After you’ve filed your certificate of formation with the Texas Secretary of State, your LLC begins its legal life. But there are still a few other actions that you need to take before your LLC is fully operational. Just when you thought that well-deserved spa day was on the horizon, you realize that it isn’t.
Here’s an outline of the steps that you need to take after you form your LLC. While some are legally required, others aren’t mandatory, but highly recommended.
Step 1: Draft and Sign an LLC Operating Agreement
First up, let’s discuss why you need to draft and sign an LLC operating agreement.
What’s an operating agreement?
It’s a legal document that establishes how your LLC is run. It includes:
- How decisions are made
- How money is distributed
- How disputes are resolved
Lots of detail here, so take your time as you write it, and really think about what you’re putting into your operating agreement.
All of the members of your LLC need to sign the agreement and follow the rules that it contains.
If you’re the only member of your LLC, you’re the only one who needs to sign it and follow it.
An operating agreement isn’t mandatory.
But it’s a great idea to have one in place, even if your LLC only has one member and you’re in charge of making all of the decisions.
Why do all this extra work?
A written operating agreement lends credibility to your LLC. It also helps show that your LLC is a legitimate business entity that’s separate from you, not just a sham that’s been created to avoid liability.
That’s really important for single-member LLCs (SMLLCs) because, without the formality of an agreement, an SMLLC can look like a sole proprietorship.
Plus, lenders might ask to see an operating agreement before they’ll agree to issue you a loan in your LLC’s name. If you’re planning to take out loans to build your business, this simple document will definitely be helpful.
Your operating agreement doesn’t need to be complex or long, especially if you’re an SMLLC.
Also, while you don’t need to file the agreement with the Secretary of State—or anywhere else, for that matter—you should keep this document with all of your other important LLC files.
Step 2: Get a Federal Tax ID (EIN)
Next up is the Federal Tax ID (or Employer Identification Number / EIN).
You can obtain an EIN from the IRS.
This nine-digit number is used by the IRS to identify your LLC, so you’ll need to include it in all of your tax forms and communications with the IRS.
If your SMLLC doesn’t have any employees, a separate EIN is, generally, not required by the IRS.
Instead, you can use your personal Social Security number. But we still recommended that you get an EIN.
Why is an EIN an important?
It helps prove that your LLC is a legal entity that’s separate from you personally, just like an operating agreement.
Plus, using your EIN rather than your Social Security number is a smart step in avoiding identity theft, which is frighteningly common today.
And, on top of all of that, many banks actually require an EIN when you open a business bank account in your LLC’s name.
Getting an EIN is easy and free
While you can complete an online application at the IRS website, you can also join Collective, which does all of the work for you.
Step 3: Get a Business License
Whether or not you’ll need to get a business license for your LLC depends on the nature of your business and where it’s located.
Most Texas cities and counties don’t require that most types of businesses obtain a licenses. But, there are exceptions.
Like an operating agreement and EIN, getting a business license helps prove that your LLC is legitimate.
It also helps preserve your limited liability.
And, more importantly, if your local government finds out that you failed to get a required license, it could impose penalties and fines.
Obtaining a local business license is usually simple and straightforward.
The specific details for your particular license are available from your local government, so some research is required.
Once you know what you need, you’ll fill out an application and pay a fee.
In addition to a local business license, you might need to get a license or permit from the State of Texas, or even from the federal government.
This will depend on the work that you do.
For example, real estate brokers and sales agents must be licensed by the Texas State Real Estate Commission.
Want more information on business licenses? Check out our article, Freelancer’s Guide to Business Licenses in Texas.
Step 4: Open a Business Bank Account
We highly recommended that you open a bank account in your LLC’s name, rather than use your personal bank account for business purposes.
Once again, it boils down to ensuring that your LLC is recognized as a separate, legal entity that’s a legitimate business.
Combining your personal funds with your LLC’s funds in a single account is a bad idea.
If you use your personal bank account for business purposes, you might even end up losing the limited liability that your LLC provides. You definitely don’t want that!
Setting up a business bank account might seem daunting, but you can read through our article, Freelancer’s Guide to Banking to learn more.
Step 5: Register with Texas Comptroller of Public Accounts
Texas imposes a state franchise tax on LLCs that do business in the state.
You won’t be subject to this tax unless your LLC earns more than $1,130,000 per year.
Even so, you have to register your LLC with the Texas Comptroller of Public Accounts. You can register online here.
Every year, by May 15, your LLC must file a Franchise Tax Report with the Comptroller of Public Accounts.
If you don’t owe any tax, you file a one-page No Tax Due Report.
You must also file an annual Public Information Report with the Comptroller, showing the current address for your LLC and its members.
You can find out more about the franchise tax here.
Step 6: Obtain a Sales Tax Permit
If your LLC sells goods to the public or provides taxable services, your required to collect sales tax from your customers or clients and pay that tax to the state and local government.
Texas imposes sales taxes on 17 categories of services.
If your LLC is required to collect sales tax, you must apply to the Texas Comptroller of Public Accounts and obtain a sales tax permit. You can apply online.
Step 7 (Optional): File an Assumed Name Certificate
Did you know that you aren’t required to operate your LLC under the legal name that’s listed in your certificate of formation? It’s true; you can use a different name.
This name is referred to as an assumed name or DBA (short for “doing business as”).
To operate under a different name than your LLC’s legal name, you have to file an assumed name certificate in the county where your business is located.
Check your county clerk’s assumed name records to be absolutely sure that the name you want to use isn’t already taken by another business.
Then, file the appropriate form and pay the required fee.
You must also file a copy with the Texas Secretary of State and pay a $25 fee. Check with your county clerk website for details.
You can also learn more about naming your LLC by reading our article, The Ultimate Guide to Naming an LLC in Texas.
Maintaining Your LLC Doesn’t Have to Be Complicated
Wow, those are a lot of rules! But try to relax, and just take things one step at a time so that you don’t become overwhelmed.
Also, know that Collective is here for you to help you through all of these important steps (and more!)
With the right strategy and the right support, you can rest assured that your LLC will have everything it needs to operate legally and be recognized as the legitimate business that it is.
Stephen has dedicated his career as an attorney and author to writing useful, authoritative and recognized guides on taxes and business law for small businesses, entrepreneurs, independent contractors, and freelancers. He is the author of over 20 books and hundreds of articles and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Among his books are Deduct It! Lower Your Small Business Taxes, Working with Independent Contractors, and Working for Yourself: Law and Taxes for Independent Contractors, Freelancers & Consultants.