Texas LLC Formation Guide
When forming or updating a Texas LLC, it is crucial to consider state-law considerations. Because the laws of each state are different, the LLC’s formation documents—especially the Texas company agreement—must be prepared to meet Texas’s specific requirements. This article discusses how to form Texas LLCs that meet the requirements of Texas law.
How are LLCs formed in Texas?
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.1
A Texas LLC begins its existence when it files a certificate of formation with the Texas Secretary of State. The certificate of formation is a simple, short form that includes the minimum amount of information needed to notify the Texas Secretary of State of the LLC’s existence. It does very little to structure the LLC to accomplish the owners’ objectives.
About Our Texas LLC Formation Service
It is dangerous—and possibly malpractice—to rely solely on the certificate of formation to properly form a Texas LLC. Because we believe that every Texas LLC must have a Texas company agreement to be properly formed, we do not offer standalone services to prepare and file a certificate of formation only. Each Texas LLC we form comes with a Texas-specific company agreement that is attorney-designed to structure your business in a way that meets your goals.
What is a Texas company agreement?
A Texas company agreement is a legal document that serves as a blueprint for LLC operations, including control of the LLC, distribution of profits, and the rights and duties of LLC members and managers.2
A Texas company agreement is the most important LLC formation document. It provides the framework for how the LLC will be governed. Without a valid company agreement, LLC owners are left to the default provisions of the Texas Limited Liability Company Law to govern the most crucial LLC planning opportunities. A well-drafted company agreement should:
- Specify who controls the LLC and how the LLC may act. Different states have different default laws governing control of the LLC. To avoid relying on these fallback provisions, the company agreement should specify the management structure and be clear about what is necessary to constitute an action by the LLC. The management structure should also be designed with creditor protection in mind. When structured properly, a manager-managed structure can provide enhanced creditor protection.
- Provide clear rules for profit distribution. Different states have different laws regarding how profits and losses are allocated among the members of an LLC. These laws may not match the member’s intent. The company agreement should specify the member’s economic rights. Depending on how the LLC is structured, tax distribution provisions may be necessary to deal with the phantom income problem.
- Maximize liability protection. The company agreement should be designed to provide maximum protection to both the LLC itself and each member (both inside and outside liability). This requires strategic thinking to ensure that the company agreement reflects the LLC’s substantive business arrangement while simultaneously making the LLC unappealing to a creditor if a dispute arises. Care should also be given to adequate LLC documentation—including an organizational unanimous written consent to action as discussed below–to prevent veil piercing claims.
- Define differences in voting rights for different classes of equity. If the LLC will have classes of equity that differ in either economic or voting rights, these classes should be created and clearly defined in the company agreement.
- Protect against unintended spousal ownership. The family law of some states can give a spouse an interest in an LLC by operation of law. This may be unacceptable to other LLC members who don’t want to be surprised to find themselves in business with their business partner’s spouse. The company agreement should include provisions and waivers to deal with unintended spousal ownership of the LLC.
- Clarify fiduciary duties. States have different approaches to fiduciary duties. Many rely on a patchwork of case law and statutes with lots of gray areas. The company agreement should include customized fiduciary duty provisions that match the owners’ specific intent.
- Take advantage of tax flexibility. Of all types of business entities, LLCs offer the most flexible tax structure. The company agreement should specify a tax-efficient tax classification to optimize tax-planning opportunities.
Attorney Practice Note: Although the Texas Limited Liability Company Law uses the term company agreement, other U.S. states refer to the same document as an operating agreement. These terms are synonymous. See our LLC Operating Agreement Checklist for a full list of issues to address in the Texas company agreement as part of the LLC formation process.
Want to form a Texas LLC the right way?
Each LLC that we form comes with a Texas-specific company agreement to help ensure that the LLC is custom-designed to protect the owners from liability, provide for profit distribution, structure control of the LLC, maximize creditor protection, reflect the LLC tax classification, and properly structure the LLC to accomplish the owner’s legal goals.
What is the Texas Limited Liability Company Law?
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.
How does the Texas Limited Liability Company Law relate to the company agreement?
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.
Texas law is clear that it is the company agreement—and not the provisions of the Texas LLC law itself—that is intended to govern the operation of the LLC. Section 101.052(a) of the Texas Business Organizations Code provides:
The company agreement of a limited liability company governs: (1) the relations among members, managers, and officers of the company, assignees of membership interests in the company, and the company itself; and (2) other internal affairs of the company.4
The provisions of the Texas Limited Liability Company Law are default provisions. These provisions only apply “to the extent that the company agreement … does not otherwise provide.”5 If the LLC is properly formed and structured, the company agreement is the governing law of the LLC. The Texas Limited Liability Company Law is a backstop for LLCs that fail to plan properly.
Does the Texas Limited Liability Company Law limit what the members can agree to in the company agreement?
While Texas law defers to the company agreement in most cases, there are a handful of situations in which the company agreement cannot override the Texas Limited Liability Company law. A Texas company agreement may not:
- Waive or modify the requirement of Tex. Bus. Orgs. Code Ann. § 101.101 that the LLC have one or more members;
- Waive or modify the requirement of Tex. Bus. Orgs. Code Ann. § 101.151 that a promise to make a capital contribution or otherwise pay cash or transfer property to the LLC must be in writing;
- Waive or modify the prohibition in Tex. Bus. Orgs. Code Ann. § 101.206 against making distributions if, immediately after making the distribution, the LLC’s total liabilities exceed the fair market value of the LLC’s total assets;
- Waive or modify the requirement of Tex. Bus. Orgs. Code Ann. § 101.501 that the LLC keep books and records at its principal office and make them available if requested;
- Waive or modify the provisions of Tex. Bus. Orgs. Code Ann. § 101.602(b) regarding certain records, statements, and notices that apply to series of Texas series LLCs;
- Waive or modify the provisions of Tex. Bus. Orgs. Code Ann. § 101.613 regarding distributions with respect to a series of a Texas series LLC;
- Waive or modify the provisions of Chapter 1 (Definitions and Other General Provisions);
- Waive or modify the provisions of Chapter 2 (Purposes and Powers of Domestic Entity)
- Waive or modify the provisions of Chapter 3 (Formation and Governance), except that Subchapters C (Governing Persons and Officers) and E (Certificates Representing Ownership Interests) may be waived or modified in the company agreement;
- Waive or modify the provisions of Chapter 4 (Filing);
- Waive or modify the provisions of Chapter 5 (Names of Entities; Registered Agents and Registered Offices);
- Waive or modify the provisions of Chapter 10 (Mergers, Interest Exchanges, Conversions, and Sales of Assets);
- Waive or modify the provisions of Chapter 11 (Winding Up and Termination); or
- Waive or modify the provisions of Chapter 12 (Administrative Powers).6
These exceptions are called non-waivable provisions because the Texas company agreement cannot eliminate them. The non-waivable provisions do not apply to provisions of the Texas Limited Liability Company law that, by their own terms, allow the provision to be modified in the LLC’s governing documents.7 They also do not apply if the company agreement modifies a provision that specifies either the person or group of persons entitled to approve the modification or the vote or other method by which modification is required to be approved.8
How much does it cost to form a Texas LLC?
The cost to form a new Texas LLC depends on three factors:
- Document preparation fees. 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. Although the certificate of formation is a simple form that can be filled out online, the remaining documents—including the company agreement and organizational resolution—involve legal considerations that require knowledge of the intricacies of Texas LLC law.
- Filing fees. Each new Texas LLC formation requires 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.
- Registered Agent cost. As stated below, each Texas LLC must appoint a registered agent to receive legal documents on the LLC’s behalf. Although nothing prevents a Texas resident from serving as registered agent, many LLC owners prefer to use a registered agent for professionalism and to prevent junk mail. Texas registered agent fees are usually $100.00 to $200.00 a year.
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What are the filing procedures for Texas LLCs?
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
Business and Commercial Section
1019 Brazos St.
Austin, Texas. 78701
Texas Secretary of State
Business and Commercial Section
1019 Brazos St.
Austin, Texas. 78701
The Texas company agreement is a private document. It is not filed with the Texas Secretary of State.
Texas law allows the certificate of formation to be signed electronically (e-signed). Instead of mailing or hand-delivering a hard copy, the organizer may submit the certificate of formation electronically for e-filing. There is no publication requirement.
Attorney Practice Note: 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.
What ongoing reporting requirements apply to Texas LLCs?
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 ($1,230,000 for 2023), 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.
Attorney Practice Note: The Texas Comptroller’s website has useful information about the Texas franchise tax reporting requirements.
What are the types of Texas LLCs?
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.
Texas Domestic LLCs
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.
Texas Foreign LLCs
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.
Texas Professional LLCs
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.
Texas Nonprofit LLCs
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 Series LLCs
Texas is one of a handful of states that recognize recognizes series LLCs.9. 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.
What is a member of a Texas LLC?
Texas LLC owners are called members.10 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).
Who makes decisions on behalf of a Texas LLC?
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.11 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.12 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).
Attorney Practice Note: While the member-managed structure may first seem more intuitive for small LLCs, structuring an LLC as a manager-managed LLC can provide enhanced creditor protection compared to member-managed LLCs.
How may LLC members and managers act on behalf of the LLC?
Texas LLC members and managers may act by formal meeting and vote, but that is relatively uncommon. In most cases, members and managers will sign a unanimous written consent to action agreeing to actions on behalf of the LLC.13
What is a Texas registered agent?
A Texas registered agent is a Texas resident or business organization that is designated to receive legal notices from the Texas Secretary of State on behalf of the LLC. Each Texas LLC must appoint a registered agent to receive service of process on the LLC.
What is a membership interest under the Texas Limited Liability Company Law?
The Texas Limited Liability Company Law uses the term membership interest to refer to a member’s economic interest in an LLC.14 The Texas Limited Liability Company Law does not explicitly define economic interest and non-economic interests, but they may be defined in the LLC’s company agreement.
What fiduciary duties apply to Texas LLC members and managers?
Fiduciary duties are an important—but often overlooked—aspect of LLC law. A fiduciary duty is a responsibility to act on behalf of another person and, where necessary, to put the other person’s interest ahead of one’s own.
It is not uncommon for LLC members and managers to be involved in different activities, some of which could be viewed as adverse to the interest of the LLC or other members or managers. Failure to consider fiduciary duties in the company agreement can create unexpected liability for breach of fiduciary duty claims.
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.15
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.16
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.
How are Texas LLCs Taxed?
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 may be subject to the Texas franchise tax.
Does Texas law permit LLC domestication or conversion?
Texas law permits an LLC that was formed in another state to become governed by Texas law through a process called conversion.17 The same process is called domestication in other states.
What are the events of dissolution under the Texas Limited Liability Company Law?
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.18
Does the Texas Limited Liability Company Law permit member withdrawal or expulsion?
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.19
What charging order protection applies to Texas LLCs?
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.20
- 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.
- See Tex. Bus. Orgs. Code Ann. § 101.001(1).
- Tex. Bus. Orgs. Code Ann. § 1.008(e).
- Tex. Bus. Orgs. Code Ann. § 101.052(a).
- Tex. Bus. Orgs. Code Ann. § 101.052(b).
- Tex. Bus. Orgs. Code Ann. § 101.054(a) and (b).
- Tex. Bus. Orgs. Code Ann. § 101.054(b).
- Tex. Bus. Orgs. Code Ann. § 101.054(c).
- Tex. Bus. Orgs. Code Ann. § 101.601 et seq.
- 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. § 6.201.
- Tex. Bus. Orgs. Code Ann. § 1.002(54).
- 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.