Limited liability companies (LLCs) are the right choice for most small businesses and, if you live in Texas, it is probably best to form your LLC in Texas. This article discusses the basics of Texas LLC formation.
Start with the Goals
Start with the goals. Why are you forming an LLC in the first place? Is it for inside or outside liability protection? To define the management and financial relationship between the owners through the operating agreement? To achieve tax savings? The answer to these questions will dictate many decisions in the LLC formation process.
Choose the Type of LLC
Most Texas LLCs are regular limited liability companies with broad business purposes. But two special types of LLCs are used to provide more specialized services or protection:
- Professional LLCs. Professional LLCs (PLLCs) are formed to provide professional service. It is required for architects, attorneys, accountants and CPAs, dentists, physicians, and veterinarians.
- Series LLCs. Series LLCs are a special form of ownership structure designed to make it easier and less expensive to provide asset protection for multiple assets or lines of business. Find out more in our discussion of Texas series LLCs.
If your LLC will be a professional LLC or a series LLC, the LLC formation documents should include the information for the LLC to qualify for its intended purpose.
Choose a Name for the LLC
Before any documents are prepared, it is important to choose a legally valid name for the LLC. Texas law requires an LLC to include specific words or abbreviations in the LLC’s name. For most LLCs, the name must include one of these phrases or abbreviations: limited liability company, limited company, LLC, L.L.C., LC, L.C., or Ltd. Co. In practice, most new LLCs will include the “LLC” abbreviation at the end of the name.
For professional limited liability companies, the name must include one of the following: professional limited liability company, PLLC, or P.L.L.C.
Texas law also prohibits the use of certain LLC names. A Texas LLC may not have a name that:
- Contains the words “lotto” or “lottery;”
- Implies that the LLC was created by or to benefit war veterans or their families or includes the words veteran, legion, foreign, Spanish, disabled, war, or world war (there are exceptions for pre-approval);
- Implies that the LLC was created for a business that the LLC may not pursue (for example, an LLC could not be called “Travis Law Firm, PLLC” if it was not formed by attorneys to engage in the practice of law); or
- Is the same as, similar to, or deceptively similar to the name of another entity or a name already reserved with the Secretary of State (unless written consent of the other entity is provided in some situations).
The name of the LLC need not be creative. For real estate investors using the traditional holding company structure, the LLC will often reference the property name. For example, if an LLC is formed to hold title to property with an address of 701 Brazos Street, the LLC may be named “701 Brazos Street LLC.”
Similarly, if a series of a Texas series LLC is being formed to hold title to property at a specific address, the series may be named using the same naming convention (for example, “701 Brazos Street LLC Series 2020B P.S.”). You can read more about best practices for naming series of Texas series LLCs at What to Name a Series of a Series LLC.
Confirm Name Availability
Before preparing documents, it is good practice to run a preliminary name check to spot any issues with the name you intend to use. A search of the Secretary of State records will provide the most coverage. If the name is currently available but there will be a delay in filing, it may be beneficial to file a name reservation with the Texas Secretary of State to reserve the name until the initial documents are filed.
Decide Who Will Own the LLC
The best ownership structure of an LLC may not be as simple as it seems. If only one person will be involved in the business, you might assume that the LLC should be a single-member LLC. While that might be true most of the time, adding an additional owner can provide more charging-order protection. Using a disregarded entity as an additional owner can provide more state-level liability protection without introducing tax complexity.
Anonymity is another important consideration. Some business owners—particularly real estate investors—prefer to keep their personal names out of the public records. Keeping the LLC ownership private makes it more difficult for plaintiff’s attorneys and potential litigants to discover what assets you own. Some anonymity strategies involve tiered ownership of the LLC so that your name is not listed in the Secretary of State records.
Choose a Management Structure
The LLC’s management structure must be specified in the LLC’s certificate of formation. There are two types of LLC management structures.
- Member-Managed LLC – All members may bind the LLC to contracts and to make day-to-day decisions regarding the operation of the LLC.
- Manager-Managed LLC – The members appoint one or more managers—who may or may not also be members—to manage the LLC. Only the managers may bind the LLC to contracts and participate in the day-to-day operation of the business.
The manager-managed LLC structure is usually the better choice. The operating agreement should detail the management structure and provide specific guidance on management decisions.
Choose a Registered Office and Registered Agent
A registered agent is a person or organization designated to receive legal documents on behalf of the LLC. Every Texas LLC must have a registered agent. Texas law requires that the registered be:
- An individual who lives in Texas and has consented to serve as a registered agent; or
- A business registered or authorized to do business in Texas and has consented to serve as a registered agent.
You can either serve as your own registered agent or pay for a professional third-party registered agent service. You can read more about those options in our discussion of registered agents.
File the Certificate of Formation
A certificate of formation is a legal document filed with the Texas Secretary of State to officially form an LLC. Unless the certificate of formation provides otherwise, the LLC’s existence begins with the certificate of formation is accepted by the Texas Secretary of State.
The certificate of formation contains the bare minimum necessary to put the LLC on record with the Secretary of State. Texas law requires the following information to be included on the certificate of formation:
- The LLC’s name;
- The name and address of the registered agent and office;
- Whether the LLC is manager-managed or member-managed and the name and address of each member or manager;
- The LLC’s purpose (almost always stated in boilerplate language included on the state-provided forms);
- The name and address of the organizer (the person forming the LLC); and
- If the LLC will not be formed immediately, the date upon which the LLC will be formed.
If the LLC will be a Texas series LLC, custom language must be added to the state-provided form to create the series LLC structure. Similarly, if the LLC will be a professional LLC, a professional certificate of formation must identify the profession conducted through the LLC.
The certificate of formation may also include any other provisions that are not inconsistent with Texas law. These provisions might include information about the LLC’s ownership, governance, business, and internal affairs. But including this information in the certificate of formation is not only unnecessary, but also makes private information about the LLC a matter of public record. The better approach is to include the details about the LLC in the LLC’s operating agreement.
The certificate of formation must be submitted to the Texas Secretary of State along with the filing fee ($300). The Secretary of State usually processes the certificate of formation within seven business days from the date of filing.
Draft the Operating Agreement
Although the certificate of formation technically forms the LLC, it does very little to specify how the LLC will be governed. The governance of the LLC is a critical part of the LLC formation process, but one that is neglected and often overlooked by non-attorney LLC formation services.
The operating agreement is the LLC’s most important governing document. In the operating agreement, the owners specify how profits will be divided, how decisions will be made, how and whether LLC interests can be transferred, the tax classification that applies to the LLC, and many other important matters. Without an operating agreement, these matters are left to the Texas legal system to decide. See Why Every LLC Needs an Operating Agreement for more information.
Fund the LLC
The LLC should be adequately capitalized. If the LLC will be an operating business that will receive and make payments, you will need to set up a bank account for the LLC and keep the LLC funds separate from your personal funds.
An LLC only governs assets transferred to the LLC. Business assets should be transferred to the LLC for two reasons:
- Asset-Related Liabilities. LLCs are usually formed to protect the owners from liability related to business assets. This protection only works for assets owned by the LLC. If the owner keeps the property in her personal name, she is unprotected for liabilities relating to the asset.
- Ownership and Control of Business Assets. The LLC has no ownership or control of assets that are not transferred to the LLC. For the operating agreement to control the management of an asset or the income from it, the LLC must own the asset.
Operate and Maintain the LLC
If the LLC is not properly maintained and operated, a court may set it aside and “pierce the veil” of protection that the LLC would otherwise provide. It is important to treat the LLC like a separate business and not commingle LLC funds with your personal funds. For example, if you use the LLC bank account to buy groceries, a court may decide that you treated the LLC as a “mere alter ego” of yourself and disregard its liability protection. See our discussion of veil-piercing for a more detailed explanation.