Setting up a Texas LLC can be a smart choice for entrepreneurs looking to capitalize on the state’s business-friendly climate. Texas stands out as a highly attractive destination for businesses thanks to its advantageous tax and regulatory environment, along with substantial incentives for companies of all sizes. Ranking among the world’s top ten economies, Texas offers a fruitful ground for business growth. The state’s tax structure is particularly favourable for businesses. Texas is one of the few states without a personal or corporate income tax, making it an attractive location for businesses from across the globe. 

The state’s business incentives are a testament to its economic strength and commitment to attracting new enterprises. Key incentives include the Texas Enterprise Fund, which provides grants to businesses considering Texas as a viable location against out-of-state alternatives. Additionally, companies relocating to Texas may be eligible for a franchise tax exemption and a deduction for relocation costs in their first annual report, provided they meet specific criteria.

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What are the tax requirements for an LLC in Texas?

The Internal Revenue Service (IRS) taxes a Texas LLC based on its number of members. Following this, the Texas Comptroller also taxes the LLC similarly at the state level. If an LLC has only one owner (a Single-Member LLC), it faces taxation similar to a Sole Proprietorship. Conversely, an LLC with two or more owners (a Multi-Member LLC) is taxed like a Partnership.

These taxation methods are the “default status”, meaning they automatically apply based on the number of LLC Members. However, you can choose an “elective status” for your LLC by submitting an additional form to the IRS. If approved, this elective status allows the IRS to tax your LLC as a corporation, either an S or C corp, for tax purposes.

Why form a Texas LLC?

If you’re looking for the limited liability of a corporation but prefer to avoid its formal structure and demanding ongoing requirements, a Texas LLC offers a distinct advantage with its flexibility and simplicity. However, a Texas S Corporation provides the benefit of enabling owners to reduce self-employment taxes.

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Some points to consider when forming a Texas LLC

• File official documents with Texas and pay the state filing fees to form a Texas LLC.
• The law treats a Texas LLC as an individual entity, separate from its members and managers.
• A Texas LLC can conduct almost any lawful business.
• Texas LLCs require fewer formal reports and less paperwork compared to corporations.

Limited liability

• Texas LLC members and managers typically have the same limited liability as a corporation’s shareholders, directors, and officers, risking only their contribution to the LLC.
• Protecting members’ personal assets is a major advantage of a Texas LLC.
• Similar to corporations, exceptions exist where LLC members and managers may face liability.

Taxation

• A Texas LLC can opt for taxation as a corporation or choose the pass-through tax structure of proprietorships, partnerships, and S corps.

Members & employees

• Texas LLC members can be split into various classes, each with different voting rights, profit shares, loss shares, and distribution rights, regardless of capital contribution.
• Employees often prefer working for an LLC over a sole proprietorship or partnership.
• Texas LLCs can be managed either by their members or by managers.
• Texas LLCs can have an unlimited number of members.
• Corporations, partnerships, and trusts can be members of a Texas LLC.

Public perception

• The general public typically thinks of LLCs as being more substantial than sole proprietorships and partnerships.

How to form a Texas LLC

Step 1: Choose and reserve a business name (optional)

In Texas, your business must have a unique name. Contact the Texas Secretary of State by email or phone to check availability. Formal confirmation of the name’s availability comes with filing the Certificate of Formation. Optionally, you may reserve a chosen name for 120 days using Form 501, with a filing fee.

Step 2: Appoint a registered agent

Texas law mandates that every LLC must appoint a registered agent. This agent, either an individual or entity, accepts legal notices on the business’s behalf. The agent should have a physical address, not a PO box, and be available during business hours. You may act as your agent or registered agent.

Step 3: Submit the certificate of formation

To officially register your LLC, submit the Certificate of Formation (Form 205) in Texas. This form requires your business name, registered agent details, the names of the LLC’s managers, a description of the business purpose, and the business address. You can set the LLC’s formation to be effective immediately upon filing or at a later date, up to 90 days in the future.

Step 4: Create an operating agreement (recommended)

Though not legally required in Texas, drafting an Operating Agreement is advisable. This document outlines your business’s structure and management and can protect your personal liability. It may include distributing profits and losses, ownership percentages, and each member’s duties, voting rights, and responsibilities. Referencing this agreement in the “Supplemental Provisions/Information” section of the Certificate of Formation is beneficial.

Step 5: Obtain an Employer Identification Number (EIN)

Your business needs an EIN, provided by the IRS, for identification in tax documents and for hiring employees. Applying for an EIN is free and can be done online, which is recommended, or through mail, fax, or phone.