Benefits of an LLC in Texas
LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.
Benefits of an LLC in Texas vs other business structures are:
- Limited Liability Protection
- Pass-through taxation
- Tax options
- Ownership flexibility
- Increased credibility
- Name registration
Limited Liability Protection
When a business owner has limited liability protection, they can't be held personally responsible if the business suffers a loss. This means personal assets (car, house, and bank account) are protected.
In order to have limited liablity protection, the LLC must maintain its corporate veil.
Corporations offer limited liability but are difficult to maintain and often offer unfavorable taxation for a small business.
LLCs, by default, are subject to pass-through taxation, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return. The net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.
Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.
In a Texas corporation, profits are subject to "double taxation". This means profits are taxed before being distributed to owners and taxed again when owners report their share of profits on their individual tax returns.
Once a small business grows and can pay owners a reasonable salary and at least $10,000 in distributions each year, they might benefit from another LLC tax option, the S corporation (S corp) tax status.
When an LLC elects S corp tax, it reduces self-employment taxes and overall tax burden under the right circumstances.
For questions about tax solutions for your small business, we recommend scheduling a free tax consultation.
A limited liability company can choose among three different ways of paying income tax. One popular option is to be taxed as an S corporation. Technically an S corp is a tax designation, not its own type of business entity.
You can learn more about choosing the S corporation tax designation in our LLC vs S Corp guide.
Limited liability companies in Texas are relatively easy to form and maintain with little paperwork or expense. Unlike corporations, LLCs aren’t required to assign formal officer roles, hold annual meetings, create bylaws, or record company minutes and resolutions.
Including LLC in your business name lets customers and partners know that you are a credible business.
When you form an LLC in Texas, you’ll choose a unique name that will be registered when the LLC is formed. By registering your name, no other businesses in your state will be able to use the name while your business is active.
A sole proprietorship or partnership must use the names of the owner(s) as the business name. A sole proprietor or partnership would need to register a doing business as name (DBA) in order to use something besides their personal name.
There are very few restrictions on how you can structure the ownership and management of a Texas LLC:
- Your LLC can be single-member or multi-member
- A Multi-Member LLC can be managed by its members, termed as member-managed
- A Multi-Member LLC can be managed by a manager that is appointed by its members, termed as manager-managed
Learn more about LLC management in our member-managed vs manager-managed LLC guide.
Disadvantages of Starting an LLC in Texas
Texas LLCs offer many benefits but there are some cases where it might make sense to form a Texas corporation or sole proprietorship.
Businesses that need to carry large amounts of profit from tax year to tax year should consider a corporation.
Learn more in our LLC vs Corporation guide.
If your business is more of a hobby, carries zero risk, and you don't intend to scale up, then running a sole proprietorship might be a better option.
Learn more in our LLC vs Sole Proprietorship guide.
How To Form An LLC in Texas
Five Basic Steps to Start an LLC in Texas
Step 1: Name Your LLC
You'll need to give your business a unique name that is distinguishable from all registered names in Texas when you file your Certificate of Formation.
Recommended: Check to see if your business name is available as a web domain. You may want to buy the URL to prevent others from using it.
Step 2: Choose a Registered Agent
Your Texas registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your Certificate of Formation.
Many of these Best LLC Services offer a free year of registered agent service when you hire them to form an LLC.
Step 3: File the Certificate of Formation
The Certificate of Formation is the document you will file to officially register an LLC with the Secretary of State.
Step 4: Create an Operating Agreement
A Texas operating agreement is a legal document that outlines the ownership and member duties of your LLC.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN
An Employer Identification Number (EIN) is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS. For more information about whether your LLC is required to obtain an EIN, visit our EIN for LLCs guide.