How To Start An LLC Business In Texas
Texas has become one of the leading states to do business in the country, attracting tech firms from Silicon Valley to relocate in the Lone Star State in a phenomenon that has been called,”Texit”. Businesses are drawn to Texas thanks to its lower cost of doing business, lower cost of living for workers, wonderful climate, 0% corporate and wage income tax rates, and the large, diverse labor pool. For entrepreneurs looking to establish a business, Texas is truly an ideal destination. So here’s a guide to what you need to do to start an LLC in Texas.
What is an LLC?
LLC stands for limited liability company. This is a type of business structure permitted under state statute. Each state, therefore, has its own rules on LLCs.
An LLCs owners are referred to as members. There are no restrictions on membership, so members can be individuals, other LLCs, corporations, or foreign entities There is no cap on the number of members an LLC can have. An LLC may have just one member.
Generally, any business can exist as an LLC with the exception of businesses such as insurance firms, or banks. Some licensed professionals such as doctors, dentists, psychologists, lawyers, accountants, architects and veterinarians, have to form a special type of LLC known as a Professional LLC.
You can tell a business is an LLC because that designation, or some form of it, has to appear at the end of a business name. The most common forms are LLC itself, or the fuller, “Limited Liability Company”.
Select a Business Name
An LLC has to have a unique name to distinguish itself. So, before registering the business name, you have to search the state’s Taxable Entity records to see that there is no other business in the state that shares that name. The law says that not only must there not be a business with the same name, there must also not be a business with a “deceptively similar” name. For example, if there is a company called “Orange” in the state, you not only cannot call your business, “Orange”, you also cannot call it, “Ora.nge”, for example, because a casual reading might convince someone that the two businesses are the same.
Determining if this is the case may be difficult, so you are advised to speak with the Secretary of State’s office if you suspect your business name may be deceptively similar to others.
If the name you want is available, and you want to reserve the name, you have to file a Form 502 for a fee of $40. This will reserve the name for 120 days.
Get a Registered Agent
Under state law, you have to have a registered agent in order to set up or run a business. A registered agent is an individual or business responsible for receiving service or process whenever your LLC is involved in some kind of legal action. A registered agent must be available at all times during the work week. Furthermore, the law equates your registered agent receiving service of process, with your business directly receiving it, so your registered agent must be reliable. A company cannot be its own registered agent. You can learn more about registered agents here.
The Costs of Setting Up an LLC
Setting up an LLC requires filing a number of forms, each of which has associated costs.
Form 205: The most important filing you will have to make is the Form 205, or, “Certificate of Formation – Limited Liability Company”. This filing costs $300.
Form 304: If your LLC was formed in another state and you want to register it in the state, you must file the Form 304, or “Application for Registration of a Foreign Limited Liability Company”. This form costs $750.
In addition to these filings, you will also have to pay the state franchise tax. The state Comptroller provides information on how your LLC’s franchise tax is calculated. When you file those taxes, you do so alongside the associated form.
Texas does not levy any other annual fees for keeping your LLC in good order.
What Happens if You Make a Mistake in Your Filing?
You may find that you have made a mistake in one of your filings. If that is the case, then you will have to file a Form 403, or “Certificate of Correction”, stating the error and making the necessary amendment. You will have to pay a $15 fee to file the form. Filing is done offline and not online.
Even publicly listed companies make errors on their filings, so you should not worry about admitting the error, the important thing is to correct the error quickly.
Is an LLC the Only Option?
Although an LLC is the most popular option for entrepreneurs, it is not the only option. There are a number of business structures that you can use to set up your business, such as a partnership, sole proprietorship, corporation, or S corporation. Each business structure has its own legal and tax implications.
In Texas, the cost of setting up a corporation and an LLC is the same, for example, so cost is not a deciding issue. What is a deciding issue is the kind of liability protection you are looking for, the degree of complexity you need in your business structure, the long-term aims of your business, and what your tax aims are. So, for instance, if you want to list your business some time in the future, then a corporation makes more sense.
The cheapest option of course is working as a sole proprietor and using a “doing-business-as” name to run your business. A DBA can be registered for $25 and some counties may levy additional fees. However, sole proprietors and other informal structures using a DBA, have severe limitations: they do not limit your liability, and they make it impossible to raise external capital, either in the form of loans or equity finance, for your business.
Consult with your lawyer or an account about the merits of each business structure, before making your decision.
