If you’re starting a small business, there are few better spots in the US than Texas. Here, you have more than 2.8 million small businesses. Small businesses actually account for 99.8% of all businesses here in Texas.
Forming an official company for your business offers several advantages, especially when it comes to taxes. With an official company, you may be able to write off company operation costs as business expenses. These include renting office space, your Internet connection fees, business meals, and buying computers and cell phones for business use.
There are several types of business structures you can use, and the limited liability company or LLC may be best for your situation.
The LLC is a business structure that lets you separate your personal assets from your company assets, so you have limited liability. In other words, creditors generally cannot go after your bank account and your home to cover your company’s debts. Litigants suing your company for damages also can’t go after your personal assets. This is the main advantage of the LLC over a sole proprietorship.
Many people also prefer to start an LLC instead of a corporation. With an LLC, there’s no double taxation. The main issue with a corporation is that you’re taxed at the corporate level, and then you’re taxed again when you pocket your profits as part of your personal income.
Running an LLC is also easier than managing a corporation. Running a corporation involves more complicated rules, while an LLC allows for greater flexibility.
If you live in Texas and you want to start your own small business, then you might want to consider forming an LLC.
Here are the steps you need to take:
Step 1: Name Your Texas LLC
It all starts with the name. This will be your brand, the corporate identity that separates your business from all the others. You’ll want something memorable, of course.
Unique LLC Name
But it has to be unique, as you can’t just use any famous brand name already in existence for your LLC. To make sure that it’s unique, you’ll want to head to the Texas Comptroller of Public Accounts website where there’s a database of the business names already in use. Confirm that the name you’re considering is not registered there.
Then, you may as well check that the name isn’t in use anywhere in the country. That way, you’re sure that your brand name is distinct from any other business.
You should also confirm that your business name is also available as a web domain. That means you can get the LLCname.com before others buy it for their own use. Nowadays, it’s imperative that you have a website for your business, and it’s a lot more convenient if you have your LLC name as your web domain.
Once you have the brand name all checked out, you then have to formally conform to Texas LLC naming requirements. That means you have to add the term “limited liability company” at the end of the brand name. But you can also use some other version of the phrase. You can go with “LLC”, L.L.C.”, “Limited”, “Ltd.”, “Company”, or just “Co.”.
So, you end up with any of the following:
- LLC Name, Limited Liability Company
- LLC Name, LLC
- LLC Name, L.L.C.
- LLC Name, Limited
- LLC Name, Ltd.
- LLC Name Company
- LLC Name Co.
There are some words and terms you cannot use for the LLC name, such terms that might let people think that your company is associated with any government agency. These words and terms include “State Department”, “Treasury”, FBI, CIA, NSA, and other similar terms. You can learn more about this on the guideline provided by the Secretary of the State of Texas website. Furthermore, you can learn more about naming your business in the State of Texas here
Using a DBA
It’s very possible that you might want to use a DBA, which stands for “doing business as”. In essence, it’s just another name under which your LLC can use to do business. Think of it like an alias, like the celebrities Lady Gaga, Sting, and just about every hip-hop artist out there.
If you have a rather formal name and you want to rebrand, then you can obtain a DBA after forming (and naming the company. You can use the DBA name as a nickname for your company. It may also work if your company is launching a different product line, or entering a new industry.
The same basic rules apply to the DBA. It has to be unique, and you can use certain terms that might associate the name with a government agency.
Download the Assumed Name Certificate (Form 503), and put in all the required information in the form. Submit a duplicate copy (not the original copy) of your Assumed Name Certificate to:
The Secretary of State
P.O. Box 13697,
Austin, Texas 78711-3697.
If you’re delivering it by hand or courier, go to:
James Earl Rudder Office Building,
Austin, Texas 78701.
You’ll pay $25 for each assumed name certificate.
Step 2: Choose a Registered Agent
Texas, like just about every other state, will require that you have a registered agent working for your LLC. Without a registered agent, you won’t be able to set up your LLC in Texas. In fact, you will be fined if you run your LLC without a registered agent, and the Texas state government may even dissolve your LLC if you persist in not having a registered agent.
The registered agent is a person (or the business identity that employs that person) who receives crucial legal documents on behalf of your LLC. These documents include notices of lawsuits, crucial tax forms, and other types of official government correspondence.
The registered agent needs to be a Texas resident with their own address, and they have to be present in that location during business hours to receive the crucial legal documents sent to your LLC.
Even if it’s not an absolute requirement to have a registered agent, it makes complete sense to have one nonetheless.
- You’re then free to travel outside your office to grow your business, as you won’t have to be trapped indoors to be able to receive the official correspondence.
- The address of the registered agent can be used as your official LLC address, to maintain your privacy. This is convenient when you’re using your house as your home office and you don’t want your residential address publicly published. You won’t have to be inundated with junk mail.
- It’s also better in situations that might embarrass your company. You don’t want to receive notices for lawsuits at your home office, where these might be seen by clients and customers.
You can select any person within your company to act as your registered agent, and that includes yourself. But it’s best if you simply hire a professional registered agent service to receive the legal documents on your behalf.
These professional registered agent services can then receive all the documents, and screen out the junk mail. They can then scan all the crucial documents, and send them to your office online. They generally use an online document storage platform from which you can just download the documents.
In addition, professional registered agents can offer additional services. They may offer compliance support, which means they can send you reminders about approaching deadlines for important filings, such as annual reports. They may even help you file those reports.
Registered Agent Statement of Consent
Once you have a registered agent chosen, you’ll have their formal consent to the appointment in electronic or written form. This is the statement of consent that will be included among your crucial LLC documents. This will have to include the following information:
- Your LLC name
- The name of the person you’ve picked as your registered agent
- The formal statement that the person you’ve chosen has agreed to work as the registered agent for your LLC
- The registered agent’s signature
- The date on which the registered agent starts working for the LLC
You can download the consent form and then fill it up with the required info. The statement of consent is a requirement, but you don’t have to file it with the Texas Secretary of State.
Step 3: Create an Operating Agreement
The company agreement is the legal document that lays out the ownership details and the operating procedures for the LLC. Basically, it is the codified set of laws for the company which the various LLC owners and officers have to agree upon and follow.
Texas calls this the company agreement, although it’s referred to as the LLC operating agreement in other states.
Technically, you don’t absolutely need the company agreement to form your Texas LLC. You can start your LLC without one in Texas.
But it’s still a sensible idea, which is why in other states, having an operating agreement is mandatory. It helps to confirm your LLC’s credibility, plus it also helps to enhance the limited liability status of your company.
With this document, everyone in the company operates on the same set of rules. That minimizes potential conflict down the road. The company agreement will lay out the procedures by which the LLC will operate.
The company agreement should include the following sections:
- It should note when the LLC was formed, and who the owners (known as the “members”) are. It should also detail how the company ownership is divided. This is crucial when you’re part of a multi-member LLC.
- The company agreement should specify as to how much money each member has contributed to the LLC. In addition, the document should also describe how the LLC will raise additional funds for the LLC in the future.
- The document should also list specifics regarding the distribution of profits. Normally, the profits are divided equally among members who contribute the same amount of money. But you and the other members may have a different profit-sharing scheme, especially when some members contribute additional services for the LLC.
- Who will manage the LLC? The company agreement specifies whether an appointed manager will run the LLC, or if the LLC will be managed by the members. If it’s run by an appointed manager, then the company agreement should describe how this manager will be chosen. If the members run the LLC, the document should describe how this will be done. Some LLCs give 1 vote for each member, while other LLCs may confer greater voting power for those members with larger shares of the business.
- What happens if a member wants to leave the company? The company agreement should also specify if a member who wants to leave can sell their shares to anyone, or if there’s a buyout plan that lets the other current members acquire the shares of the member who wants to leave.
- If the member who wants to leave also has additional functions for the LLC, the document should also have a plan regarding the transfer of these roles.
- In addition, the company agreement may have a section detailing the option for a majority of the members to remove a particular member. This may be needed if a specific member acts illegally or fraudulently, or does anything counter to the interests of the LLC.
- The company agreement should also have a set of procedures in place to let the majority of the members dissolve the LLC.
Step 4: File your Certificate of Formation
The filing fee is $300. You can pay through debit cards, or American Express, Discover, MasterCard, and Visa credit cards, along with money orders and personal checks.
You’ll need to make sure that you put in all the needed information. This will include:
- The name of the LLC
- The name and address of the registered agent (whether organization or individual)
- Names and addresses of members and managers
- Initial mailing address (which may be a street address or a post box)
- The name and address of the organizer (the person filling up and filing this document)
- The effective date of the filing
It is also possible to send this form through the mail. Submit the completed form in duplicate along with the filing fee to:
P.O. Box 13697,
Austin, Texas 78711-3697.
If you’re using courier delivery, have the form delivered to:
James Earl Rudder Office Building,
Austin, Texas 78701.
The processing time for the application is about 3 business days if you’re applying online. If you sent the form through the mail, you may have to wait for 5 to 7 business days.
Step 5: Get the EIN
This is the Employer Identification Number, which is a 9-digit number issued by the IRS. It’s also known as the Federal Employer Identification Number (FEIN) or Federal Tax Identification Number (FTIN).
This number basically functions as the Social Security Number for the LLC. It classifies the LLC as a separate identity, and helps to keep track of the tax reporting of the LLC.
If you’re running a single-member LLC with no employees, then you don’t absolutely need an EIN. But even then, it helps you to run your LLC more efficiently.
- You need the EIN to hire employees for the company.
- The EIN is required for state and federal tax purposes, when you have a multi-member LLC.
- Banks will require the EIN if you’re opening a business bank account for the LLC.
How to Obtain the EIN
Actually, it’s rather easy. You can apply online to request an EIN from the IRS. You’ll then get the form, which you’ll need to fill in to complete the application. Your information is validated during the online session, so there’s no waiting time for processing. You get your EIN immediately.
That’s it. You don’t even have to pay for the EIN. The online method is so easy that it’s the most common way to obtain the EIN.
If, for some reason, you want to do this by snail mail, that’s also possible. But you still need to download the required form. Print out the form, fill it out, and then mail it to:
Internal Revenue Service,
Attn: EIN Operation Cincinnati,
Using an Online Formation Service
You don’t have to do everything yourself. In fact, you should consider using an online formation service to form your LLC in Texas. This approach offers several significant benefits:
- The best online formation services have extensive experience in this process. That means it’s almost impossible they’ll make a mistake, and the entire process will proceed hassle-free.
- You get guidance on every step of the way.
- These online formation services can offer other types of services that your LLC will need. These can include registered agent services and compliance support.
Many of the best online formation services offer extremely affordable packages, and they’re often worth the expense.
What To Do after LLC Formation: Compliance
Once you’ve formed your LLC, it means you should now proceed to make sure your LLC works as intended, and that it doesn’t close right away. Your LLC has rules to follow so that it remains in good standing with the state of Texas.
Sales Tax Permit
You need the sales tax permit when doing business in Texas if you’re leasing or selling tangible personal property, or if you’re providing taxable services.
Visit the Texas Comptroller of Public Accounts website, and provide the needed business information to register for the permit,
Check out this Texas Business Licenses and Permits guide to make sure you have all the permits and licenses you need for your LLC.
Texas LLC Tax Filing
There are several types of state taxes that may pertain to your Texas LLC business. If you’ve obtained the sales tax permit, then you’re selling a physical product. With the permit, you can then collect sales tax on taxable sales.
If you have employees working for the LLC, you will also have to register for Unemployment Insurance Tax. Do this online.
Then there’s the Annual Report & Franchise Tax, which can only be done online. You’ll have to create an online account to complete the process.
If your small business has an annual revenue of less than $1.13 million, then you don’t actually have to pay a tax. But you still have to file your “no tax due report”.
If your annual revenue exceeds $1.13 million, then there is a graduated tax with a rather complicated formula. You’ll want a business accountant for this step.
Either way, the report is due by May 15 of each year. Keep in mind that you don’t have to file this report in the same year you formed your LLC. So, if you formed your LLC in March 2022, then you can file your first report on May 15, 2023.
File this report late, and you’ll pay a $50 penalty even if you don’t have to pay taxes. And if you pay your state taxes late, you’ll pay a 5% penalty fee. This will increase to 10% after 30 days. You can learn more about filing the Annual report in the State of Texas here.
Here are some guidelines you may want to keep in mind when hiring employees for your LLC.
- Make sure they’re eligible to work in the US.
- Report your workers to the State as “new hires”.
- Obtain workers’ compensation insurance
- Withhold employee taxes
- Don’t forget that the Texas minimum wage as of Feb 18, 2022, is $7.25 per hour.
Other Important Steps
To help make sure your LLC succeeds, take note of these important steps:
Open a Business Bank Account
One of the main reasons why small business owners start an LLC (or a corporation) is to protect their personal assets. To make sure you do this, you need to establish a business bank account that’s separate from your personal bank account.
This will reinforce the idea that your business is a separate identity from your person. It protects your personal assets more effectively.
It also makes it easy for you to run your business. At the very least, it makes accounting and tax filing a lot less complicated.
Obtain a Business Credit Card
Again, this helps to separate your business expenses from your personal expenses. Just don’t use this credit card for personal purchases.
Using the business credit card also helps to build the credit history of the company. After all, you can’t just rely on your excellent personal credit history. That’s especially true for a multi-member LLC. Keep in mind that the LLC is a separate legal identity.
You can then use that LLC credit history to raise capital (such as business loans) later on.
Hire a Business Accountant
This may seem like overkill at the start, but the business accountant becomes a lot more important as time passes and your LLC grows more successful.
The business accountant makes bookkeeping and payroll a lot easier. They can take care of the fussy details, while you can concentrate more on growing your business.
The business accountant can also offer insights regarding extra profit and unexpected loss. And of course, the accountant can help make sure you’re paying the correct amount of taxes. You’re not paying too much, or not paying enough so you end up with penalties and fines.
Obtain Needed Insurance
In most cases, this means getting general liability insurance. In case your LLC is hit with a lawsuit and paying for damages, the insurance can cover part of the damages.
If you’re offering professional services, then you should also consider getting professional liability insurance. That way, you get some protection if you’re hit with a malpractice suit.
If you have employees (especially employees offering outdoor services), then you should also get workers’ compensation insurance. This can provide coverage just in case your workers get sick, get injured, or even die due to job-related causes.
Start A Website
Today, this is generally a mandatory step for any small business. Without a website for your company, potential clients and customers may doubt the legitimacy of your business.
A website is also an extremely helpful tool for advertising. Unlike print ads or TV spots, you don’t have any practical constraints as to how much advertising you can feature on your website. You can create pages of information regarding your products and services, along with pictures and videos.
With the right tools, you can even use the website as a selling platform. That means you need proper security so that people can use their credit cards to make online purchases through your website.
Texas is one of the best states in the US to start a business. You have a large population, which means you can draw upon a huge pool of talent when you’re hiring employees. Many residents are educated through the various local universities.
Texas also doesn’t have a state tax on personal income at all. Compare that to California, where state tax for personal income can reach up to 13.3%.
All in all, an LLC is a great idea, and starting a small business in Texas is a good choice. Good with your business!