Starting a Business in Texas: Entity Types, Franchise Tax, and Structural Decisions

For most Texas-based founders not chasing institutional venture capital, forming a Texas LLC is the strictly better choice on cost and friction. Delaware LLCs carry a $300 annual fee regardless of revenue. A Texas LLC below the $2,650,000 revenue threshold owes $0. Founders who form in Delaware but operate out of Austin or Houston also have to register as a foreign LLC in Texas — paying both states' fees and maintaining dual compliance obligations rather than saving anything.

There is one real exception: the institutional VC fundraising path. The vast majority of venture firms will simply not invest in LLCs. Deal documents are standardized around Delaware corporate law, and investors expect it. If your plan is to raise a seed round from institutional funds and work toward a Series A, a Delaware C-corp is effectively mandatory — and you should form there from day one rather than convert later.

Texas also has practical advantages worth noting. SOSDirect handles certificate of formation filings online, around the clock, with no minimum capital requirement under the Texas Business Organizations Code. Some founders use a Delaware holding company with a Texas operating subsidiary to thread both needles — though that structure adds administrative overhead that rarely makes sense before you have term sheets in hand.

Texas Entity Types: LLC, PLLC, LP, and the Series LLC

Texas law under the Business Organizations Code gives founders four main entity structures. For most tech startups, the choice is settled quickly. The table below maps the structural differences; the commentary that follows explains where each type actually belongs.

LLC

The standard Texas LLC is the default choice for nearly every tech founder. It can be formed with a single member, defaults to member-managed governance, and passes income and losses directly through to members' personal returns — no entity-level federal income tax unless the members elect otherwise. The Certificate of Formation is a single $300 SOS filing.

PLLC

A Professional Limited Liability Company is structurally identical to a standard LLC with one hard restriction: membership is limited to licensed professionals. Under Texas BOC § 301.003, a "professional service" is defined as "any type of service that requires, as a condition precedent to the rendering of the service, the obtaining of a license in this state" — including attorneys, CPAs, physicians, architects, dentists, and veterinarians. All members and managers must hold the relevant license. A software company has no business forming a PLLC; a law firm has no choice but to.

LP

The limited partnership requires at least one general partner — who bears unlimited personal liability — and at least one limited partner whose exposure is capped at their capital contribution. LPs are the structural backbone of real estate investment funds and private equity vehicles, not operating tech startups. The Texas SOS charges $750 for an LP Certificate of Formation versus $300 for an LLC.

Series LLC

The Texas Series LLC, authorized under BOC §§ 101.601–101.636, allows a single parent LLC to contain multiple legally distinct series, each with its own assets, liabilities, and liability shield. Under § 101.601, "the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to a particular series shall be enforceable against the assets of that series only." Since June 1, 2022, Texas recognizes two tracks: a protected series created solely through the company agreement (no SOS filing required) and a registered series filed with the SOS. Both tracks carry the same internal liability shield.

The Texas Franchise Tax — What the Margin Tax Actually Means for Your Startup

Texas imposes a franchise tax — officially a "margin tax" — on every LLC, PLLC, LP, and corporation doing business in Texas. For the 2026 report year, the no-tax-due threshold sits at $2,650,000 in total revenue. If your entity's annualized total revenue is at or below that amount, you owe $0 in franchise tax. Most early-stage startups clear this threshold comfortably and never write the comptroller a check — but that doesn't mean you're done.

Entities that cross the $2.65M threshold compute their taxable margin using whichever of four methods produces the lowest figure: (1) 70% of total revenue; (2) revenue minus cost of goods sold; (3) revenue minus compensation paid to employees and officers — with a per-person cap of $480,000 for 2026; or (4) revenue minus a flat $1,000,000 statutory deduction. You run all four calculations and pay tax on the smallest result. The standard rate is 0.75% of taxable margin for most entities, dropping to 0.375% for entities qualifying as retail or wholesale businesses.

If your revenue is under $20 million, there's a simpler path: the E-Z Computation (Form 05-169) applies a flat 0.331% rate to total revenue, bypassing the four-method analysis entirely. This is the E-Z computation rate — distinct from passive entity treatment and not a general discount.

The forfeiture consequence is not a paper technicality. Under Texas Tax Code §§ 171.251, 171.252, and 171.255, a forfeited entity loses its right to sue or defend in Texas courts, and each officer, director, member, and manager becomes personally liable for debts incurred during the forfeiture period. Filing a PIR costs nothing and takes minutes — skipping it is one of the highest-consequence administrative errors a Texas startup can make.

Operating Agreement Must-Haves Under the Texas BOC

Skip the company agreement and the Texas BOC fills the gap with defaults designed for simplicity, not your actual ownership structure. Under BOC § 101.354, every member gets one equal vote — regardless of how much equity they hold. A founder who owns 60% of the LLC has no more voting power than a co-founder holding 5%. Profits and losses allocate based on the agreed value of contributions, not percentage ownership, and the entity defaults to member-managed. These defaults are coherent for a single-member LLC and wrong for almost every other scenario.

The Texas BOC is unusually flexible once you have a written agreement. BOC § 101.401 permits the company agreement to expand, restrict, or outright eliminate fiduciary duties owed by members and managers — a degree of contractual freedom that goes further than most states allow. That flexibility is only usable if you exercise it in writing before a dispute arises.

Every Texas LLC operating agreement for a multi-member company should address four things explicitly: (1) management type — member-managed or manager-managed, with a board-of-managers structure available for VC-backed entities; (2) voting thresholds tied to ownership percentage, overriding the § 101.354 per-capita default; (3) transfer restrictions on membership interests; and (4) dissolution triggers, replacing the majority-vote default under § 101.552. If you are operating a Series LLC, the agreement must also specify that each series maintains separate financial statements, bank accounts, accounting records, and EINs for any series conducting independent transactions.

Registered Agent, SOS Filing, and Fees

Every Texas entity must designate a registered agent — an individual Texas resident or a Texas-authorized entity with a physical street address in the state. P.O. boxes and mailbox services do not qualify. The registered agent must be available at that address during normal business hours to accept service of process on behalf of the entity. You can serve as your own registered agent if you have a physical Texas address, or hire a commercial service, which typically runs $50–$200 per year.

Certificates of formation are filed through SOSDirect, the Texas Secretary of State's online portal, which accepts filings 24 hours a day, seven days a week.

One recurring obligation that catches new founders off guard: the Public Information Report (PIR), due May 15 every year. There is no filing fee, but the PIR is mandatory regardless of whether your entity owes any franchise tax. Skipping it — even at zero revenue — can trigger forfeiture of entity privileges.

Texas Business Compliance Calendar

Once your certificate of formation is on file, your compliance obligations split into two tracks: a one-time formation track you work through in the first few weeks, and a recurring annual track anchored to a single date — May 15.

Formation Track (One-Time)

1. File your certificate of formation via SOSDirect ($300 for an LLC, $750 for an LP).
2. Obtain your EIN from the IRS using Form SS-4 or the IRS online application — required before opening a business bank account or hiring anyone.
3. Draft and adopt your company agreement — this is when you override the BOC's default per-capita voting and profit-allocation rules.
4. Open a dedicated business bank account to maintain the liability separation your entity structure is meant to provide.
5. If you sell taxable goods or services in Texas, register for a Texas Sales and Use Tax permit through the Comptroller's office before you collect a dollar.
6. If you hire employees, register with the Texas Workforce Commission (TWC) for unemployment insurance and payroll reporting.

Annual Track (Recurring)

• May 15 — Franchise Tax Return and PIR/OIR. Every Texas entity must file a Public Information Report (LLC) or Ownership Information Report (LP/other) by May 15, regardless of revenue. If your annualized total revenue exceeds $2,650,000, you also owe a franchise tax return by the same date. Skipping the PIR/OIR risks forfeiture and personal liability for every officer, director, and member.
• Quarterly (if you have employees) — TWC Payroll Reports. Texas has no state income tax, so there is no state withholding obligation — only federal payroll requirements and TWC unemployment insurance filings.

Your Texas Formation Checklist

The steps below apply to most Texas LLC formations. Licensed professionals — attorneys, CPAs, physicians, and architects — must form a PLLC under Texas BOC Chapter 301 rather than a standard LLC.

1. Determine your entity type. LLC for most founders; PLLC if your work requires a state professional license; LP if you have a specific reason for the GP/LP structure.
2. Designate a registered agent with a physical Texas street address — not a P.O. box or mailbox service.
3. File your certificate of formation through SOSDirect ($300 for an LLC, $750 for an LP).
4. Draft your company agreement to override the BOC's default voting, management, and profit-allocation rules with terms that reflect your actual deal.
5. Obtain your federal EIN from the IRS (Form SS-4 or online) — required for banking, hiring, and tax filings.
6. Open a dedicated business bank account to keep entity finances separate from personal funds from day one.

Formation is the first step, not the last — your compliance calendar starts the day you file.