Your LLC is formed. Now comes the question of taxes. If you do business in Texas, you'll encounter the state's franchise tax. But what does 'doing business' actually mean? The answer lies in a legal concept called nexus—the connection between your business and the state that creates a tax obligation.

Texas recognizes two primary ways an LLC can establish nexus. The first is the traditional method: physical presence. If your LLC has an office, a warehouse, employees, or inventory in Texas, you have physical nexus. It doesn't matter if your company is legally based in Delaware or Wyoming; having boots on the ground in Texas is enough to create a filing requirement.

The second type is economic nexus. This is for businesses that may not have a physical footprint in Texas but still derive significant income from the state. For an out-of-state LLC, economic nexus is triggered when your total revenue from Texas sources reaches $500,000 in a federal income tax accounting period. This includes sales of products, services, and royalties from intangible property used in the state.

Just because you have nexus doesn't automatically mean you'll owe money. Texas has a 'No Tax Due' revenue threshold. For reports due in 2024, this threshold was increased significantly to $2.47 million. If your LLC's total annualized revenue is below this amount, you won't owe any franchise tax.

However—and this is a critical point—you still must file a report. If your LLC has nexus, you are required to file either a 'No Tax Due' report or a full franchise tax return, regardless of whether you owe anything. Failing to file can lead to penalties and loss of your LLC's good standing in the state.

This often catches business owners by surprise. The state makes it easy to get on their radar. When you register for a Texas sales tax permit, the Comptroller of Public Accounts automatically creates a franchise tax account for your business. Soon after, you'll receive a 'Welcome Letter' in the mail, officially notifying you of your filing obligation. It's a common mistake to confuse the franchise tax with sales tax. They are two separate obligations. Sales tax is collected from customers on certain transactions, while the franchise tax is levied on your business's margin or revenue.

Understanding nexus and the associated thresholds is key to staying compliant. The rules are designed to ensure that any business benefiting from the Texas market contributes its fair share, whether it's a local shop or a remote online retailer.

Keeping these distinctions clear will help you manage your LLC's obligations correctly.