For young entrepreneurs, one of the best forms of business structure is LLC. LLC is known as a Limited Liability Company. It is preferred because this structure provides benefits for both partnership and corporation. The owners’ have the freedom to manage the operation of the company in any way they want. They get this much freedom.
Also, there is liability protection. The members’ assets are secure and will not be touched in any financial situation. LLC also provides a flexible tax structure; it does not pay the tax directly; instead, it is passed through the owners’ income.
So, there are many benefits of forming an LLC; now, let us look at creating one. This article will provide you all the necessary steps to be taken while forming the LLC and what to do afterward.
Step 1: Select a name for your LLC
Selecting the name for your company is the first step and an important one too. The name you choose will represent your company and the business you do. Any person, entity, company, whatever it is, the first thing we say when we remember is the name. So, you have to give importance to naming your business.
Try to make it unique so that it leaves an impression on the minds of the people. People will get intrigued, and it will help you to increase your customer base. Also, make sure that it represents what you do, what your business deals with. But there are some rules too that you have to follow. The first and important one is that the name should be distinct.
It must not be similar to any other company name. You can check the availability of your company name in Texas through the State secretary’s SOSDirect website, or you can search it as the Taxable entity search. The title should have the words limited liability or its abbreviations. Offensive and inappropriate word usage are restricted. Ensure that the name does not give an idea that your company is affiliated with the government. You can check out all the rules and regulations regarding the naming on the Secretary of State website.
After putting in efforts, you have selected the name. Some situation arises, and there is a delay in the launch of your business. You have this worry that someone might also come up with the same name and register it before you. You can put this worry aside as there is a provision for name reservation. You can lock/reserve your preferred name for a total of 120 days. For that, you have to fill an application and submit it online or submit a hard copy. The online submissions get processed within a day. You have to pay $40 whatever method you choose.
You can download the form, print it, and deliver the form to the following address:
Office of the Secretary of State
P.O. Box 13697
Austin, Texas 78711-3697
For the hard copy, there is also another option to hand-deliver the application form. You can go to James Earl Rudder Office Building – 1019 Brazos, Austin, Texas 78701 and submit your form.
You can also fax the form to (512) 463-5709. For that, you have to download the form, get a printout and fill it.
The hard copy takes around three days to be processed. You can also accelerate the processing by paying extra fees of $25.
If you are ready to go on the floor and start your business, there is no need for the reservation process.
Step 2: Appoint a Registered Agent
Every LLC in Texas has to have a registered agent. Any business must appoint a registered agent. There is a rule before any action is taken regarding the lawsuit, notices, or legal matter, the owner must be informed beforehand. So, there must be a way to confirm that the owner will receive all the information; that way is through a registered agent.
A registered agent looks after the company’s mail and delivers all the correspondence to the owner. So, that is why every LLC is obligated to have one. It is easy to appoint a registered agent. They can be any individual or even an entity. If they are a person, then they should be over 18 years old. And also, they must have an address in Texas; they should be a Texas resident. If you select a business entity as your agent, ensure that it is authorized to conduct business in Texas.
You can ask your friends, family, colleagues to be the agent. Another exciting part is that you can be your company’s registered agent, or any member can do that. But there are some disadvantages of being your agent as your address will be in the public record. You have to be present in the office during working hours.
That means you cannot go out, which might not be feasible; you have other responsibilities as an owner. You can also utilize the services of a company that provides registered agents. These companies will charge some amount and help you set up your LLC and provide a registered agent.
The choices are totally up to you. But if you choose an individual, make sure that you get the consent of that person before writing the name on the formation documents. As after entering the name, it becomes official. And the Registered agent’s address is mentioned on the record, so you should take the approval.
Now, let us move to the next step, which actually marks the official beginning of the LLC.
Step 3: Submit Certificate of Formation
Submitting the Certificate of formation will make your LLC an official entity. You will be authorized to start your company. So, it is an important document; enter all the details carefully. You have to submit this form to the state. The following points are mentioned in the Certificate of formation:
- The name and address of the LLC
- The name and the street address of the registered agent
- the management structure
- the name of the members
- The purpose of the business
- the foundation date
- The name and signature of the organizer
There are four ways for you to submit the Certificate of formation to the secretary of state:
For the online submission, you have to go to the government’s SOSDirect online portal. Please fill the form and submit it. It is the fastest way, and your application gets processed in one day.
Via Postal Mail
If you want, you can also mail your application. Download the form from the online portal and take a printout. After that, fill the application and ship it to the following address:
Office of the Secretary of State
P.O. Box 13697
Austin, Texas 78711-3697
It will take around three working days for your application to be processed.
You can fax your form to (512) 463-5709. The processing time is three working days. You also have to add a payment form with your card details.
You can go to the office and also personally deliver the form to this address:
James Earl Rudder Office Building
Austin, Texas 78701.
Step 4: Design an Operating Agreement
For a successful and smooth running of a company, some rules and regulations are required. It is always better to refer to some guidelines when you are in a difficult position, and you have to decide something or a situation arises. A handbook which details every critical step and what to do in a particular case is essential. For LLC, this handbook is an operating agreement.
An operating document is a vital document for an LLC. It doesn’t matter whether you have one member or many. The formation of this document is not mandated, but that doesn’t mean it doesn’t hold any value. It is one of the essential documents that ensure that your LLC runs smoothly.
You don’t have to file the operating agreement with the state, but you should keep it with your business records. The operating agreement has a flexible structure. That means you can add anything you want to your business. Some of the details mentioned in the operating agreement are:
- the name of the LLC
- The name of all the members
- the managing structure, whether it is member-managed or manager-managed
- the details of the registered agent
- the formation date of the LLC
- the roles and duties of each member of the LLC
- the information on the distribution of profits and losses
- the contribution of each member
- the provision for dissolution
- how the transfer or removal of a member will take place
- the voting rights of the members
The operating agreement is signed by all the members showing their consent on the contents of the contract. In the absence of the operating agreement, the State rules apply to your LLC. You might think that what is wrong with that. See, State laws are not made for one specific industry; they are general laws. So, most of the time, they might not be in your favor. For example, you have decided that the profit should be divided based on the members’ financial contribution. That is a valid point from your side.
But in most cases, this is not the law. Their law states that the profit will be distributed equally to all the members. So, suppose you have a three-member LLC, and you divide the profits according to the contribution, and one of the members receives 10%.
That member can challenge this notion if you don’t have an operating agreement. In this situation, the state will have to decide, and according to the law, there is an equal division; he/she will get a 33.3% share.
Now, you see why an operating agreement is a must for any LLC. For a sole proprietorship also it is essential. It will also prove that your business is separated from personal assets.
An operating agreement will also safeguard your LLC from any consequences; it will also establish your credibility in front of the investors and clients. Most of them would work with a company having an operating agreement. It ensures that you are serious about your work.
Now, you know the importance. If you have decided to draft one for your company, there are two approaches for that. You write the operating agreement, or you can ask a lawyer to do that. Drafting the agreement yourself is not an intimidating process; you can take the help of the templates available online.
Also, you can appoint a lawyer; he/she is well aware of the state rules and provide you with an impressive operating agreement.
Step 5: Obtain an EIN
EIN is known as an Employer identification number. It is also called a Federal Tax ID. Internal revenue service (IRS) provides this number. EIN is used for tax purposes.
If you have a single-member LLC, then it is not compulsory to get an EIN. But it is recommended that you should. As in the absence of an EIN, you have to use your Social Security number for all the business matters. It increases the risk of security and privacy theft. Also, the IRS provides this number free of charge. There are three methods for you to obtain this number: online, mail, and fax.
You can obtain the Employer identification number from the official website of IRS free of cost. You can visit the website from 7 am to 10 pm, Monday to Friday, to fill the form. This process is quick and efficient, and as you submit, you will instantly receive your number.
You can obtain the Employer identification number by sending fax too. It is the second-fastest method. For that, you have to download Form SS-4 from the website and take a printout. Fill the form and send the completed application via fax to the office at (855) 641-6935. It will take around four working days for your application to be processed.
The third method to get your EIN is through postal mail. You have to download the form from the IRS website and fill it. After that, send the form via postal mail to the following address:
Internal Revenue Service Operation
Attn: EIN Operation
Cincinnati, OH 45999
Step 6: Business taxes and licenses
If you are thinking of ignoring the taxes, don’t. Avoiding taxes is illegal, and you should never think of it. Taxes are paid at various levels: federal, state, and local. You have to register with the Revenue department; LLC gives the members certain freedom regarding taxes.
Federal income taxes
Any LLC is known as a passed-through entity. Passed through means that the businesses’ losses and gains are passed through the owners’ income tax return. So the LLC is not required to pay the taxes straight away to the government.
Also, you have the choice to pay tax as an LLC or as a Corporation. If you go for the corporation, you have to pay a separate corporation tax.
State and Local taxes
One of the good things about opening a business in Texas is that there is no personal income tax. The state taxes work in the same manner as the Federal ones. At the state level also the LLC taxes are passed through the owner’s income.
But there are some additional taxes, such as the Franchise tax. The tax rate is 0.375% for the wholesalers, and for everybody, it’s 0.75%. Also, remember this date 15 May as it is the due date. And if you fail to file the tax on time, you have to pay a late payment of $50 for a late period of 1 to 30 days. If you are late for more than a month, then the late fees are ten percent of the franchise tax.
Also, where your LLC is located plays a role in taxes. As some cities, counties, and municipalities have their taxes. So, it is better to get informed. You can do so by contacting the local authorities and get all the details.
The taxes don’t end here. There are some indirect taxes. Depending on the type of your industry, you have to pay some additional taxes too. If you deal with selling and purchasing goods, you have to file the Sales/Use tax. You have to pay the taxes to the Taxes comptroller of public accounts. You also have to register with the Texas workforce commission if you pay Unemployment tax for your employees.
Certificate of formation makes your business legal, but the license gives you authority to operate. You cannot function without the appropriate permission or permits. If you do, it is fineable and punishable. These permits depend on your business type.
Suppose you have a massage parlor; you will need a massage therapist license. If you have a restaurant, you will have to obtain a food and service license and a health permit. For a hairdresser, you will need a cosmetology license. Similarly, for different businesses, there is a further need. But you don’t have to worry as you can get all this information on the secretary of state license page.
Steps to take after
Your LLC is total in form. It is operational, and you are doing great. But you do have to take care of the essential things. Work doesn’t end after the formation; if you want to maintain a successful run, you have to follow the following steps:
Annual report: In most states here in America, the LLCs have to submit yearly information. But this is not the case in Texas. But there is a franchise tax report that you do have to offer every year after filing the franchise tax.
Bank account: It is necessary to have a bank account specifically for your business. We know in LLC the professional, and personal assets are separated. You are not responsible for the actions of your LLC, and your purchases won’t be used to pay off the debts. But you do have to show right what is your and what belongs to the LLC. So, a separate account will help you do that. You will have all your business assets in one place, completely separated from your investments.
Maintain a record book: keeping a record of everything that goes on into your business is helpful in the long run. It can be a simple book with all the details and the essential documents. It will help you to audit your business.
Trademark your business: Trademarking helps you to protect your business. You have spent your time, money in creating your business. Nobody should have the right to copy your name, logo, or anything; trademarking helps you do that. No one can use your company’s name or logo. If they use it, you can take action against them.
Insurance: LLC protects your personal assets, but that does not mean your company won’t face any losses. Gains and losses are a part of the business. You should be prepared if there are some losses. Insurance will help you do that. There are several insurance policies available for the company that meets various needs. You will also work proficiently if you know that your business is insured.
This is the end, not of your journey, but this article. You have a long way to go. The guide might seem long, but the process of forming is simple and easy. It is always better for a budding entrepreneur to be well informed. You now know all the details of how to form an LLC and what to do after. You are ready to start your own company. And don’t worry if it feels too intimidating, as they are LLC formation services too. You can always take their help if you want.