The Complete Business Owner’s Guide to Forming An LLC
Are you ready to take your business to the next level?
Before you grow, consider taking the formal step of forming an LLC.
When formalizing your business, you have three primary options: Limited Liability Company, S-Corporation, or C-Corporation. Out of the three, LLCs tend to be the most popular.
LLCs work for two-person teams or larger businesses. They come with less paperwork but offer the benefits that come with corporate filings like pass-through taxes. More importantly, they protect the individual owners without adding all kinds of new complications.
Have you thought about forming an LLC? We put together a step-by-step guide to LLC formation in Texas.
What Is an LLC?
A limited liability company is a type of corporate structure that limits the member or owner's liabilities by placing them on the company. These structures combine the protection of a corporation with the flexibility of a sole proprietorship to help small business owners protect their assets.
Why Should You Choose an LLC?
LLCs are a popular form of corporate structure because they limit liability. However, they're also a useful way to create a partnership that's more formal than the partnership structure.
LLCs also benefit from flow-through taxation
, which limits double taxation on both the business and its owners.
Steps to Forming an LLC in Texas
Forming an LLC in Texas is relatively straightforward and only requires three major forms. We've detailed the entire process below, including links to forms, filing fees, and filing addresses.
1. Follow Texas Naming Requirements
Before you file any paperwork, you need a name.
Any name will do as long as you add one of the following naming conventions:
- Limited Liability Company
Before registering, you'll need to seek approval from the state to use the name. In most cases, you're not allowed to reserve a name already in use.
To check whether you're name might be available, use the Taxable Entity Search
function available on the Texas Comptroller of Public Account's website. It will highlight whether similar names are already in use and provide clarity, but choosing an available name doesn't guarantee acceptance by the Secretary of State of Texas.
To file a request for a name reservation, file Form 501
Form 501 serves for new applications and renewals. You'll need to know the following information to complete the form:
- Entity type (for-profit/nonprofit/LLC/limited partnership
- Applicant name (business name)
- Applicant address
To submit the form, mail it to:
P.O. Box 13697, Austin, Texas, 78711-3697 or fax it to (512)-463-5709.
You must include the non-refundable $40 filing fee with the name reservation.
2. Choose an Agent with Form 401-A
With a name reserved, you're ready to choose your registered agent.
A registered agent
is a person or organization set to accept and pass on specific documents on behalf of the LLC. If the LLC receives government correspondence, service of process notices, or compliance information or materials, then they are sent to the agent.
The registered agent then sends them onto the LLC.
Texas state law requires you to have a registered agent, but even if it didn't, they're a valuable asset anyway
. Your registered agent represents you in the state even if you don't have a physical location in that state. They make legal processes easier by accepting legal documents and then passing them on to you.
A registered agent must either be a person who resides in Texas or an organization registered in Texas, and they must have a Texas street address. Choosing and registering your agent is the second thing you'll do when forming an LLC.
Once you choose someone and they accept, you'll submit your choice with Form 401-A
Form 401-A is a single page filled out by the agent. You'll need:
- Your business name
- Your registered agent's signature
You don't need to file the form with the Secretary of State, but both you and the agent need a copy of it. If you do want to submit it anyway, you can send it and a fee of $15 to:
P.O. Box 13697, Austin, Texas, 78711-3697.
If you make a change to a registered entity or the registered agent, report on the form. Keep in mind that if you lose a registered agent and do not appoint a new one, the government has the authority to terminate your LLC.
3. Register with Form 205
The first form new businesses file is the Certificate of Formation or Form 205
Completing the form requires essential business information including:
- Name of LLC
- Address of LLC
- Name and address of the agent
- Statement declaring management type
- Name and address of organizers
- Registered agent details
- Purpose for filing
You may fill out a paper copy and send two copies by post or fax or register online. The state requests you send the form accompanied by the filing fee of $300, paid by check, money order, debit card, or credit card. Note that the state assesses a 2.7 percent fee to credit card payments.
If you send the form by post, mail it to:
P.O. Box 13697, Austin, Texas, 78711-3697
5. Get an Employer Identification Number (EIN) (Optional)
At this point, you submitted the bulk of the paperwork required for the state of Texas. If you intend to hire more than two employees
, it's time to acquaint yourself with the IRS.
To legally hire employees
, you need an Employer Identification Number (EIN). Your EIN tracks tax for both your company and your employees.
To apply, you need to open a business in the United States and already have a valid taxpayer identification number like a Social Security Number.
The IRS accepts EIN applications online. Find the application at this link
. You receive the EIN as soon as you complete the form.
You can also file by mail or fax with Form SS-4
The IRS notes that you may only apply for one EIN per day, so if you're filling for two LLCs, you'll need to do them on separate occasions.
6. Apply for a Texas Tax Licence
All LLCs must obtain a Texas sales and use tax permit if you do business in Texas and you:
- Sell taxable services in Texas
- Sell tangible personal property in Texas
- Lease/rent tangible personal property in Texas
You need a permit for each active place of business. For example, if you open three stores or offices, you need three permits. Your permits include the same Texas taxpayer I.D. number but include separate outlet numbers to account for the different offices.
Separate permits aren't necessary if you have two properties and one is a warehouse or a manufacturing facility.
If you take orders from more than one premises, you need to show I.D. for each premise.
to reach the online tax registration application. Your permit arrives two to three weeks after you apply.
What Are Taxable Services?
The state lists all taxable services in Section 151.0101 of the tax code. Overall, seventeen broad categories require a tax permit. Visit the Comptroller's website
to see if you need a permit.
Texas applies different rules to each of the services. You'll find some include more tax than others while some services feature exemptions.
7. Put Together an Operating Agreement
With much of the legal paperwork out of the way, you're ready to start getting to the finer details
. An operating agreement isn't a legal requirement, but it will help you make legal decisions about your business.
An operating agreement sets out the governance structure of the LLC. Your operating agreement should be specific for your members, but most templates include the following broad categories
- Company formation details
- Membership details
- Capital contributions details
- Management details (including restrictions)
- Accounting and tax details
- Profit, loss, and distributions details
- Transfer of membership
- Indemnification and limitation of liability
- Buyout and termination details
Creating an operating agreement counters the problems that come with the generic LLC operating rooms. It allows you the protection and control you need to run a partnership successfully.
Do You Need an Attorney to Form an LLC?
You don't need an attorney
or professional business formation service to form an LLC. The paperwork is straightforward and comes with simple instructions for the state. Additionally, most of it is available to file online.
Attorneys are helpful when you form a corporation because there's more extensive paperwork involved. Additionally, they're useful if you're buying or selling your business.
But one of the benefits of forming an LLC is that anyone with a business can feasibly do it on their own.
Learn More About Starting a Business in Texas
Forming an LLC is the first step many new businesses in Texas take, and starting a new business here is straightforward with minimal paperwork and costs. It's so easy that you only need to file two forms to start your company.
Are you a new business in Allen? Learn more about joining our Chamber of Commerce here