Forming an LLC comes with a slew of advantages for small business owners, including potential tax advantages and liability protection. However, most small businesses delay formation because they are overwhelmed and confused by the process. This is unfortunate, since it is possible to break down entity formation into simpler, more manageable, steps. This article seeks to outline the basics of entity formation in Texas.
STEP 1: DECIDE ON A NAME
You need to figure out what you want the official name of your LLC to be. In order to comply with Texas requirements, the name of your business must be followed by the words “limited liability company”, “LLC” or “L.L.C.” It is important to verify that the name of your business is separate and distinct from all other registered businesses in the state of Texas. You can check this by logging onto the Secretary of State's website and conducting a simple search, where fees may apply. Additionally, there are some further restrictions regarding particular words and phrases. Your business name cannot contain any terms suggesting a link to any government agency (CIA, FBI etc.). Finally, the inclusion of certain restricted words (like “bank”, “attorney” and “credit union”) might trigger additional paperwork.
At this stage, it might be wise to look into reserving a URL. Regardless of the nature of the business, you will require a website. It would be a shame to choose a name only to realize that the URL associated with that name is already unavailable!
If you have decided on a name and anticipate some delays in the filing process, note that it is possible to reserve your business name for 120 days for a nominal cost (see Secretary of State Form 501).
STEP 2: CHOOSE A REGISTERED AGENT
All Texas businesses must have a registered agent for service of process in the state. Simply put, a registered agent is just a person who can receive documents on behalf of the company. The registered agent must (a) have a registered address in Texas and (b) be available on-site to accept documents during work hours. An LLC cannot be its own registered agent.
STEP 3: PREPARING AND FILING YOUR CERTIFICATE OF FORMATION
The Certificate of Formation (also known as Articles of Formation) encapsulates the most important information about your business. The certificate can be filed by filing Form 205 with the Secretary of State and it must include:
- LLC’s name
- Name and address of LLC’s agent
- A statement of purpose as to why the LLC was formed
- Managerial structure: who will manage the LLC, managers, or members?
- If the LLC is member managed, name and addresses of initial members
- If the LLC is manager managed, name and addresses of initial managers
- Name and address of LLC’s organizer
- Initial mailing address of the LLC
- Effective Date of LLC
- Signature of person forming the LLC
The certificate can be filed online or by mail for approximately $300. For online filing, visit the Texas Secretary of State website SOS Direct. Once the application is filed, the secretary of state will review it. Once approved, your small business will automatically gain LLC status. The business will also be issued a certificate from the state, which serves as confirmation of the certificate of formation being duly filed and approved.
STEP 4: CREATE AN OPERATING AGREEMENT
Although an operating agreement (or company agreement) is not required by law, it is most definitely recommended. An operating agreement is an internal document which determines the allocation of power between the member(s) and the manager(s). An operating agreement does not have to be filed with the state. Having an operating agreement readily available is an easy way to resolve disputes and avoid unnecessary litigation. In the absence of an operating agreement, courts will make decisions based on the Texas Business Organizations Code, rather than on what is in the best interests of the LLC. The following is a non-exhaustive list of what an operating agreement might contain:
- Name and address of LLC
- Time frame of LLC, if limited by time
- Details of LLC’s registered agent
- Certificate of Formation information
- Division of profit and loss
- Process of entering and leaving the LLC
- Management of the LLC
- Liability clauses
- Indemnification clauses
- Voting rights of members
- Frequency of meetings
STEP 5: OBTAIN EMPLOYER IDENTIFICATION NUMBER
The Employer Identification Number is a 9-digit number that is assigned to a business by the Internal Revenue Service (IRS) to make it identifiable for tax purposes. Not only does this number come in handy when filing taxes, but it is also essential for the creation of a business bank account and for the hiring of employees.
STEP 6: FILE REPORTS
In the state of Texas, LLCs file a Franchise Tax and Public Information Report with the state comptroller’s office. As expected, the tax details can be somewhat complicated. The rules governing this can be found on the Comptroller of Public Accounts website. Reports are due on May 15th every year and generally are not due until a year after the formation of your LLC.
STEP 7: KEEP YOUR REGISTRATION CURRENT
After forming your LLC, it is important to ensure that your registration remains current, compliant, and active on the state’s website. This can be done by making tax payments in a timely fashion and having a dedicated registered agent for the business.
In summary, filing your business with the secretary of state gives it legal credibility and allows business to be conducted in a more efficient manner. Legal liability is limited, permits and licenses can be easily obtained, insurance can be purchased, and the name and logo of your business can be protected by a trademark. The initial effort which goes into entity formation is well worth it if you consider the many benefits that it brings.
What are you waiting for? Make your life easier and allow The South Texas Business Lawyers to assist you with forming your LLC!
Disclaimer: This article is made available for educational purposes only, to give you general information and a general understanding of the law, not to provide specific legal advice. By using this article, you understand and acknowledge that no attorney-client relationship is formed between you and The South Texas Business Lawyers, nor should any such relationship be implied. This article should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
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