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If you are considering starting a small business in Texas, forming a Limited Liability Company (LLC) can be an excellent option. An LLC provides the flexibility of both a partnership and the benefits of asset protection that a corporation offers.
However, the process of starting an LLC in Texas can seem daunting, with many steps to follow and requirements to meet. While there are various resources available, this guide will walk you through the seven essential steps you need on how to start an LLC in Texas in 2023.
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Pros and Cons of Starting LLC in Texas
Starting a small business can be an exciting and rewarding venture, but it also comes with a lot of responsibilities. Selecting the appropriate legal structure for your company is one of the most crucial choices you will face as a small business proprietor.
One popular option is a limited liability company (LLC). There are many advantages to starting an LLC, which can make it an attractive choice for small businesses. However, an LLC has its own disadvantages too. Here are some of the most significant pros and cons of starting an LLC in Texas.
Pros
Obtain Permits or Licenses Necessary to Operate Your Business
The chief benefit of launching an LLC is that it enables you to secure the permits or licenses required for operating your business in compliance with legal requirements. The permits and licenses needed for your business may vary, depending on the type of operation you are running. These could include health department permits, zoning permits, home occupation permits, professional licenses, and other permits as required. In some states, a seller’s permit is obligatory to conduct sales. By registering your business as an LLC, you can ensure that you have all the necessary permits and licenses to operate legally.
Register Your Business with the State’s Tax Agency
Another advantage of starting an LLC is that it allows you to register your business with the state’s tax agency. This holds significance as it guarantees that your business adheres to all state tax regulations. By registering your business with the tax agency, you can also obtain a tax ID number, which is necessary for opening a functional business bank account and filing your taxes.
Open a Business Bank Account
For small business proprietors, it is vital to maintain a clear separation between personal and business finances. Creating an LLC can facilitate the opening of a business bank account, enabling the separation of business finances from personal finances. This makes it easier to manage your cash flow, track expenses, and prepare financial statements.
Apply for a Business Credit Card
In addition to opening a business bank account, starting an LLC also makes it possible for you to apply for a business credit card. Maintaining a separate business bank account can prove to be an invaluable instrument for effectively managing business expenditures and establishing credit for your business. By using a business credit card for your expenses, you can also earn rewards and cashback on your purchases, which can help you save money in the long run.
Purchase Insurance for Your Business
Starting an LLC also makes it easier to purchase insurance for your business. Depending on the type of business you are running, you may need general liability insurance, professional liability insurance, property insurance, and more. By registering your business as an LLC, you can ensure that you have the necessary insurance coverage to protect your business in case of an accident, injury, or lawsuit.
Protect Your Name and Logo with a Trademark
Finally, starting an LLC also allows you to protect your business name and logo with a trademark. This is important because it prevents other businesses from using your name or logo without your permission. Registering your trademark with the U.S. Patent and Trademark Office can provide your business with safeguarding and assurance, as it grants you exclusive rights to your name and logo.
Cons
Increased Paperwork and Administrative Requirements
Although the process of setting up an LLC in Texas is relatively uncomplicated, it still involves several administrative responsibilities such as submitting the Articles of Organization and developing an operating agreement. Moreover, LLCs have to file annual reports and comply with other ongoing requirements which can be both expensive and require a significant amount of time.
Limited Liability Does Not Always Protect Personal Assets
Despite an LLC being intended to safeguard the personal assets of its proprietors, there are instances in which this protection may not be effective. For instance, if an LLC proprietor gives a personal guarantee for a loan or enters into a contract using their personal name, they may still be held personally responsible for any debts or legal judgments that arise.
Self-Employment Taxes
Forming an LLC has the potential drawback of categorizing the owners as self-employed, making them accountable for paying both the employer and employee share of Social Security and Medicare taxes. Consequently, this may result in increased tax obligations compared to alternative business structures like S corporations or partnerships.
7 Steps on How to Start LLC in Texas
Hereis how to open an LLC in Texas for your small business:
1. Choose a Name for Your LLC
To register your Texas LLC, you must first choose a name and ensure it meets certain requirements.
When naming your business as an LLC, it is necessary to include the terms Limited Liability Company, LLC, or L.L.C. Additionally, the name must be distinctive and not already in use by another business in the state. To check name availability, you can refer to the Secretary of State’s website to ascertain if a name has already been taken in Texas.
Additionally, your business name cannot contain words reserved for government agencies or certain restricted words like bank, credit union, etc., without proper documentation and licensure paperwork.
When choosing a name, it’s also important to consider URL availability, as you may need a website in the future. It’s recommended that you check if your desired domain name is available before finalizing your LLC name.
If you’re not yet ready to register your LLC but want to reserve your chosen name, you can do so for a small fee. In Texas, names can be reserved for up to 120 days by submitting the appropriate form and paying the fee to the state authority.
2. Choose a Registered Agent for Your LLC
When forming an LLC in Texas, it is mandatory to choose a registered agent. A registered agent assumes responsibility for receiving official legal papers and notifications, which includes the service of process, on behalf of your LLC.
You can choose an individual, such as yourself or an employee of your LLC, or an organization that specializes in providing registered agent services as your registered agent.
In either case, they must meet certain criteria set by the state of Texas, including having a physical address within the state and being available during regular business hours to accept documents in person. Organizations or firms providing registered agent services are also obligated to meet these requirements.
3. Draft and Submit the Certificate of Formation.
To establish your Texas LLC officially, you will need to prepare and file a Certificate of Formation, which is also known as Articles of Organization in other states. This document contains basic information about your LLC and officially registers it with the Texas Secretary of State.Preparing the Certificate of Formation is a straightforward process that involves filling out an online form or sending a paper form by mail.
To successfully fill out the form for forming an LLC, you will need to provide some essential information. Firstly, you must provide the name and designation of your LLC. Secondly, the name and address of your registered agent, who will be responsible for receiving legal documents on behalf of your LLC, are required.
Depending on the management structure of your LLC, you will also need to provide the names and addresses of each initial member or manager. The name and address of the LLC’s organizer, the effective date of the Certificate, and your signature as the individual forming the LLC are additional details that must be included in the form. You’ll also need:
- A general statement explaining why you formed the LLC
- The LLC’s duration or the time period over which it will exist
- The management structure (i.e., whether it will be managed by managers or members)
After you file the Certificate of Formation, the secretary of state will review it, and if it’s approved, your LLC will become a legal business entity.
4. Obtain a Certificate From the State
Upon approval of the LLC’s formation documents that are filed, the state will provide you with a certificate verifying the formal existence of your LLC. With this certificate, the LLC can proceed to apply for an Employer Identification Number (EIN), obtain necessary business licenses, and open a business bank account.
5. Create an Agreement for Operation
Drafting an operating agreement is crucial for your LLC as it outlines the framework for conducting business. Although it is not mandatory in Texas, having a written operating agreement can prevent potential legal issues and resolve disputes that may arise. Without an operating agreement, decisions regarding the LLC are subject to state laws rather than the LLC’s best interests.
The LLC operating agreement can cover a wide range of topics, including:
- LLC’s name and primary address
- Duration of the LLC
- Registered agent’s name and address
- Details on the Certificate of Formation
- Business purpose
- Member contributions and their ownership percentages
- Distribution of profits and losses
- Procedures for admitting new members or removing existing members
- Management of the LLC
- Clauses for indemnification and liability
By including these elements in your operating agreement, you can ensure that your LLC operates efficiently and with clear guidelines in place.
6. Acquire an Employer Identification Number
To distinguish businesses operating in the United States for taxation purposes, the Internal Revenue Service assigns a distinctive nine-digit Employer Identification Number (EIN). This number is also commonly known as a Federal Tax Identification Number.
If you’re an LLC owner, you can acquire your EIN through the Internal Revenue Service either by mail or online.
The EIN has a few key purposes, including making it easier to file and manage both state and federal taxes, as well as enabling businesses to open a bank account specifically for their operations. Additionally, obtaining an EIN is necessary if a business plans to hire employees.
7. Submit an LLC Public Information and Franchise Tax Report
Every year, LLCs in Texas must submit a Franchise Tax and Public Information Report to the Texas Comptroller’s Office. The Franchise Tax is a levy on the privilege of conducting business in Texas and is computed based on the LLC’s revenue or margin. The Public Information Report, on the other hand, is a document that provides information about the LLC’s ownership, officers, and other key information to the public.
It’s important to note that the due date for both the Franchise Tax and Public Information Report is May 15th each year. This means that the LLC’s report must be submitted by this date to avoid penalties and interest. Additionally, the first report is not due until the year following the formation of the LLC, which provides an avenue for new LLCs to get up and running before filing their first report.
LLC owners in Texas can file their Franchise Tax and Public Information Report online through the Texas Comptroller’s website. It’s recommended that business owners keep up with this annual filing to maintain good standing with the state and avoid any penalties or fees associated with missed or late filings.
FAQs On Starting LLC in Texas
Conclusion
Forming an LLC in Texas has pros and cons. On the plus side, it helps with legal compliance, financial management, and brand protection. However, it also involves more paperwork and administrative duties, limited liability protection, and self-employment taxes. Consider these factors and take necessary steps, such as choosing a unique business name and a registered agent, before starting an LLC in Texas.
