If you want to start a new business in Texas, one of the most important decisions you can make is the formation of the business entity. There are four primary styles of business in Texas, but here we’ll talk about the Limited Liability Company, or LLC for short. The most important benefit of an LLC is in the name itself, limited liability. This means that the owners are only liable for the money they invest in the business, or put another way, their personal money and assets are protected. There are other advantages as well, including more flexibility in ownership structure, pass-through taxation, less paperwork, and more flexibility when it comes to profit distributions.
But how, in Texas, does a business become an LLC? The process is not overly complex, but you do have to follow the rules precisely to obtain the benefits, including limited liability. Let’s take a look at them step-by-step.
- First, you need to select the name of your LLC. It’s important to know that just because you name your LLC one thing, it doesn’t mean that you can’t operate under a dba. But before you start with any forms or any filing fees, you need to make sure that no one else is using the same name, which is done through a simple search using the Texas Secretary of State’s website.
- Next you need to appoint a registered agent to serve as the person (or company) that will receive legal documents on behalf of the LLC. You can have any Texas resident serve as your registered agent, but it may be better to pay a commercial registered agent to handle these things for you.
- In Texas, filing the Certificate of Formation is the most important element of LLC formation, and it must be done with absolute precision. Even if most information comes down to the basics, such as name and address, there are some sections of the form that may require careful wording. While no formal operating agreement is required in Texas, having one is a great way to prevent practical, financial, and legal issues going forward. It serves much like the Bylaws for a corporation, detailing how the LLC will be run, how profits will be distributed, and most importantly serves as clear evidence that the LLC is truly separate from the owners’ personal interests.
- Finally, while not absolutely required, it is a great idea to open a separate bank account for the LLC. Any bank or credit union can do this, but you may want to shop around for the best deal for your business’s volume. The concept of ‘piercing the corporate veil’ operates in LLCs as well, so keeping personal and LLC operations distinct remains one of the most important aspects of operations, at least in terms of maintaining that all important limited liability.
While we do not give tax advice, there are annual tax reporting requirements, but unlike most other states, Texas does not require the LLC to hold any kind of formal annual meetings. You can set up your LLC is what is called a pass-through entity, so the LLC to not pay taxes directly on the income it earns, but the owners (called ‘members’ in an LLC) will pay for the income they earn through the LLC on their personal income tax returns. LLCs in Texas are required to file annual franchise taxes and a public information report with the Texas Comptrollers Office, this is true even if no franchise taxes are due. Taxation is where these things get complicated, often requiring the services of a skilled attorney and/or accountant. Roquemore Skierski can assist you through the formation, expansion and even dissolution of your LLC, but Roquemore does not provide tax advice. We defer to tax attorneys and CPAs for this knowledge and think you should too.