Structuring your business depends on your business type, how you want to define ownership, and how you want to formalize your operation. The most common business structure is the LLC or Limited Liability Company. If your business generates profit or if you have personal assets like a car, house, bank accounts, etc., it is imperative that you begin the process of creating an LLC immediately.
An LLC can protect your personal assets from the liabilities of your business and establish credibility for your company. Plus, you enjoy certain tax advantages. If you are wondering when you should start or how to start your LLC, please review the following questions.
What is an LLC Versus a PLLC?
An LLC is a business structure designed to protect your personal assets from your business’ liability. It is a unique business structure that combines the best aspects of corporations and partnerships. According to the Texas Secretary of State, an LLC in Texas designates your business as a separate entity. By doing so, it separates your personal assets from your business assets.
The formation of an LLC acts as a shield, protecting your personal assets from creditors and lawsuits. For example, if your business is sued, the plaintiff can only go after the LLC’s assets, not your personal assets, such as your home, car, and savings, which are generally protected. This is especially important for high-risk businesses, such as construction, consulting, or any company with a high risk of potential liability.
What is a Professional Limited Liability Company or PLLC?
Professionals like lawyers, doctors, and accountants may choose to form a professional limited liability company (PLLC) when selecting a business structure. This structure offers similar liability protection as a standard LLC, while adhering to specific professional licensing and ethical requirements. The Texas Secretary of State provides a guide for determining permissible entity types for licensed professionals.
What are the benefits of an LLC?
Many Texas entrepreneurs choose to form an LLC to retain complete control over their business operations. Unlike corporations, where decisions are often made by a board of directors or shareholders, an LLC gives its solo or multi-member owners greater autonomy and limits the reach of creditors and lawsuits.
Who Can Form an LLC?
According to Texas SoS, you do not have to be a US Resident, Citizen, or US Resident to form an LLC in Texas. However, any person starting an LLC must be able to enter into a contract. There is also no age restriction for owning a business entity or acting as an officer or director within an LLC, except when laws of capability, minor children, or other laws are in question.
When Should Texas Business Owners Create an LLC?
Every situation is unique, but it is recommended that you form an LLC as soon as you start your business or when it starts to generate profit. This proactive approach can provide immediate protection for your personal assets, even if your business is small or low-risk. It may also help enhance your business’s credibility and professionalism, making it appear more established and reputable, especially when dealing with clients and partners.
How to Form an LLC in Texas
To start, confer with an attorney and/or accountant who can help you determine the structure of your LLC or PLLC. Then, you will need to choose a unique name and submit a Form 205 for LLC or Form 206 for PLLC, to the Texas Secretary of State. The document indicates the following:
- Registered agent: A registered agent is a person or entity who receives service papers for any process, notice, or demand on behalf of the LLC. An entity may not serve as its own registered agent.
- Governing authority: Under this section, you may choose to manage the LLC yourself or appoint another individual or entity as a manager.
- Purpose: For LLC, it is for the general purpose of all lawful business transactions. For PLLC, the purpose of the section is to define the type of professional activity.
- Effectiveness of signing: The choice is whether to make the business formation immediate, delayed (no longer than 90 days), or on the 90th day after submission to the Texas SoS.
Depending on your business activities, you may need additional licenses and permits. Then, once the entity is formed, look to the IRS to create an Employer Identification Number (EIN). Finally, open a separate business bank account to keep your personal and business finances separate.
Navigating Texas Taxes for LLCs
In Texas, LLCs are pass-through entities. This means that the business’s revenue and expenses flow directly through the business owner’s personal tax returns. The specific tax implications depend on the type of LLC and the number of owners:
- Single-Member LLCs: These are taxed as sole proprietorships. The owner reports the income and expenses of their business on Schedule C of their personal income tax return (Form 1040).
- Multi-Member LLCs: These can be taxed as partnerships or corporations. The choice of tax classification is typically made on the LLC’s formation documents or through a tax election. If taxed as a partnership, each member reports their share of the LLC’s income and losses on their individual tax returns. If taxed as a corporation, the LLC files a corporate tax return (Form 1120) and issues K-1 forms to its members.
As an LLC owner in Texas, you will likely be considered self-employed. This means you must pay self-employment taxes covering Social Security and Medicare taxes. We advise our clients to seek advice from their CPA or accountants to make sure all wages are properly set up and accounted for at time of formation. While Texas does not impose a state income tax on individuals, LLCs may be subject to certain taxes and fees:
- Franchise Tax: Most LLCs in Texas don’t owe franchise tax if their revenue is below a certain threshold.
- Sales Tax: If your LLC sells tangible personal property, you must collect and remit sales tax.
- Local Taxes: Some cities and counties may impose local taxes, such as occupational taxes.
While LLCs offer significant liability protection, it is essential to understand the tax implications. You can minimize your tax burden by choosing the appropriate tax classification and staying informed about state tax requirements. Given the complexity of tax laws and the potential for changes, you should consult with a professional to ensure compliance with your tax strategy.
Ready to Form Your LLC? Contact Feldman & Feldman for Help
If you still have questions or concerns regarding the formation of your LLC, contact the business law attorneys at Feldman & Feldman. We can provide advice regarding the best methods to set up your legal entity, whether you choose to form an LLC or another type of corporation.
Our Houston business lawyers have decades of experience working with both clients starting new ventures and those representing large, established corporations. Call us today to schedule a consultation.