Table of Contents
- What is the Texas Limited Liability Company Law?
- How Does the Texas Limited Liability Company Law Relate to the Company Agreement?
- What are the Non-Waivable Provisions of the Texas Limited Liability Company Law?
- How Are LLCs Formed in Texas?
- How Much Does It Cost to Form a Texas LLC?
- What are the Filing Procedures for Texas LLCs?
- What Annual Reporting Requirements Apply to Texas LLCs?
- What Are the Types of Texas LLCs?
- Who Owns a Texas LLC?
- Who Controls a Texas LLC?
- What Fiduciary Duties Apply to Texas LLC Members and Managers?
- How are Texas LLCs Taxed?
- Does Texas Law Permit LLC Domestication, or Conversion?
- What are the Events of Dissolution Under the Texas Limited Liability Company Law?
- Does the Texas Limited Liability Company Law Permit Member Withdrawal?
- What are the Events of Dissolution under the Texas Limited Liability Company Law?
- What Charging Order Protection Applies to Texas LLCs?
The Business Organizations Code is a comprehensive set of laws that governs all Texas business organizations, including corporations (Title 2) and partnerships (Title 4).
The Business Organizations Code also recognizes professional LLCs designed to provide specific services. Professional LLCs are governed by both Title 3 and Title 7 of the Business Organizations Code.
The provisions of the Texas Limited Liability Law defer to the terms of the company agreement. As a general rule, if the company agreement addresses an issue, the provisions of the company agreement control. The provisions of the Texas Limited Liability Company Law are only there as gap-fillers for LLC owners that fail to properly structure the LLC using a company agreement.
The relationship between the company agreement and the Texas Limited Liability Law—including non-waivable provisions of Texas law—are discussed in more detail in our article on Texas company agreements.
A Texas LLC is properly formed when two governing documents are in place:
- Certificate of Formation. The certificate of formation is a simple, three-page form (Form 205, Certificate of Formation – Limited Liability Company) that is filed with the Texas Secretary of State to begin the LLC’s existence. By its own terms, it is “designed to meet minimal statutory filing requirements” and does little to structure the LLC.
- Company Agreement. The company agreement is a comprehensive blueprint for the LLC operations. It deals with important matters like control of the LLC, distribution of profits, responsibilities of the LLC owners and managers, and the relationship of the owners and managers to the LLC and to each other.2
You can read about how to form a Texas LLC in our discussion of the Texas LLC formation process.
The costs of forming a Texas LLC include two components:
- Filing Fees. The Texas Secretary of State charges $300 ($308.10 if filed online) for filing the certificate of formation. If an existing LLC is being domesticated from another state, an additional $300 is required for the certificate of conversion.
- Document Preparation. To be properly formed, the Texas LLC should have a valid operating agreement, organizational resolution, and related documents. If the LLC will open a bank account, a Form SS-4 and related authorization should also be included. The cost of these documents can vary depending on the provider.
Attorney Practice Note: Beware of non-attorney LLC formation services that confuse LLC formation with filing the certificate of formation. While filing the certificate of formation is a necessary part of the LLC formation process, an LLC is not properly formed unless it has a valid operating agreement and related documents necessary to structure the LLC.
The first step in the Texas LLC formation process is to file the certificate of formation with the Texas Secretary of State. Almost all Texas LLCs use the state-provided certificate of formation form (Form 205, Certificate of Formation – Limited Liability Company). The certificate of formation may be mailed to the mailing address below or hand-delivered to the physical address below:
Texas Secretary of State
Texas Secretary of State
Most Texas LLC attorneys have accounts with the Texas Secretary of State’s SOSDirect service and can complete the filing online in a few minutes. The Texas Secretary of State will typically return a copy of the filed certificate of formation within a few business days.
The Texas company agreement is a private document. It is not filed with the Texas Secretary of State.
While Texas LLCs are not required to file annual reports with the Texas Secretary of State, they are required to file a franchise tax report with the Texas Comptroller of Public Accounts.
The Texas Secretary of State notifies the Texas Comptroller of Public Accounts is notified each time a new Texas LLC is filed. The Comptroller will then create an account for the new LLC send a letter to the LLC’s registered agent with information about the new account, including a taxpayer number, file number, and WebFile number.
If the LLC’s revenue is less than the “no tax due” threshold ($1,180,000 for 2020 and 2021), the LLC may file a simple Texas Franchise Tax No Tax Due Report. Reports are due by May 15 of each year and are filed online. The Texas Comptroller’s website has useful information about the Texas franchise tax reporting requirements.
The Texas Comptroller’s website has useful information about the Texas franchise tax reporting requirements.
Texas law recognizes several types of LLCs. The first three—domestic LLCs, foreign LLCs, and professional LLCs—are common forms of LLCs that are recognized by most state statutes. Nonprofit LLCs are a relatively recent development. Series LLCs are only recognized in a handful of states.
The vast majority of Texas LLCs are domestic LLCs. In this context, the term domestic means that the LLC was formed under and is governed by Texas law. An LLC that was not formed under Texas law can be domesticated by filing the appropriate paperwork to convert it to a Texas LLC.
LLCs that were formed in other states are known as foreign LLCs. The word foreign does not mean that the LLC was formed in another country. If the LLC was formed or is governed by the law of any state other than Texas, it is a foreign LLC. Before transacting business in Texas, a foreign LLC must register with the Corporations Section of the Texas Secretary of State.
Whether a foreign LLC is “transacting business” in Texas is not always clear. BOC § 9.251 includes a non-exhaustive list of activities that will not be considered to constitute transacting business in Texas. This list provides some assurance to LLCs that clearly fit within one of its categories. But the list is not exhaustive and does little to define what is considered to be transacting business within the state.
For example, BOC § 9.251(15) provides that “owning, without more, real or personal property” in Texas does not constitute transacting business in Texas. That means that an LLC is not required to register as a foreign LLC if the LLCs only activity in Texas is holding title to real estate. But what if the LLC leases the real estate? What if the LLC sells it and buys another property? Questions like these are often difficult to answer. As stated by Texas Attorney General Opinion No. GA-0726:
Whether a given foreign entity is transacting business in this state, and is thereby required to register with the Secretary of State’s office under section 9.001 of the Business Organizations Code, is a fact question that will depend on the specific circumstances of that entity’s business in Texas.
Although the circumstances that require registration are not always clear, it is clear that failure to register has bad consequences. An unregistered foreign LLC cannot maintain any action, suit, or proceeding in Texas. If a foreign LLC does business in Texas without registering, the attorney general may bring an action to prevent the LLC from doing business in Texas. The LLC is also liable for a civil penalty equal to the amount that the entity would have paid if it has registered, as well as penalties and interest for failure to register.
A professional LLC (often referred to as a PLLC) is an LLC that has been formed to provide professional services. The name of a Texas PLLC must include the phrase “professional limited liability company” or an abbreviation. The certificate of formation must include information about the LLCs management structure. A foreign PLLC may not register to do business in Texas unless the jurisdiction where it is formed allows Texas PLLCs to register in that jurisdiction.
Like professional LLCs, nonprofit LLCs are distinguished by their purpose. Under Texas law, a domestic nonprofit LLC may be formed for any of following purposes:
- Serving charitable, benevolent, religious, eleemosynary, patriotic, civic, missionary, educational, scientific, social, fraternal, athletic, aesthetic, agricultural and horticultural purposes;
- Operating or managing a professional, commercial or trade association, or a labor union;
- Providing animal husbandry; or
- Operating on a non-profit cooperative basis for the benefit of its members.
An LLC formed for any of these purposes is considered a nonprofit LLC for purpose of Texas law. Organizing a nonprofit as an LLC can provide a flexible management structure and other benefits. But simply forming a Texas nonprofit LLC does not provide any tax benefits. In order to qualify as a tax-exempt organization, a Texas nonprofit LLC must file for recognition with the Internal Revenue Service.
Texas is one of a handful of states that recognize series LLCs. A series LLC allows the company to segregate assets into separate series. Each series is shielded from liability arising from assets held in other series. Series LLCs are popular in the real estate development context. You can find out more about them at Series LLCs and Texas Series LLCs.
Texas LLC owners are called members.3 Unlike S corporations, LLCs can generally have any number and any type of owners. The Texas Limited Liability Company Law expressly recognizes one-owner LLCs (single-member LLCs).
The control of a Texas LLC depends on how it is structured. If the LLC is manager-managed (which is usually the best option), the LLC is controlled by one or more managers.4 A manager may be an individual, business entity, or trust. The LLC company agreement defines the role of the manager.
Control of an LLC can be further defined through the use of voting and non-voting membership interests as permitted by the Texas Limited Liability Company Law.5 The voting/non-voting structure is defined in the company agreement. It allows certain management decisions to be made by a class of members (the voting members) without the involvement of other members (the non-voting members).
Unlike the LLC acts of most other states, the Texas Limited Liability Company Law does not clearly impose fiduciary duties on LLC members and managers. The company agreement may define the fiduciary relationship and any fiduciary duties that apply. Section 101.401 of the Texas Business Organizations Code provides:
The company agreement of a limited liability company 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.6
While this language does not specifically allow the operating agreement to eliminate fiduciary duties, there is case law stating that the Texas LLC statute does not mandate a fiduciary relationship.7
Attorney Practice Note: The failure of Texas law to clarify the fiduciary duties of LLC members and managers creates traps for the unwary. Without a company agreement that defines the fiduciary duties of the members and managers, state law provides little certainty. It is important that the company agreement either define the fiduciary duties that should apply or disclaim all fiduciary duties.
Because Texas does not have a state-level income tax, the income of Texas LLCs is generally only subject to tax at the federal level. The federal treatment depends on the LLC’s tax classification.
As mentioned above, Texas LLCs with revenue in excess of the “no tax due” threshold ($1,180,000 for 2020 and 2021) may be subject to the Texas franchise tax.
Texas law permits an LLC that was formed in another state to become governed by Texas law through a process called conversion.8 The same process is called domestication in other states. Texas LLC domestication is discussed in detail in our discussion of Texas LLC domestication.
The term winding up refers to the process of dissolving an LLC that is going out of business. A Texas LLC must wind up on the occurrence of any of the following events:
- The expiration of any period of duration specified in the LLC’s governing documents;
- A voluntary decision to wind up the LLC;
- An event specified in the governing documents of the LLC requiring the winding up, dissolution, or termination of the LLC;
- An event specified in other sections of the Texas Business Organizations Code requiring the winding up or termination of the LLC; or
- A decree by a court requiring the winding up, dissolution, or termination of the LLC.9
No, the Texas Limited Liability Company Law does not allow a member to withdraw or dissociate from the LLC, nor does it allow the LLC to expel a member.10
Texas law provides favorable charging order protection. The creditor of a Texas LLC member may only obtain a charging order against the member’s interest. A charging order allows the creditor to receive any distributions from the LLC that would have otherwise been paid to the member, but doesn’t allow the creditor to participate in management. The charging order is the exclusive remedy for the creditor of an LLC member under Texas law, effectively prohibiting creditors from liquidating the LLC or otherwise forcing distributions of LLC profit.11
- Tex. Bus. Orgs. Code Ann. § 1.008(e).
- Bus. Orgs. Code Ann. § 1.002(36). See also Tex. Bus. Orgs. Code Ann. § 101.052, providing that the company agreement is the second company document governing the internal affairs of the LLC.
- Tex. Bus. Orgs. Code Ann. § 1.002(53).
- Tex. Bus. Orgs. Code Ann. § 1.002(51).
- Tex. Bus. Orgs. Code Ann. § 101.104.
- Tex. Bus. Orgs. Code Ann. § 101.401.
- Suntech Processing Systems, L.L.C. v. Sun Communications, Inc., 2000 WL 1780236 (Tex. App.—Dallas Dec. 5, 2000)(unpublished).
- Tex. Bus. Orgs. Code Ann. § 10.101.
- Bus. Orgs. Code Ann. § 11.051.
- Tex. Bus. Orgs. Code Ann. § 10.101.
- Tex. Bus. Orgs. Code Ann. § 101.112.