Forming a limited liability company (LLC) is an easy and inexpensive way to enable your business to enjoy the pass-through taxation of a sole proprietorship or partnership, the personal liability protection of a corporation, and a great deal of management flexibility.
But forming an LLC is just the beginning. After the LLC has been formed, there are still ongoing maintenance requirements that must be met.
Maintenance is what makes an LLC legitimate and keeps it in good standing with the state. Maintenance is also what avoids lawsuits, helps win lawsuits, and provides the members of an LLC with asset protection.
What is an Annual Fee?
The process for starting and maintaining an LLC differs from state. So do the costs involved.
The main cost of forming an LLC is usually the fee required to file the Articles of Organization or with the Secretary of State. In Texas, the fee for filing the Certificate of Formation to create an LLC is $300.
In addition to the initial formation fees, most states require LLCs to pay regular maintenance fees to keep the LLC in good standing. Typically, this means paying an annual (or biannual) fee, along with submitting a report that includes any updates to the name and address of the LLC. This annual fee varies from state to state, but is typically less than $50 per year.
Any failure to pay an annual fee will usually result in significant penalties e.g. late fees, interest, and even the dissolution of the LLC. Therefore, if you want to avoid the risk of losing your LLC, you should pay the annual fee early, or certainly within the deadline for doing so.
Even if your LLC is not doing business, but you want to keep it in good standing with the state, you will need to pay the annual fee and comply with any other maintenance requirements, or risk mounting late fees and the dissolution of your business.
The Annual Franchise Tax in Texas
Texas is different from most other states because it does not require its LLCs to pay an annual fee, nor does it impose any tax on the income generated by the LLC. Instead, Texas requires most of its LLCs to pay an annual Franchise Tax, along with a Public Information Report (Form 05-102) that lists the names and addresses of the LLC's managers, officers, and directors.
How Much is the Annual Franchise Tax in Texas?
Texas's annual Franchise Tax, which is assessed simply for "the privilege of doing business in the state," is a percentage of an LLC's total gross revenue, specifically:
- 0.375% for wholesalers and retailers
- 0.75% for all other types of businesses
If your LLCs total gross revenue was less than $1,130,000, you may not owe any franchise taxes. However, you must still file a No Tax Due Report (Form 05-163).
When Is the Annual Franchise Tax Due in Texas?
The Franchise Tax in Texas must be paid annually to the Texas Comptroller of Public Accounts (CPA) between January 1 and May 15th.
What Happens If I Don't Pay the Annual Franchise Tax?
In Texas, a Failure to pay the annual Franchise tax and/or submit a Public Information Report may result in a late fee of $50 plus 5% (if less than 30 days late) or 10% (if more than 30 days late).
In addition, past due taxes will begin to accrue interest from the 61st day after the due date.
Moreover, a failure to pay the annual Franchise Tax or to file a Public Information Report can result in the involuntary dissolution of your LLC.
Who is Required to Pay the Annual Franchise tax in Texas?
Except for sole proprietorships and certain types of general partnerships, virtually every business in Texas is required to pay the annual Franchise Tax. This includes LLCs that are treated as partnerships for tax purposes and those treated as corporations for tax purposes.
If your Texas LLC is also doing business in other states, it may need to pay an annual fee and/or franchise tax in those states as well. Each state has its own maintenance requirements for businesses operating within its borders. Therefore, you need to check with the Secretary of State in each state where you LLC does business to find out if it is subject to an annual fee (or some equivalent) in that state.
Consult with a Knowledgeable and Experienced Texas Business Attorney
Calculating the annual Franchise Taxes owed by a Texas LLC can be complicated. In many cases, it will require the assistance of a knowledgeable professional. For help with completing the necessary forms and paying the annual Franchise Tax for your Texas LLC, contact an experienced Texas business attorney for guidance.