Texas LLC Overview

Texas LLC Overview


Virtually every entrepreneur or investor has been told they should consider using a business entity like a limited liability company (LLC), but why? What are the benefits of an LLC? How much will it cost? What options should be considered?

We work with first-time business owners almost every day and understand how these topics can seem overwhelming.

This guide aims to organize and simplify the main LLC concepts so you can digest them without information overload.

If you still have questions after reading this overview (or prefer to discuss), you can schedule a free phone consultation with our Texas LLC lawyer.

1. LLC Definition & Basic Terms

A limited liability company (“LLC”) is a state-regulated business entity. The LLC combines the beneficial characteristics of a corporation with those of a partnership. Once an LLC is officially registered (“formed”) at the state level, it shields its owners (“members”) from the LLC’s debts and liabilities.

2. LLC History

In 1977, Wyoming became the first state to authorize a limited liability company (LLC). Other states were hesitant to authorize LLCs as it was unclear if the IRS would allow an entity with limited liability features (similar to a corporation) to enjoy pass-through taxation (similar to a partnership).

The IRS ultimately blessed the hybrid entity structure; all 50 states had enacted LLC statutes by 1996, including Texas in 1991. LLCs are now the most popular entity choice in both Texas and the U.S.

3. LLC Formation

A Texas LLC is officially formed by filing a Certificate of Formation with the Texas Secretary of State. Some states refer to the LLC’s formation document as Articles of Formation or Articles of Organization, which are essentially synonymous terms.

Read more about our Texas LLC formation service.

A. Governing Documents

LLCs are governed by both the Certificate of Formation and the Company Agreement. The Certificate of Formation is filed with the state, while the Company Agreement is a private/internal document signed by the members (and managers, if applicable).

i. Certificate of Formation

A Certificate of Formation is the name of the document that, once filed with the Texas Secretary of State, officially creates a Texas entity. A Certificate of Formation for a Texas LLC must state certain information. For example, the name of the LLC, the initial mailing address, the registered agent and the registered agent’s address, the purpose of the LLC, the initial members or managers, along with an address for each member/manager, and the name and address of the organizer.

The Texas Secretary of State has published a sample Certificate of Formation for a Texas LLC (Form 205) that complies with the minimum statutory filing requirements.

See how long it takes to create a Texas LLC.

ii. Company Agreement

A Company Agreement is the document that governs a Texas LLC, along with the Certificate of Formation. The Company Agreement (aka operating agreement) provides an overall framework for how the LLC will operate and is often quite detailed. The Company Agreement is not filed publicly like the Certificate of Formation but rather stored internally in the LLC records after being signed by the LLC’s members (and managers, if applicable).

The Company Agreement usually addresses issues such as ownership, management structure, each member’s rights, and obligations, transfer restrictions, etc.

B. Cost to Form an LLC

The initial start-up costs of creating a Texas LLC are the Secretary of State filing fee. The Secretary of State collects a one-time filing fee of $300 (plus $8.10 when filed online or paid via credit card) when the Certificate of Formation is filed. There are some optional start-up costs that you can read more about in our article titled "Costs to Form a Texas LLC."

C. Registered Agent

A "registered agent" is the individual (or entity) designated by the LLC to receive legal documents such as service of process (i.e., lawsuits, liens, subpoenas, etc.) and other correspondence from regulatory agencies. The State of Texas requires all entities, including LLCs, to have a registered agent in Texas. The registered agent’s name and address must be included in the Certificate of Formation.

Any Texas resident can be the registered agent of a Texas LLC, but often we will hire a professional registered agent.

Read more about the benefits of a professional registered agent.

D. How to Name an LLC

The name of an LLC must include the words “limited liability company” or “limited company” (or an abbreviation of either of these) at the end of the LLC name. An LLC cannot use the words “corporation” or “incorporated” (or an abbreviation of either of these) as those are reserved for a corporation.

The name of the LLC cannot be the same as an existing business entity registered with the Texas Secretary of State (it must be distinguishable). You can see the definitions of “same” and “distinguishable” along with some examples via the Secretary of State’s website.

Certain words are troublesome as well. Some examples of restricted words would be: insurance, olympian, lottery, surety, bank, trust, co-op, college, university, disabled, veteran, etc.

In addition to the above state rules/statutes, you'll need to select an LLC name that does not infringe on someone else's intellectual property rights. You can see our due diligence checklist in an article we wrote titled "How to check if a Texas LLC name is available."

E. Best State to Form an LLC

The best state to form an LLC is typically where the owners reside unless the LLC is created to hold real estate in another state or most operations will be located in another state. Before you decide on the state of formation (especially if either of these exceptions to the general rule exists), you should talk to an LLC formation attorney in your home state to discuss in detail.

4. Types of Texas LLCs

Texas LLCs can be created with various unique characteristics. We often characterize an LLC by its dominant characteristic(s). As such, you'll often see descriptors like professional, series, foreign, parent, subsidiary, anonymous, or veteran-owned.

A. Series LLC

A Series LLC is a type of LLC that has adopted particular language within the governing documents to authorize the use of "series." A series is like a cell within the LLC that can do almost anything an LLC can do, and a Series LLC can have multiple series within the framework of a single LLC.

B. Professional LLC (PLLC)

A "Professional LLC" or PLLC is a type of LLC that is created to provide a professional service. Generally speaking, a "professional service" is any service that requires a license from the state of Texas. Classic examples of "professional service" providers include architects, attorneys, CPAs, dentists, physicians, and veterinarians.

C. Domestic LLC

The state in which you first establish your LLC and begin doing business is considered a "domestic LLC" in that state and a "foreign LLC" in all other states. If, for example, you form a Texas LLC, it would be considered a domestic LLC in Texas and a foreign LLC in all other states.

Read more about Foreign vs Domestic LLCs

D. Foreign LLC

A "foreign LLC" is the term used by one state to describe an LLC formed in another. As such, we sometimes refer to a foreign LLC as an out-of-state LLC. A Delaware LLC that does business in Texas would be called a foreign LLC here in Texas and would be required to register as a foreign LLC.

Read more about Foreign LLCs

E. Parent LLC

A "parent LLC" is an LLC that owns another entity (LLC) and, as such, is sometimes referred to as a holding company. In other words, an LLC that has one or more subsidiaries is called a parent company. For example, Amazon is a parent corporation as it owns many subsidiaries like Whole Foods and Zappos.

F. Subsidiary LLC

A "subsidiary LLC" is an LLC that is owned by another entity and sometimes called a child company. Famous examples of subsidiaries would be Pampers (a subsidiary of Proctor & Gamble) and Milky Way (a subsidiary of Mars, Inc.)

G. Anonymous LLC

An anonymous LLC is an LLC in which the owner’s identity is not disclosed publicly. Once filed with the state, the LLC formation paperwork (called a Certificate of Formation in Texas) and the information contained therein are visible to the public.

Read more about anonymous LLCs in Texas

H. Single-Member LLC

The term "single-member LLC" describes an LLC with only one owner. The term “member” is synonymous with an owner of an LLC.

Read more about single-member LLCs in Texas

I. Veteran-Owned LLC

A veteran-owned Texas LLC (i.e., an LLC owned 100% by a veteran or veterans) is entitled to a waiver of the LLC state filing fee.

5. Texas LLC Benefits

You can read all about the numerous benefits of a Texas LLC, but generally speaking, the main benefits of a Texas LLC include: limited liability for the LLC's owners, shielding the LLC's assets from the liabilities of the LLC's owners, tax advantages and flexibility, ownership flexibility, perpetual existence, increased credibility, etc.

6. Annual Costs for a Texas LLC

Unlike almost every other state, there are no annual fees to keep an LLC active in Texas. An annual report must be filed with the Texas Comptroller, but there is no filing fee for the annual report.

Read more about potential annual costs for a Texas LLC

7. Federal Taxation

One of the many benefits of an LLC is the flexibility in which it can be taxed at the federal level.

An LLC combines the pass-through taxation characteristics of a partnership or sole proprietorship with the limited liability barrier of a corporation. If the LLC owners desire to be taxed like a corporation, a simple tax election can be submitted to the IRS. In other words, the LLC can be taxed like a partnership (or sole proprietorship if owned by one person), S-Corporation, or C-Corporation. These options are not available to other entity types.

Read more about LLC taxation

A. Federal Tax ID (EIN)

Virtually every LLC will need an EIN (aka federal tax ID). An LLC will need an EIN to open an LLC bank account and/or hire employees.

i. Disregarded Entity

A single-member LLC is considered a "disregarded entity" unless a corporate tax election is filed with the IRS. A disregarded entity does not file a federal return but passes the income/profit to the owner. The owner will report the LLC's profits (or losses) on their federal tax return (i.e., IRS Form 1040 if the owner is an individual).

ii. Partnership

A multi-member LLC will be taxed like a partnership unless a corporate tax election is filed with the IRS. There is one exception to this general rule: an LLC owned by only two people, who are married to each other, who live in a community property state (like Texas), and who file taxes jointly may elect to be taxed like a single-member LLC also known as a disregarded entity.

A multi-member LLC taxed like a partnership will file an annual federal tax return (IRS Form 1065) with the IRS each year and issue K-1s to each member, informing the members what portion of the LLC's profits to report on the members' federal tax return.

iii. S-Corp Election

An LLC may elect to be taxed like an S-Corporation by filing IRS Form 2553 within 75 days of the date of formation or within the first 75 days of a future tax year.

iv. C-Corp Election

An LLC may elect to be taxed like a C-Corporation by filing IRS Form 8832 within 75 days of the date of formation or within the first 75 days of a future tax year.

8. Post Formation

Forming a Texas LLC is a huge first step but by no means the last. We've put together a sample task list in an article titled "What to do after LLC formation."

A. Annual Costs

Unlike almost every other state, there are no annual fees to keep an LLC active in Texas. An annual report must be filed with the Texas Comptroller, but there is no filing fee for the annual report.

Read more about the annual costs for a Texas LLC.

B. Annual Maintenance

All Texas LLCs must file an annual report with the Texas Comptroller each year by May 15th. There is no filing fee for the annual report, but the LLC may owe a state franchise tax if the annualized total revenue exceeds the threshold set by the State (currently around $1.23MM).

C. Assumed Names

An LLC that uses an assumed name (any name that does not equal the LLC name, must file an Assumed Name Certificate. An "assumed name" is often referred to as a DBA which is short for Doing Business As.

Read more about assumed names for an LLC

D. Trademarks

Certain intellectual property (IP) rights will arise from your using IP (i.e., the business's name or its logo). You (or your LLC) can apply for a federal trademark to protect your IP rights further.

E. Name Change

We are often asked whether or not an LLC name can be changed after formation. An LLC name can be changed anytime, but it will require some effort. The tasks or steps required depend on the situation, but typically involve, at a minimum, signing an authorizing resolution, filing a Certificate of Amendment with the state, and notifying various third parties.

F. Address Change

It is common for an address that a Texas LLC uses to require an update. Changing an address for an LLC requires an authorizing resolution, a state filing, and notices sent to anyone who has the old address.

G. Ownership Change

An owner of an LLC is called a "member," so when the owners of an LLC (or ownership percentages) change after the date of formation, a membership transfer is typically required.

H. Meetings & Votes

Before an LLC takes action (i.e., buys a property), the activity should be approved by the necessary parties. An LLC that is governed by its owners/members, for example, will typically need at least a simple majority of the members or membership percentages to consent to the action. In some cases, it may be necessary to call a meeting, obtain a quorum, and document a vote (in what would be called "meeting minutes"), but in most cases, the required number of consenting parties will sign a document called a "Consent in Lieu of Meeting."

I. Reinstating an LLC

An LLC can be terminated for several reasons, the most common of which being failure to file the required annual report with the Texas Comptroller. An LLC that has been terminated or forfeited can most likely be reinstated by filing an Application to Reinstate with the Texas Secretary of State.

J. Terminating a Texas LLC

A Texas LLC is typically perpetual. In other words, the LLC will remain in existence until formally terminated. Suppose the LLC's governing parties decide to terminate an LLC. In that case, there will be a wind-up process followed by filing a Certificate of Termination with the Texas Secretary of State.

Zachary Copp, Esq.

Attorney at The Copp Law Firm

Mr. Copp is a graduate of the University of Texas at Austin and the founder of The Copp Law Firm. He has personally formed over 3,000 Texas LLCs since 2015 and was recognized as a Rising Star by SuperLawyers® for seven straight years. See full bio →

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