How to Form an LLC in Texas!

Forming an LLC inTexas can provide a number of business and legal benefits.

Strong and Fast Growing Economy

Texas has one of the biggest markets in the United States in terms of population and wealth.  According to the U.S. Chamber of Commerce, Texas has had more than 8% job growth over the past decade.  It ranks first for job creation.  And adjusted for the state’s size, Texas has the highest export volume of any state.

Texas is the second largest state by population.  Its economy ranks second in the nation by gross domestic product.  The U.S. Chamber of Commerce ranks Texas second in entrepreneurial activity, third in cost of living, third on its small business survival index, and ninth in business tax climate.  Texas therefore contains millions of good prospective customers for new businesses.

Freedom of Contract

Texas is an economic powerhouse in size, job creation, entrepreneurial activity, and friendliness to small businesses.  The Texas LLC Chapter gives LLC members contractual freedom to customize their duties, liabilities, and classes of membership.  It also enables them to protect membership interests from members’ creditors.

Texas Has a Larger Body of Legal Precedent than Many Stand-Alone Nations

Texas is so large that if it was a stand-alone country, its economy would be the fifteenth largest in the world.  Because the state is so large, it has a larger body of legal precedent than most stand-alone nations.  This means Texas courts have experience and expertise in deciding commercial cases.  And the larger the body of precedent, the greater the level of certainty business owners can have in planning for business transactions.

Advantages of Forming a Texas LLC

An authorized officer or manager may sign an LLC’s Certificate of Formation, and the officer or manager does not need to be a member of the LLC.  The definition of a “person” who can be an authorized officer includes almost any kind of business or legal entity.  An LLC’s members may therefore have an entity or person who is not a member file the LLC’s Certificate of Formation with the Texas Secretary of State.

Benefits for Business Partners

The Texas LLC Chapter gives LLC members contractual freedom to customize their duties and liabilities.  An LLC agreement may waive or modify almost any provision of the Chapter.  An LLC agreement “may expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person has to the company or to a member or manager of the company.”  This contractual freedom means the LLC agreement can be customized to achieve almost any goal.

In addition, an LLC agreement may establish classes of membership interests with different rights, powers, and duties, including voting and non-voting interests.  This facilitates everything from complex, multi-million dollar business deals to succession planning in family businesses and estate planning by gifts of non-voting interests.

Creditors Cannot Obtain Controlling Rights

The Texas LLC Chapter protects membership interests from members’ creditors.  An LLC member’s judgment creditor may not foreclose on a membership interest.  Instead, the judgment creditor may only obtain a charging order, and “the judgment creditor has only the right to receive any distribution to which the judgment debtor would otherwise be entitled in respect of the membership interest.”  And because § 101.112 is the “exclusive remedy” for judgment creditors, they are not entitled to participate in the management and affairs of the company, become a member of the company, or exercise any rights of a member.

In addition, for married couples, a membership interest may be community property under applicable law, but a member’s right to participate in an LLC’s management is not community property.  Both of these provisions therefore enable members to protect their control of an LLC against other members’ spouses and their own spouses.

Here are the steps you will need to follow to successfully set up a Texas LLC.

Step 1. Choose a Name

Your Texas LLC needs a name that follows a few requirements. First, the name must contain “limited liability company” or “limited company,” both of which can be abbreviated. The name must also be distinguishable from the names of all other business entities that are formed in Texas or can do business in Texas, and cannot contain any words related to unauthorized business, lotteries, wars, or veterans organizations (including “Spanish”).

Step 2. Appoint a Registered Agent in Texas

A Texas LLC must list a Texas registered agent for service of process.  A Texas LLC cannot act as its own agent for service of process, even if it has a Texas address.

Step 3. File a Certificate of Formation

To form your LLC, a member, manager, or authorized person needs to file a Certificate of Formation with the Secretary of State. This Certificate of Formation must include: the LLC name, the name and address of the Registered Agent, the names and addresses of the managers (if there are any) or members (if there are no managers), the effective date of the filing, and the purpose of the LLC. After submitting this Certificate and a $300 filing fee, your Texas LLC will be an official business.

Step 4. Prepare an Operating Agreement

A Company Agreement (“Operating Agreement” in most states) governs the internal affairs of a Texas LLC. While the law is not clear on the necessity of a Company Agreement, almost all LLCs will have one. This can contain whatever you want, subject to a few restrictions in the Texas code.

There are some additional steps you will need to take after you form your Texas LLC to finish setting up and maintaining your business.

EIN: If you plan on hiring people to work for your LLC or have more than one member, you’ll need to contact the I.R.S. or use an incorporation service to obtain an EIN.

Franchise Tax: Texas LLCs need to file annual Franchise Tax forms (Series LLCs only need to file one for the whole LLC). The amount will vary from business to business, and more information can be found online at the Texas Comptroller of Public Accounts website.

Texas is one of the select states that offer the benefits of a series LLC.  A series LLC is essentially multiple LLCs for the price of one: it allows members to create an unlimited number of separate series within a single LLC entity.  The assets and liabilities of each series are separate from the assets and liabilities of all other series.  The series LLC is a popular entity type for natural gas deals and multiple real estate holdings.