Howdy! Are you an aspiring entrepreneur looking to avoid pesky lawsuits and double taxation? Well, how about you form an LLC? One of the first and most important steps in establishing your business is choosing the right legal structure. Limited Liability Companies, or LLCs, are a popular choice for small business owners in Texas because of their flexibility, simplicity, and liability protection.
What it means is that if your business is sued or incurs debts, the personal assets of the owner are generally protected. From the initial paperwork to ongoing compliance requirements, I have got you covered so you can confidently launch your business and hit the ground running.
“What’s in a name?” Well Shakespeare, EVERYTHING. There are certain rules and regulations while naming your LLC in Texas.
- Pick a name that hasn’t been taken by any other business in Texas. To find out if a specific business name is already in use, you can easily search for it on the Texas Secretary of State's website.
- It's a legal requirement in Texas that all LLCs include the phrase "Limited Liability Company" or one of its abbreviations (such as LLC or L.L.C.) at the end of their business name.
- It is important to note that your name cannot contain words that may be confused with a government agency. Words like CBI, FBI, treasury, state department, etc.
- Words like bank, attorney, and doctor can be used. But before incorporating any of these terms into your LLC in Texas, ensure that you meet the State Government's requirements for such entities.
- It is advisable to purchase your domain name even if you don’t anticipate creating a website immediately. Before setting your name for the LLC, it is advisable to check if the corresponding email is available.
- You can secure the name by completing Form 501, also known as the Reservation or Renewal of Reservation of Name form, if it is available. This form can be filed for a fee of $40 and enables you to reserve the name for a maximum of 120 days.
In Texas, it is mandatory for an LLC to hire a registered agent. In essence, the agent (the agent can be an individual or a business entity) is the primary point of contact between your business and the state. They are responsible for receiving crucial legal documents, tax forms, notice of lawsuits, and official government correspondence on behalf of your business.
The person or the entity should be authorized to conduct business in the state of Texas. They must consent to being your agent, either electronically or in a written agreement.
The statement of consent includes the following things:
- The name of your LLC
- The name and signature of your agent
- A statement that they consent to serve as your LLC’s registered agent
- The date of execution.
However, this does not need to be filed with the secretary of state.
The Certificate of Formation in Texas is similar to what other states refer to as the Articles of Organization. You can file the Certificate of Formation in Texas online through SOSDirect for faster processing, or by sending it through the mail, fax, or in-person delivery to the Secretary of State's office in Austin.
Domestic LLCs must fill out Form 205 and pay a $300 fee, while foreign LLCs must complete Form 304 and pay a $750 fee. After submitting the form, the Secretary of State will review and file it, and provide a stamped copy within one to three business days.
An operating agreement is a legal document that outlines the ownership structure and operational procedures of an LLC. While Texas law doesn’t mandate an LLC operating agreement, it’s highly recommended that members create one.
Here’s what your operating agreement should include:
- Division of ownership - The operating agreement should specify all the members of the LLC and how the ownership is divided among all.
- Management - It's important to determine whether it will be member-managed or manager-managed, as this will determine the level of involvement members have in day-to-day operations.
- Allocation - The LLC should mention the contribution of each member, specifying the amount of money invested by each member and how profits or losses will be allocated.
- Dissolution - For LLCs with a limited lifespan, the operating agreement should include provisions for dissolution and the filing of a Certificate of Termination using Form 651.
Additionally, the agreement should outline procedures for any changes to the LLC's structure or if a member decides to withdraw.
There are two types of state-level business licenses:
- General business license
- Occupational business license
Your Texas LLC does not require a general business license to operate but depending on the nature of your business, you may need federal, state, or local permits and licenses. Failure to obtain the necessary permits can result in hefty fines or even the closure of your business.
An Employee Identification Number is a 9-digit number assigned by the IRS. This is assigned for tax purposes but also has other benefits. It's required if your LLC has multiple members, but even if you have a single member, it's a good idea to get one.
Also, having an EIN reduces the risk of identity theft, eliminating the need to use your Social Security number for business activities.
Once you have picked a bank based on your preferences, opening a bank account is easy. Here are some documents that are needed but depending on the bank, you may need more.
- Certificate of Formation
- EIN confirmation letter
- Personal Identification - You would be required to carry 2 forms of ID. A government ID, which is your driver's license, and a personal ID, like a debit card, credit card, etc.
- Operating Agreement
All the LLC members may need to present when opening an account. I recommend calling the bank to double-check before you make the trip.
The Texas state does not mandate LLCs to file their yearly reports with the secretary of state. They are however required to file annual franchise reports.
Before you can start conducting your business, Texas requires that all LLCs (and sole proprietors) obtain a sales tax permit. A sales tax permit is a document that authorizes a business to collect and remit sales tax on taxable goods and services sold in the state. The permit is issued by the Texas CPA and is valid for 2 years.
Can I obtain a sales tax exemption?
Depending on the type of activities, your LLC may be eligible for Sales tax exemption. It’s recommended that you check with your tax professional or get in touch with the Texas Comptroller's office for guidance.
To apply for the exemption:
- Register your LLC with the Texas Comptrollers' office and obtain the sales and use tax permit
- Complete form 01-399 available on the comptroller's website.
Employers are required to pay the state an Employer tax. This tax is used to fund the state's unemployment insurance program, which provides financial assistance to workers who lose their jobs through no fault of their own.
As an LLC, if you have one or more employees you have to pay this tax. The amount of tax you pay is based on a variety of factors such as the wages you pay to your employees, their past experiences with unemployment claims, and the industry.
You must register with the TWC (Texas Workforce Commission) to obtain a tax account number. You will have to make regular payments and report your employee's wages and other important details.
You are required to pay an annual franchise tax to Texas. The main difference between the corporate income tax and the annual franchise tax is that income tax is based on the profits of the business. While franchise tax is a fee that you pay for the privilege of doing business in Texas.
The amount of tax you pay is calculated by multiplying your LLCs taxable margin with 0.375%, the current applicable tax rate. If your LLC incurs a revenue of less than $1,18,000, you can choose to pay a flat rate of $50.
The way in which you file your return depends on how your LLC is classified for tax purposes.
- Single member LLC- You would be considered as a sole proprietor if your LLC is single-membered, for tax purposes. You will report the income and expenses of your LLC on Schedule C of your personal income tax return (Form 1040) and file it with the IRS by April 15th of each year.
- Multi-member LLC - You will need to file a partnership tax return (Form 1065) with the IRS. Each member will receive a Schedule K-1 which reports their share of income and losses. The partnership tax return is due by March 15th of each year, unless you file for an extension.
- Corporation - If your LLC decides to be taxed as a corporation, you will have to file a corporate income tax return (Form 1120) with the IRS.
IRS Form 1099
To report payments of over $600 (made to vendors or independent contractors), you need to file Form 1099. The form is used to report various types of income such as fees, commissions, etc.
To file this form with the IRS, you will have to obtain the necessary information like name, number, address, and tax identification number, from each of your vendors and contractors. You will need to provide a copy of this form to the vendor and file one with the IRS. The deadline for filing this form is on the 31st of January.
IRS Form 8300
To report cash payments received, which are over $10,000 (single transaction), you will be required to file form-8300 with the IRS. The filing should be done within 15 days of receiving the payment.
To file the form, you would be required to provide information about the transaction such as
- Name and address of the person making the payment
- Nature of the transaction
- Date of the transaction
A copy of this needs to be filed with the Financial Crimes Enforcement Network (FinCEN).
As an employer in Texas, it is of paramount importance that you display the required posters and notices in the workplace.
To determine the posters and notices required for your business, you will need to visit the US Department of Labor’s website. Some posters may require a fee but once you obtain these, you must display these at a prominent location in your workplace.
Funds or properties held by LLCs are called unclaimed or abandoned by the rightful owner are called unclaimed property. You are required to register for Texas state unclaimed property if you hold any such funds.
- Determine if your LLC is subject to unclaimed property reporting. This can include assets, such as uncashed cheques, bank accounts, and stocks, that are not claimed by the owner for over a period of time.
- Register with Texas CPA. You can register through the website or by submitting the form at the office.
- Once registered, you will have to file an annual report of your unclaimed property. The report must include a list of all unclaimed property held by the LLC, the owner's last known address, and any attempts made to contact the owner.
- If the owner of the property cannot be located, you need to remit the property to the state.
The permits required for your business will depend on the nature of your business. Some common permits include air quality permits, water quality permits, waste management permits, and hazardous waste permits.
To determine if your business needs a permit, contact the TCEQ (Texas Commission on Environmental Quality). Once identified, you would need to complete the application and pay a fee thereafter. The application would require detailed information about the operations of your business and the possible impact on the environment.
Once you've selected a provider, you can obtain a workers' compensation insurance policy that covers your employees. Workers' compensation insurance provides benefits to employees for medical expenses, lost wages, and other related costs. You'll also need to post notices in your workplace that explain your employees' rights under the policy, such as how to report injuries and file claims.
Having an LLC in Texas can be a total game-changer. Here’s why
- Personal asset protection: With an LLC, your personal assets are protected. It means if your business ever gets sued or goes bankrupt (let's hope it doesn’t), your personal assets remain untouched.
- Tax flexibility: You can reap the benefits of tax deductions by forming an LLC in Texas. You can deduct your operating costs or business expenses from the gross revenue of the business. Additionally, the depreciation of assets can also be deducted. These assets have to be mentioned on your balance sheet.
- Easy management: Unlike corporations, LLCs aren’t required to hold annual meetings or create bylaws. This allows you to focus on doing what you love rather than being bogged down by menial responsibilities.
- Ownership & management: LLCs provide greater flexibility when it comes to ownership structure compared to other types of corporations. Depending on your preference, you can choose between a member-managed or manager-managed structure. This allows you to customize the management of your LLC to fit your specific needs and goals.
- Professional credibility: Having an LLC is a great way to impress potential clients or investors as LLCs have a stronger credible hold over sole proprietorship or partnership.
Starting an LLC is a giant leap toward achieving your entrepreneurial goals. With a little bit of research, careful planning, and attention to detail, you can establish a strong foundation for your business and set yourself up for success.
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