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October 25, 2022
Samantha M. Alecozay
You’re at the starting line, ready to make your dreams come true: starting your own business! But how do you form a Limited Liability Company (LLC)? What are the rules of starting an LLC in Texas? Is an LLC even right for your business? These questions (and more) can slow you down and make you question if you even want to start a business.
Not to worry! We’re here to help guide you through this process. In this article, we’ll explain how business law works, why forming a business entity matters, whether an LLC is right for you, and how to start a Texas LLC.
Please keep in mind this article is not meant to replace legal advice. For legal advice, contact us at Alecozay Law Firm, PLLC for a free consultation to see if we can help you start your business.
What Is Business Law?
It helps to have some familiarity with business law before forming an LLC. Business law refers to the section of laws that govern how a business may form, operate, and more. Essentially, business law deals with formation and any issues that can arise while operating.
Businesses deal directly with the general public to provide goods and services, i.e. to conduct business. Businesses also generate jobs. As such, Texas businesses have certain duties and obligations to operate according to Texas law.
If you start a business and fail to follow the rules or protect yourself to the fullest extent possible, you could face major liabilities, lawsuits, bankruptcy, and more. The best way to operate your business under Texas laws and regulations is to first form a legal business entity.
What Is an Entity and Why Do I Need One?
When starting a business, forming a legal “entity” or “incorporating” your business is just as important as writing a business plan and getting your finances in order.
An “entity” means a thing with a distinct and independent existence. This can apply to an individual or business entity. In the context of business law, a limited liability company (LLC) is considered a separate entity from the people who own it.
To “incorporate” means to take legal steps to turn a business into its own legal business structure set apart from the individuals who founded the business.
Forming an entity is important for many reasons, some of which we’ll review below.
Liability Protection
Your answer to these questions will determine what entity type is right for your business. For purposes of this article, we will only focus on LLCs. A Texas LLC is a type of entity that provides business owners exactly what it says: limited liability. In other words, an LLC provides its owners p from the debts and actions of the business itself.
This barrier also helps to separate acts of the business from personal acts of the owner(s) for purposes of tax treatment, agency law, and more.
Commitment to Recommended Business Practices
Forming a legal entity shows commitment to operating under recommended business practices. In other words, it lets people know you’re serious about your enterprise, and you’ve taken the necessary steps to ensure your business operates according to the law. It builds trust in your business.
Transactions With Banks and Other Third Parties
Banks and other third parties are more willing to work with and finance an incorporated entity based on credibility and availability of company assets. For instance, if you need a loan to start your business, and you apply for the loan as an individual rather than through an LLC, you will face a high likelihood of rejection.
Is an LLC Right for Me?
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There are numerous entity options available in Texas, each with its own unique rules and benefits. These are the most common business entities in Texas:
Limited Liability Company (LLC)
Corporation (C-Corporation or S-Corporation)
Limited Partnership (LP)
There are other forms of entity options available for specific purposes. A Texas-based attorney can guide you through entity options to determine which one is right for you. When choosing an entity form, there are several factors you should consider, including the following:
How many people will actually own the business?
Who will be responsible for what regarding operations?
Investments: Who is contributing what? What is each person’s intent of involvement?
What type of business is it? A doctor’s office? Art shop? Brokerage?
How will you deal with partner/director/member disputes?
What assets/equity will be involved?
How will employees be hired (if any)?
How do you want company profits to be taxed?
Your answer to these questions will determine what entity type is right for your business. For purposes of this article, we will only focus on LLCs. A Texas LLC is a type of entity that provides business owners exactly what it says: limited liability. In other words, an LLC provides its owners protection from the debts and actions of the business itself.
Members of an LLC
Owners of an LLC are called “members.” Generally, members are responsible for the day-to-day operations of the company and any “fundamental” actions, meaning acts such as termination or sale of the business. Members can elect to appoint a “manager” to handle day-to-day operations, but members will still be responsible for fundamental actions.
The LLC will also require someone to be appointed as a “registered agent.” A registered agent can be a person or entity. The registered agent acts as a handler for all important notice documents and other legal information delivered to the business. You as a member or manager may act as the registered agent of the LLC, or you can appoint a separate individual or entity to do so.
Taxation and Other Rules of an LLC
An LLC allows for “pass-through” taxation, meaning the company is not double taxed on its income like a corporation. Instead, the income passes to the members of the business who pay personal income taxes for their share of the business.
In Texas, LLCs are subject to specific rules and agencies, such as the Texas Business Organizations Code (TBOC), the Secretary of State, and the Texas Comptroller.
The TBOC provides the default rules of operations for LLCs, but members can (and should) elect to operate under a “Company Agreement” or “Operating Agreement.” These internal agreements define how the LLC should operate, division of responsibilities, how disputes should be handled, and more. As long as the agreement does not violate any laws, members can choose to operate the LLC as they see fit.
The Office of the Secretary of State provides record keeping for official business and commercial records required to be filed with the office. All LLCs must first be approved by the Secretary of State before they can operate.
Once formed, the LLC has to pay a recurring franchise tax and file an annual report handled by the Texas Comptroller. The Texas Comptroller serves as Texas’ chief financial officer.
LLCs can be a great entity choice for a wide variety of business forms. This is in part because LLCs have minimal operation formalities and reporting requirements compared to other entity options. That’s right — other entity options are much more complicated! An LLC is the best option for most small businesses.
How to Start a Texas LLC
To apply for an LLC in Texas, we strongly recommend that you work with a corporate lawyer who can handle all the filing requirements, draft internal documents, and guide you through the process efficiently and competently. And we’re not just saying that because we’re a law firm! Unless you have detailed knowledge of business law, you’re much safer working with a lawyer.
Technically, you can apply for an LLC on your own, but there are numerous issues you can encounter during the filing process. Errors in filing can result in unwanted harm to your business, or even to you as an individual. Furthermore, drafting your own legal documents can result in severe consequences down the line.
So, not only is forming an LLC complicated, but it can also have negative consequences if you make a mistake — and you’re much more likely to make a mistake if you’re new to business law. This is where a skilled business attorney can help. All of the following are things your business attorney can take care of for you.
Provide Identifying Information of the Business and Its Owners
This may sound relatively straightforward, but a business attorney will know exactly what information to provide in order to ensure your application is approved. A business attorney will also appoint someone (or a company) as the LLC’s registered agent, a process that may be confusing for those with no background in business law.
Submit LLC Filings to the Texas Secretary of State
A business attorney will know exactly how to fill out all the necessary paperwork that needs to be submitted to the Texas Secretary of State. This includes a certificate of formation, appointment of registered agent, a filing fee, and other documents depending on the nature and intent of the business.
Apply for an EIN With the IRS
After your LLC is approved by the Texas Secretary of State, you’ll need to apply for an employer identification number (EID) with the Internal Revenue Service (IRS). These applications can be daunting, but your attorney will provide you access to an easy to fill out form with the IRS that takes just a few minutes to complete.
Draft and Execute Contractual Agreements
Once your LLC is approved, you’ll need to draft and execute many contracts for your LLC. These include Company Agreements or Operating Agreements, Employee Handbooks, Non-Compete Agreements, Master Sales/Service Agreements, and any other operational documents that may be relevant to your LLC.
Again, if you’ve never drafted contracts like this before, the task may seem overwhelming, and relying on a free template online can be disasterous for you and your company if you cannot properly review and amend them. A business attorney has experience with commercial contracts and will be able to draft and execute such contracts with ease.
Make Proper Transfers of Assets to Be Held by the LLC
If there are any assets your LLC is going to be holding, monetary or otherwise, your business attorney will help you officially transfer those assets to the LLC. Examples of assets include any equipment your business needs, any money to be held by the business (i.e. setting up a business bank account), any buildings you intend to use for your business, etc.
Contact Alecozay Law Firm, PLLC to Get Started
As you can see, there are numerous steps to forming an LLC in Texas. Each step requires detailed legal knowledge, so it is crucial that the LLC be formed by a skilled professional to avoid unwanted harm. Additionally, having a professional form your entity allows you to focus on more important matters of the business and its operations.
Ready to start an LLC in Texas? Contact us to schedule a free consultation! You can schedule an appointment via email at sam.a@alecozaylaw.com or by phone at 210-774-2741 during standard office hours. We look forward to hearing from you!
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