You are ready to start your new Texas business and you’ve decided that you want to form an LLC, or “limited liability company”. What’s next? The setup process is multi-step, but this article will give you the steps you need. We also provide links to important sites and give you things to think about along the way.

Getting Started 

Naming Your LLC

It might seem easy, but this is a challenging aspect for some people. They’ve thought about their new business, but naming it just hadn’t entered the picture. If that’s you, get your thinking cap on and come up with your perfect name. If already have that perfect name, great! You’re ready for the next steps in this part:

  • Naming guidelines for Texas: Texas law does not allow company names to be duplicated or to be “deceptively similar” to the name of any other corporation, partnership or limited liability company. Also, only numbers, letters and symbols present on a standard keyboard used here in the U.S. and other symbols specifically authorized are allowed.
  • Is the name available? [How to do a search]: The easiest way to see if a name is available is to do a search to see if the name is already in use.
    • You will need to access the SOS Direct site. You call follow the directions there to use the temporary login feature.
  • Be sure to record the session number issued for your temporary access. This will be needed later to check on the status of and retrieve any orders you place. [Note: if you want to file documents online, you will need to subscribe to SOSDirect.]
  • The Name Availability Search allows you to compare your selected name to the business entity database. If the name you have selected is already taken or reserved, you will need to think of a new name.
  • Is the domain name available? [Search for the name you want]: Once you have determined that your LLC name is available from the Texas Secretary of State, you next want to make sure that the domain name that you want is available for your new website.
    • Selecting a registered agent – According to the Texas Secretary of State, “every domestic or foreign filing entity” is required “to maintain a registered agent and office in Texas.” But, what is a “registered agent”? This is basically a person or company that can receive documents or correspondence for the LLC, especially as it relates to legal filings.
    • Who can be a registered agent? Generally, an individual Texas resident or business may serve as the registered agent. Your LLC may not act as its own registered agent, but one of the LLC owners may be the agent for the LLC. Also, the LLC can contract for the registered agent services from another business, such as a service company. The secretary of state, or other governmental agency or authority, cannot serve as an entity’s registered agent.
  1. Filing articles of organization for your LLC – A Texas limited liability company is created by filing a certificate of formation with the Texas Secretary of State. The Secretary of State provides a form that meets minimum state law requirements. Online filing of a certificate of formation is provided through SOSDirect. You can file a certificate of formation online. This is completed through SOS Direct and requires a fee of $300.
  2. Creating an operating agreement for your LLC – While an operating agreement is not required by the Texas Secretary of State, you should consider having one for your LLC.
    • What is an operating agreement? Texas Business Organization Code (“BOC”) refers to this agreement as the “company agreement”. (See BOC section 101.052.) This agreement governs how the LLC conducts its internal business and how the members of the LLC interact with each other in connection with the LLC.
  3. Obtaining an employer identification number for you LLC – If your LLC has multiple members and/or employees, you will be required to get an employer identification number (“EIN”) for you LLC.
    • What is an EIN? An EIN is a nine-digit number assigned by the IRS. Per the IRS, “it’s used to identify the tax accounts of employers and certain others who have no employees.” The IRS uses the number to identify taxpayers who are required to file various business tax returns.
    • How to apply?
      • Online – The easiest way to apply for an EIN is online. Before clicking on the “Apply Online Now” button, make sure that the following eligibility requirements can be met:
        1. The principal place of business is in the U.S. (Shouldn’t be a problem if you are going to be operating in Texas.)
        2. The person applying has either a valid Social Security Number (“SSN”), EIN, or Individual Taxpayer Identification Number (“ITIN”).

It is important to remember that this service is available from 7am to 10pm, Eastern time, Monday through Friday.

  • By fax – Here are the steps:
    1. Complete Form SS-4.
    2. Fax it to 855.641.6935.
    3. IRS indicates that an “EIN applied for by fax will be issued within 4 business days.” This service is available 24/7.
  • By mail – Here are the steps:
    1. Complete Form SS-4.
    2. Mail it to:

Internal Revenue Service

Attn: EIN Operations

Cincinnati, OH 45999

 

Running Your Business

Keep things separate

It is imperative that you keep everything to do with your LLC separate from your personal business. After all, one of the reasons that you chose an LLC form of entity was probably to give personal liability protection. In order to maintain that protection, personal and LLC business must be kept separate, including all financial transactions. In order to do this, it is important to have separate accounts in the LLC name:

  • Bank accounts,
  • Credit card accounts,
  • Loan accounts,
  • Any ownership documents.

 

Registering for taxes in Texas

You registered the LLC for federal taxes when you applied for and received your EIN. Now, you will need to enroll for taxes in Texas. These may or may not be applicable, depending on the type of business that you have and whether you have employees.

Sales tax – Depending on where you are doing business in Texas, if you are engaged in retail sales, lease/rental of goods, or taxable services, the sales tax rate is 6.25%. Additionally, cities, counties and some other taxing authorities can impose an additional 2% sales tax rate resulting in a maximum possible rate of 8.25%. This tax is collected by the business providing the goods or services and remitted to the Texas State Comptroller. In order to collect and pay over sales tax, your LLC will need to register for and obtain a sales tax permit. Before completing the application, be sure to have the following items available:

  • LLC EIN
  • SSN/EIN/ITIN for each member
  • LLC file number from Texas Secretary of State

Note: first time users will need to sign up via the “Sign Up” button on this page.

  • Unemployment tax – If you have employees, you will need to register for an unemployment tax account with the Texas Workforce Commission. Before completing this application, gather the following items from the list provided in their FAQs:
    • Email address of business contact
    • Payroll information, including when the business first hired an employee, when the first wages were paid, and total quarterly wage payment amounts paid by the business for all locations
    • LLC members’ SSNs/EINs/ITINs and residence addresses
    • The current U.S. mailing address for the registering entity
    • The trade name and physical address of each business location in Texas
    • Knowledge of the principal activities or products of the business

Note: first time users will need to sign up via the sign up for a User ID.

  • Withholding tax – since there is no personal income tax in Texas, there is no state withholding tax
  • Franchise tax – This is another tax managed by the Texas Comptroller. This is a “privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas.” Texas LLCs are generally liable for this tax. In order for the Texas Comptroller to determine if your Texas LLC needs a franchise tax account, a Franchise Tax Accountability Questionnaire must be completed. For a newly-formed Texas LLC, this questionnaire must be completed online. Using the sign-in information obtained when you applied for the sales tax number for the LLC, you can complete the Questionnaire. Before completing the questionnaire, make sure that you have the following information available:
    • 11-digit Comptroller’s Taxpayer Number
    • WebFile number for the account

Then, login here and select Franchise Questionnaire.

  1. Getting an accountant or bookkeeper – Since all financial transactions must be kept separate and be recorded in a format that will help you to properly report your activities to the various governmental entities that require reporting, you may want to consider hiring a bookkeeper or accountant. These individuals are specially trained in this area and have experience with the needed reports and returns and also when they are due. They can help your LLC stay compliant with taxes and licenses that your LLC will need to pay. You can do an online search for accountants and bookkeepers in your areas or call your local chamber of commerce. You can also ask your friends for the name of a good accountant or bookkeeper.
  1. Licensing you Texas LLC – Depending on the type of business that you are starting, there may be licenses that you need. For this, you will need to go to Texas.gov and click on Agencies. From there, click on the View More button to take you to a listing of agencies in the Texas government. Scanning through this should give you the contact information for agencies that would work with your type of business. Be sure to contact them to inquire as to any licenses that you may need. Be sure to also ask them about any similar Federal license that may be needed. You should also contact the county and city in which you plan to operate to see if they have licenses that you will need to obtain.
  2. Workers’ compensation for your Texas LLC – In most cases, workers’ compensation insurance is not required in Texas.
  3. General liability insurance for your Texas LLC – All businesses, including your new LLC, should carry general liability insurance. This is insurance that you can protect your LLC from a variety of claims against it. These might include property damage, personal injury and other types of claims. This insurance is obtained from your insurance agent.
  4. Employee compliance for your Texas LLC – If you have employees, you need to be aware of requirements that you may have regarding how, when and how much you pay them. That information can be found in the following places:

 

Keeping Your Texas LLC Compliant

 

After you have registered your LLC for the various taxes that may be due, it is important to understand how to file the returns and pay the amounts due for each. Failing to file the returns and/or paying the taxes due late can result in additional interest and penalties being due, and these amounts could be significant.

 

  1. Federal income tax – Assuming your LLC has multiple members and you have not elected other tax treatment, Form 1065 – U.S. Return of Partnership Income will be due on an annual basis. If your LLC has a calendar year, the return is due by March 15th of each year and can have the due date extended to September 15th.
  2. Sales tax – Sales tax reports, if applicable, can be due monthly or quarterly, based on the notification letter received from Texas State Comptroller. It is usually best to file and pay electronically.
  3. Texas unemployment tax – Unemployment wage reports are submitted quarterly and require payment of unemployment tax. This is done quarterly through the Texas Workforce Commission.
  4. Texas franchise tax – Texas LLCs are not treated the same as in a lot of other states, where typically, an annual report is filed with the Secretary of State. According the Texas Secretary of State, LLCs that “are subject to state franchise tax laws file annually with the Comptroller of Public Accounts.”

 

According to the Texas Franchise Tax Report instructions, it is recommended that you “electronically file and pay your franchise tax report using WebFile. It helps with mathematical computations and has built-in edits to help you avoid mistakes that could lead to unnecessary billings and the forfeiture of an entity’s right to transact business in Texas. Electronic filing and paying is available 24 hours a day.”

 

Whether you file electronically or not, here are some important facts regarding Texas franchise tax:

  1. Reports are due each year on May 15th
  2. It is possible to get an extension of time to file (but not to pay)
  3. Each LLC will file both a Franchise Tax Report and an Information Report
  4. A Franchise Tax Report is one of the following (requirement based on financial calculation)
    • No Tax Due
    • EZ Computation
    • Long Form
  5. An Ownership Report is one of the following (requirement based on type of Franchise Tax Report required)
    • Public Ownership Report
    • Ownership Information Report

 

Foreign or Out-of-State LLCs in Texas

 

According to the Texas Secretary of State, “Whether an entity is domestic or foreign does not depend on the location of the principal business office. Instead, it depends on where the entity was formed and what law governs its internal affairs. If an organization was formed under, and the internal affairs are governed by, the laws of a jurisdiction other than Texas, the organization is a ‘foreign entity.’ We sometimes refer to foreign entities as out-of-state entities to reinforce the concept that entities formed in other U.S. states are foreign entities, as well as entities formed outside of the United States.” If your LLC is already formed and it was setup somewhere other than Texas, but you want to use it for your Texas operations, you will need to register your LLC with the Texas Secretary of State. Here are the steps to complete:

  1. Check to make sure that the name is acceptable. The name must meet the following requirements:
    • contains a recognized term of organization for the entity type as listed in sections 5.054 to 5.059 of the BOC;
    • does not contain any word or phrase that indicates or implies that the entity is engaged in a business that the entity is not authorized to pursue; and
    • is available in Texas, that is, is not the same as, deceptively similar to, or similar to the name of any existing domestic or foreign filing entity, or any name reservation or registration filed with the secretary of state. (Similar names are available with consent.)
  2. If your LLC’s legal name does not meet the above requirements (other than a similar name for which the entity has obtained permission to use), the entity must register in Texas under an assumed name (d/b/a). This special type of assumed name is often referred to as a fictitious name.
    • A fictitious name is a special type of assumed name because, unlike other assumed names, a fictitious name must meet the above requirements.
    • A foreign entity that registers to transact business under a fictitious name is stating that the entity will transact business in Texas under that name. BOC § 9.004.
    • A foreign entity registering under a fictitious name must file assumed name certificates with the secretary of state (Form 503 (Word 125kbPDF 74kb)) and the appropriate county or counties.
  3. Register:
    • Online, or
    • Via Form 304 – Limited Liability Company Application for Registration.

 

Starting up an LLC in Texas can be a challenging endeavor. We hope this guide has helped you with all the steps needed to get off to a successful start.