
Considering its formal status, the Certificate of Formation must meet certain requirements before it can be approved. Namely, it needs to contain basic company information, including the following:
- LLC’s name and designation;
- The registered agent’s name and address;
- Company’s management structure, along with names and addresses of governing individuals;
- The statement of purpose is written in general terms to avoid limiting the LLC’s operations;
- Mailing address;
- Organizer’s name and address;
- The date the Certificate becomes effective;
- Organizer’s signature;
- The date of the signing.
To file the Certificate of Formation, you need to complete and submit Form 205 to the Texas Secretary of State along with a $300 submission fee. As soon as the document is approved, you will receive a certificate confirming your company’s LLC status.
Employer Identification Number
Once your LLC is officially formed, the IRS will assign it a nine-digit Employer Identification Number (EIN) used for tax filing purposes. In addition, it can assist in opening a business bank account and recruiting new employees. To obtain an EIN, you must file the Application for Employer Identification Number (Form SS-4) by mail or complete the required form online.
Franchise Tax and Public Information Report
All LLCs established in Texas are required to submit the annual Franchise Tax and Public Information Report to the Comptroller. This document keeps the Comptroller up to date with company information, including the name of the governing authority and the company’s address. As a result, the tax return notices and government correspondence will be delivered to the right place.
Business owners must file the Franchise Tax and Public Information Report every year by May 15th. The only exception is the year of your LLC formation, in which case you will need to submit the document by May of the following year.
Business Licenses and Permits
To ensure your LLC remains in good standing with the state, you need to obtain licenses and permits confirming that you are qualified to conduct your chosen business. The required documentation may differ depending on the industry. However, we have included general permits and licensing guidelines below.
General Business License
Although many U.S. states require the LLCs operating within their borders to obtain a general business license, Texas does not impose any universal regulations. Nevertheless, business owners should check whether any general licenses need to be acquired for each specific Texas city.
Sales and Use Tax Permit
If your LLC is selling tangible or digital goods in Texas, it needs to obtain the Sales and Use Tax Permit to operate legally. This document gives the seller the authority to collect taxes on sales and pay the appropriate percentages to the state. To apply for the permit, submit Form AP-201 to the Comptroller or complete the online form.
Businesses purchasing goods with the purpose of reselling should obtain the Resale Certificate to avoid paying taxes on otherwise taxable products. With this certificate, the reseller takes over the responsibility of collecting taxes from buyers. As a result, the supplier is not obligated to charge sales taxes during the transaction with the retailer.
To qualify for the Resale Certificate, you must first receive the Sales and Use Tax Permit. Once this document is in your possession, you can complete the Texas Sales and Use Resale Certificate (Form 01-339). Afterward, present the certificate to suppliers to prove your eligibility for tax exemption.
If an LLC conducts business in a regulated field, it must obtain a professional license and follow stricter requirements. Common professions that require additional licensing include architects, attorneys, doctors, therapists, engineers, accountants, and food handlers. Practicing any of these professions without a license may lead to criminal charges.
Texas LLC Taxes and Tax Forms
Tax forms requirements for LLCs depend on their chosen tax structure. For instance, if a single-member LLC is taxed as a sole proprietorship, the owner must report and submit business taxes using the U.S. Individual Tax Return (Form 1040). The same document is filed by the members of multi-member LLCs, but each member must also submit Schedule K-1 to report their share of profits. In addition, the company is required to send the completed U.S. Return of Partnership Income (Form 1065) to the IRS.
Furthermore, if an LLC elects to be taxed as a C corporation, it must file the U.S. Corporation Income Tax Return (Form 1120) with the IRS. However, corporation taxes Texas imposes on C corporations result in double taxation, as each member must also report their business tax liability on their individual tax return.
On the other hand, S corporations allow business owners to avoid double taxation while retaining their corporate status for tax purposes. LLCs that choose to be taxed as S corporations must submit the U.S. Income Return for an S Corporation (Form 1120-S) to the IRS.
Who Should Start an LLC?
LLCs blend the best attributes of corporations and sole proprietorships or partnerships, making them particularly attractive to small business owners with significant personal assets. Due to the entity’s limited liability policies, entrepreneurs can be certain their personal possessions will remain protected. Simultaneously, they lose none of the flexibility in business structuring and management.
Nearly all businesses can operate as LLCs, some may benefit from choosing other structures. For instance, larger companies seeking investors should consider corporate status. Although corporations come with extensive paperwork and limited flexibility, raising capital is less challenging than it is for an LLC.
Work With a Lawyer to Establish Your LLC
Consulting a lawyer is not a requirement when forming an LLC, but it can bring you numerous benefits. As a rule, a professional with experience in establishing LLCs can provide guidance and significantly speed up the formation process. In addition, a lawyer can:
- Help you draft an operating agreement and the Certificate of Formation;
- Assist in choosing a business name;
- Serve as your company’s registered agent;
- Help you file the necessary documents;
- Provide business advice and support;
- Help you obtain required licenses and permits;
- Instruct you on collecting and filing taxes.
Texas LLC Requirements: The Next Step
A Texas limited liability company must comply with numerous requirements in order to conduct business legally. However, submitting the required forms and following regulations can be overwhelming to an inexperienced entrepreneur. Fortunately, Wyoming LLC Attorney has worked with countless business owners over the years, helping them successfully establish LLCs and providing continuous guidance and legal support. The experience we have gathered as a result allows us to assist you with the documentation and ensure your business operates legally.
Schedule attorney time with Wyoming LLC to meet all state requirements and form an LLC today!