Advantages and Disadvantages of Setting up an LLC in Texas

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Laws around business registration can vary vastly between states and Texas has long maintained a reputation as a place where the members of an LLC enjoy the most effective personal liability protection. There are both positive and negative aspects of registering your LLC in Texas, as opposed to another state, so we’re going to outline the pros and cons of setting up your LLCs in Texas.

Firstly, what is an LLC?

An LLC is a legal framework upon which entrepreneurs are able to register their business and is considered to be what gives “life” to the entity. LLC’s can be started by one or more members and is a business structure that provides members with liability protection from business activities in a personal capacity. LLC members are considered separate to the entity and therefore cannot be held liable for any debts incurred or legal liability cases. Under exceptional circumstances, that include fraud and legal malpractice, government agencies may “pierce the corporate veil” of protection that an LLC provides between the company and its members, and hold the members liable in a personal capacity for any debts, obligations or liabilities incurred by the business.

Source: Incfile

What are the advantages of setting up an LLC in Texas?

Tougher laws on piercing the corporate veil

Texas is known for its having particularly clear laws surrounding the process of piercing the corporate veil. In 1986, The Texas Supreme Court amended the regulations for piercing the corporate veil to be “unjustifiably broad.” These new regulations were heavily criticized and they were forced to amend the state laws. The revised laws, that are still in effect today, make it very difficult to pierce the corporate veil without providing clear evidence of fraud or intentional malpractice.  According to howtostartanllc.com, as a result, one of the most crucial advantages of forming an LLC in Texas is that you will enjoy more extensive protection than any offered by any other state.

Registration costs

The cost of LLC formation in Texas is $300, which is cheaper than registering a Limited Liability Partnership and you enjoy far more extensive protection in an LLC. You are not required to pay a name reservation fee when applying for your chosen name and your Operating Agreement and Franchise Tax Report are all free. Depending on your business, there may be some hidden registration costs, such as the agent’s registration fee – so be sure to do your research on the particular aspects of the registration fees.

Source: LegalZoom

Flexible tax filing options

LLC’s across the country enjoy the benefits of being able to choose how they wish their LLC to be taxed and Texas is no exception. All LLC’s are able to choose if they wish to be taxed by the IRS as a partnership, s-corp, c-corp or – should they be a single-member LLC – as a sole proprietor.

Limited reporting

Although LLC’s in Texas are required to file an annual franchise tax report, by law they are not required to file the annual reports with the Secretary of State that is required by other states. This means that although your financials and governing policies need to be disclosed, you only need to go through the process once and the filling takes place at a state level instead of a federal level, meaning less paperwork and more time to focus on your business!

Source: US Global Mail

You are not required to simultaneously register a DBA

In states such as New York and New Jersey, as part of the normal business registration filings, LLCs are also required to register a DBA (Doing Business As) otherwise known as a trade or fictitious name. In Texas, however, the only time you would be required to formally register a DBA is if you wished to operate under a different name to that of your registered business entity.

What are the disadvantages of setting up an LLC in Texas?

Texas requires a registered agent and valid business address

Before an LLC is allowed to operate in Texas, they are required to provide the government with a person who will be their sole point of contact and registered address to send any and all business-related documentation to this contact. This person is referred to as the managing agent, and in Texas, the aforementioned address should be a valid business address, not a personal one, in the state of Texas. It is important for the purpose of maintaining the effectiveness of the corporate veil that the address should not be a personal address. Having an agent can also result in additional unforeseen and recurring costs, both to register and to pay so be sure to keep an eye out for those.

Source: MOSourceLink

Naming requirements

The federal government requires that when naming an LLC, there must be a clear indication given at the end of the name as to the nature of the entity. The particular regulations around exactly which words you can use  to indicate your entity type when naming your LLC can vary per state – for an LLC in Texas there are several restricted words that require additional approval from the state government to include in your name such as

Texas franchise tax

Aside from the federal tax that your company is required to pay – LLCs in Texas are also required to pay Texas Sales Tax and Franchise Taxes. All businesses in Texas, regardless of type, are required to pay Sales Tax. And most businesses, except for sole proprietorships, and general partnerships where the partners are all natural persons, are required to pay a franchise tax.

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