For small business owners in Texas, the LLC is the most popular and easiest type of legal entity to form for operating their business. But unfortunately, that doesn’t mean forming an LLC in Texas is exactly simple. Therefore, I created this 5-step process to walk a new business owner through the LLC formation and registration process in Texas. Plus, I included instructions at the end on how to apply for your federal employer identification number.
Note: For purposes of this example, I assumed the client is a single business owner wanting to form the simplest version of an LLC and does not have an operating agreement.
Step 1: Choose and Verify the Availability of Your Business Name
Your first step is to figure out what you want to name your LLC. You can find a helpful list of the do’s and don'ts for naming here, but an important one is that you must include the words “limited liability company,” “limited company” or an abbreviation thereof (“LLC”) in your business name. This is to put all your potential customers on notice that they are dealing with a company whose liability is limited by law.
Next, you need to make sure the name you want isn’t already in use. If there is already a company registered in Texas with the same name or a very similar one, you cannot use it. Making small alterations (adding or removing a space, altering the spelling, or adding one or two letters) won’t work either, as any name that is likely to cause confusion in the market place will be rejected.
You can search the Texas Secretary of State’s website to see if a name is in use through the SOSDirect system and you can find a list of other ways to run this search here.You will need to create an account with SOSDirect in order to run the search online, but you’ll need an account anyway if you intend to file your formation application electronically, so you might as well go ahead and create one now. FYI, the state charges a $1.00 fee for every name availability search.
Step 2: Prepare the Filing Fee
At the time of this writing, the State of Texas charges a $300 filing fee for each LLC application. Although you can pay by mail and fax, I have found filing and paying through the SOS Direct website is the quickest and easiest way. They accept payment by debit or credit card.
Step 3: Download The Form
Next, download the “Certificate of Formation for a Limited Liability Company” from the Texas Secretary of State’s website, located here. The form has 3 pages of instructions that I recommend you read before filling out the application. I will also walk you through each section of the application below.
Important Note: if you plan to submit your application electronically through the SOS Direct website, you don’t need to fill out the form beforehand. The online application process will ask you each question contained in the application and then generate an electronic application for you. However, you should still read through the instructions and the application itself so you know what information you will need to provide. If you plan to submit your application via mail or fax, you should use the printed application from the website, linked above.
Step 4: Fill Out the Application
Whether you’re submitting your application electronically or otherwise, you will need to know the answer to several questions before you can complete your form. Here are the information and decisions you will need to make:
Article 1: Entity Name and Type. This is where you put the name of your new business, as discussed above. The only type of business allowed on this form is an LLC, so the “type” portion is redundant.
Article 2: Registered Agent and Registered Office.
Every business entity in Texas is required to appoint a registered agent for service of process. This is the person or company that will receive all official notices on behalf of your LLC, including notice of lawsuits filed against your company and correspondence from the State.
The registered agent can be (a) another registered Texas business entity; (b) a non-Texas business entity that is registered to do business in Texas, or (c) an individual resident of the state. Your LLC cannot serve as its own registered agent, but individual owners (or “members,” as LLC owners are called) who are Texas residents can. If you are appointing anyone other than yourself as the registered agent, you must have their consent to serve as the registered agent for your company before you appoint them.
The address of your registered agent must be a street address (no P.O boxes or similar mail services). This is because legal service of process must sometimes occur in person and these addresses typically don’t have anyone there in person to accept such service.
You should also keep in mind that the name of your registered agent and their address will be available to the public. If privacy is a major concern, there are a number of companies in Texas that will serve as your registered agent for a fee; to find one, simply search the web for “Texas registered agent services.”
Article 3: Governing Authority.
LLCs generally have two types of management (governing) structures: (1) all of the owners/members are involved in the running of the company, or (2) one or more persons has been designated to run the day to day operations of the company and the other owners/members are not involved in the daily company operations.
The first type is called “member managed,” meaning that all members participate (or have the right to participate) in the business’s operations. The second type is called “manager managed,” meaning certain people (members or otherwise) have been designated by the members to actually run the operations, while the other members act more as a board of directors or as silent investors.
If you are a single-member LLC and running the business yourself, the choice does not make much practical difference. For simplicity’s sake, you may wish to choose member managed.
Article 4: Purpose. This is one people usually find confusing. Essentially, you are asked to state the kind of business your LLC will be engaged in. A Texas LLC can be formed for almost any purpose. However, anyone forming a business that requires a professional license from the state - such as doctors, dentists, and lawyers - must form a Professional Limited Liability Company instead.
For the majority of businesses, a general statement like “The purpose for which Business Name, LLC, is formed is for the transaction of any and all lawful purposes for which a limited liability company may be organized under the laws of the state of Texas” is sufficient. If you’re unsure whether your business needs a more specific statement, contact me or your own business attorney.
Supplemental Provisions/Information: Most LLCs do not have a reason to utilize this space. However, if you have special provisions or concerns, contact me or your own business attorney for professional advice before using it.
Organizer: This is the name of the individual filling out the paperwork for the application. Only one organizer is required and it can be any person who has been granted the authority by the company to make the application. For most single-owner LLCs, it is the name and information of the owner.
Effectiveness of Filing: Unless you have special circumstances, the most common choice is for the formation to take place upon filing.
Execution: No notary is required, only your signature. But do make sure you read the instructions provided with the form and, if you have any questions, consult with a business attorney before signing. Even inadvertent or innocent mistakes in the formation of your LLC can have unforeseen consequences. An ounce of prevention is, as they say, worth a pound of cure (and usually a lot cheaper).
Step 5: Submit Your Application and Payment
As I mentioned above, I have found that submitting your application electronically through the SOSDirect system is the quickest way to apply. But whatever option you choose, follow the instructions for submission and payment on the form carefully.
Once your application has been filed, it will be reviewed by the Secretary of State’s office. If there is a problem, they will return your filing and provide an explanation. Otherwise, you will receive a Certificate of Formation confirming that your application has been granted. This is an important document, so I suggest making copies and a digital scan.
Step 6: Apply for an EIN and Open a Business Bank Account.
At this point, the formation process is actually complete. However, I included this step because it’s equally important. Once you have your Certificate of Formation from the State, you can fill out and submit the Employer Identification Number (EIN ) application from the IRS here. Getting an EIN is free and the application can be done quickly online.
Even though it’s called an Employer ID Number, you should get one even if you don’t have any employees other than yourself. That’s because the EIN is also used as a Tax Identification Number for your new entity and you’ll need one of those to open a bank account in your business’s name. And opening a separate account in the name of your LLC is an important step for many reasons, not the least of which is so you can start getting paid!
I hope you’ve found this article helpful. If you have any questions about any step of the process, please feel free to contact me for a free consultation.
Disclaimer: This blog is made available by the Caleb Patterson Law Firm, PLLC, to the general public for educational purposes only. Specifically, the entries contained within this blog are designed to provide the general public with general information concerning Texas law. The blog does not provide specific legal advice and does not create an attorney-client relationship between the reader and the Caleb Patterson Law Firm, PLLC. This blog is not an effective or appropriate substitute for obtaining legal advice from a qualified attorney licensed in your state with experience in your practice area or forum of law