Texas Limited Liability Company Certificate of Formation

Last Updated on January 16, 2023.

About the Certificate of Formation and Checklist

The certificate of formation form is the principal document needed to form an LLC in Texas. It includes the name of the proposed company, the registered agent for service of process, and the address of the place of business, among other information. The purchased version of this form is guaranteed compliant with Texas law and comes with instructions and filing information. Our provided checklist below explains the process of forming an LLC in Texas in detail.

How to Start an LLC in Texas — A Checklist

To form a limited liability company (LLC) in Texas, you will need to follow and these steps:

❒  Choose a Name for Your LLC

The requirements for naming an LLC within the state are set forth in Tex. Bus. Org. Code § 5.056. The name of your LLC must be unique and distinguishable from other businesses registered in Texas. The name of the LLC must include the phrase "limited liability company" or "limited company"; or an abbreviation of one of those phrases, such as “L.L.C.” or “LLC”. You can check the availability of your desired name by searching the Texas Secretary of State's online database or by contacting the office directly. The Texas Secretary of State advises that preliminary name searches may be conducted by phone on 512-463-5555 or email at corpinfo@sos.texas.gov for no fee, by SOSDirect for $1 per query, or by fax on 512-463-5709 for $5 per query. However, one may also check the availability of a proposed business name for free by querying the Texas Comptroller's Business Entity Search tool. The disadvantage of the Comptroller's search tool is that it will not indicate if a name has been reserved, as it is only a query of active and inactive taxable entities within the state.

❒  Select a Registered Agent

Every LLC in Texas must appoint and maintain a registered agent before the LLC may conduct business in the state. A registered agent is a person or business designated to receive legal documents on behalf of the LLC. These documents may include lawsuits, service of process, or notices from the state or federal government. The registered agent must be either an individual who resides in Texas over the age of 18 or a business entity authorized to conduct business in the state. Any adult within the company, including any member, owner, or manager, may serve as the registered agent. The registered agent must have a physical street address in Texas, as P.O. boxes are unacceptable. The LLC must ensure that the registered agent is available during regular business hours to receive any legal documents that may be delivered.

❒  File the Certificate of Formation Form

To formally create your LLC, you will need to file a certificate of formation with the Texas Secretary of State. This document includes information about your LLC, such as its name, purpose, member information, and designation of your registered agent. You can file your certificate of formation online or by mail. Texas accepts this filing online via SOSDirect, the state’s official portal for e-filing formation documents and other entity-related matters, such as a change of the registered agent and a change of the principal place of business. Texas charges a fee of $300 for the filing of a certificate of formation. Texas will waive this fee for 100% veteran-owned businesses.

❒  Obtain any Required Licenses and Permits

Depending on the nature of your business and where it is located, you may need to obtain certain licenses and permits to operate legally. This may include a sales tax permit, a business license, or a food service permit, among others. If you will be operating a business that requires certain skills or expertise, such as a medical or legal practice, you may need to obtain a professional license or permit. It is important to research and understand the specific requirements for your business in Texas. You can contact the Texas Secretary of State or the Texas Comptroller's office for more information on the licenses and permits that may be required for your business.

❒  Create an Operating Agreement

An operating agreement is a document that outlines the rights and responsibilities of the members of your LLC. It is not required by law in Texas, but it is a good idea to have one in place for several reasons. An operating agreement helps to establish the rights and responsibilities of the LLC's members and management, as well as the ownership and profit-sharing structure of the company. This can help to avoid disputes and misunderstandings among the members, and ensure that the LLC is run in a manner that is consistent with the expectations of all parties involved. In addition, an operating agreement can serve as evidence of the LLC's separate legal existence and help to protect its member or members from personal liability for the company's debts and obligations.

❒  Determine Which Tax Classification is Best for Your LLC

The tax classification you choose for your LLC will depend on a number of factors, including the number of members in the LLC, the type of business you are operating, and your personal tax situation. Here are some options to consider:

Sole Proprietorship: If the LLC has only one owner (called a "single-member LLC"), it can be taxed as a sole proprietorship. This means that the LLC's profits and losses are reported on the owner's personal tax return, and the owner pays taxes on the business income at their individual tax rate.

Partnership: If the LLC has more than one owner (called a "multi-member LLC"), it can be taxed as a partnership. In this case, the LLC's profits and losses are divided among the owners and reported on their individual tax returns. The owners pay taxes on their share of the business income at their individual tax rates.

C Corporation: An LLC can also choose to be taxed as a C corporation. This means that the LLC is treated as a separate tax-paying entity, and it pays taxes on its profits at the corporate tax rate. The owners of the LLC do not pay taxes on the business income personally, but they may be subject to "double taxation" if the profits are distributed as dividends to the owners. This classification can be beneficial for LLCs that have a high volume of business, are looking to attract outside investors, or want to issue stock to employees.

S Corporation: An LLC can also elect to be taxed as an S corporation, which is similar to a C corporation but offers some tax benefits. An S corporation is a pass-through entity, meaning that the business itself does not pay taxes on its profits. Instead, the profits and losses are passed through to the owners and reported on their individual tax returns. As an LLC, the S corporation provides its owners (called shareholders) with limited liability protection, which means that their personal assets are protected in the event that the business is sued or incurs debt. S corporations may offer tax savings to their shareholders, particularly if the business is generating significant profits. S corporations can have a single or multiple shareholders, making them a good option for a variety of businesses. Make certain to file IRS Form 2553 if you wish to make this election.

One potential benefit of electing S corp classification for an LLC is that it may allow the business to save on employment taxes. In an S corp, the shareholders are considered employees and are paid salaries. These salaries are subject to employment taxes, such as Social Security and Medicare taxes. However, any profits distributed to the shareholders as dividends are not subject to employment taxes. This could result in a lower overall tax burden for the business and its owners. An S corp may be a good fit for a small business with only one or a few owners who are actively involved in the business's day-to-day operations. It may also be a good option for businesses that expect to generate significant profits and want to distribute some of those profits to the owners as dividends rather than retaining them within the business.

It is important to note that each tax structure has its own set of rules and requirements, and the one that is right for your LLC will depend on your specific circumstances. You may choose to consult with a tax professional or financial advisor to determine the best tax structure for your LLC.

❒  Register for State and Federal Taxes

If your LLC will have employees or will be selling goods or services, you will need to register for state and federal taxes by following these steps:

_____ Obtain an Employer Identification Number (EIN) from the IRS. This is a unique nine-digit number assigned to your business by the IRS. You can obtain an EIN online, by fax, by mail, or by telephone.

_____ Register your business with the Texas Comptroller of Public Accounts. You can register online at the Comptroller's website (preferred method) or by filling out Form AP-201, Texas Application for Sales and Use Tax Permit (only suggested if you do not have a SSN). You will need to provide your EIN and other information about your business, including your business name, type of business, and contact information. Registering your business is only required if you are engaged in business in Texas, and you sell or lease tangible personal property in Texas; or you sell taxable services in Texas. Email the application to sales.applications@cpa.texas.gov or fax the application to (512) 936-0010. Additional information about this requirement is available on the Texas Comptroller's website.

_____ Select the tax types for which you need to register. Depending on the type of business you operate, you may need to register for one or more of the following tax types: sales tax, use tax, franchise tax, and hotel occupancy tax.

_____ File your tax returns and pay any taxes due. Once you are registered for state taxes in Texas, you will need to file tax returns and pay any taxes due on a regular basis. The frequency of these filings and payments will depend on the type of tax you are registered for.

It's important to note that the process for registering for state taxes in Texas may vary depending on the specific details of your business and the tax types for which you need to register. If you have any questions or need assistance, you should contact the Texas Comptroller of Public Accounts or seek the advice of a tax professional.

❒  Comply With Ongoing Requirements

Once your LLC is formed, there are ongoing requirements that you will need to meet to maintain its status. It is required for an LLC in Texas to file a Franchise Tax and Public Information Report annually. The deadline for filing these reports is May 15 of each year.

Franchise Tax Report. LLCs in Texas are required to file a Franchise Tax Report annually, regardless of whether the LLC is active or inactive, or whether it has generated any income during the year. The Franchise Tax Report is used to calculate the LLC's franchise tax liability for the year. It is important to note that even if an LLC has no tax liability, it is still required to file a report and pay the minimum "No Tax Due" fee of $50. Texas will waive this fee for new 100% veteran-owned businesses for the first five years of the entity's existence.

Public Information Report. In addition to the Franchise Tax Report, LLCs in Texas are also required to file a Public Information Report, which provides information about the LLC's owners and management, such as their names and mailing addresses. The Public Information Report must be filed along with the Franchise Tax Report. If an LLC fails to file the required reports and pay the franchise tax by the deadline, it may be subject to penalties and interest. It is important for LLCs in Texas to ensure that they comply with these filing requirements in order to avoid any issues with the state. It is also important to keep accurate records and maintain compliance with all state and federal laws and regulations that apply to your business.

Statutory Authority & Requirements

The statutory authority for an LLC within the state is Tex. Bus. Org. Code § 3.101 et seq.

The requirements for the formation of an LLC are set forth in Tex. Bus. Org. Code § 3.005. The text of the statute is as follows:

Sec. 3.005.  CERTIFICATE OF FORMATION.

(a)  The certificate of formation must state:
(1)  the name of the filing entity being formed;
(2)  the type of filing entity being formed;
(3)  for filing entities other than limited partnerships, the purpose or purposes for which the filing entity is formed, which may be stated to be or include any lawful purpose for that type of entity;
(4)  for filing entities other than limited partnerships, the period of duration, if the entity is not formed to exist perpetually and is intended to have a specific period of duration;
(5)  the street address of the initial registered office of the filing entity and the name of the initial registered agent of the filing entity at the office;
(6)  the name and address of each:
(A)  organizer for the filing entity, unless the entity is formed under a plan of conversion or merger;
(B)  general partner, if the filing entity is a limited partnership; or
(C)  trust manager, if the filing entity is a real estate investment trust;
(7)  if the filing entity is formed under a plan of conversion or merger, a statement to that effect and, if formed under a plan of conversion, the name, address, date of formation, prior form of organization, and jurisdiction of formation of the converting entity; and
(8)  any other information required by this code to be included in the certificate of formation for the filing entity.
(b)  The certificate of formation may contain other provisions not inconsistent with law relating to the organization, ownership, governance, business, or affairs of the filing entity.
(c)  Except as provided by Section 3.004, Chapter 4 governs the signing and filing of a certificate of formation for a domestic entity.