Intro: How to Start a Business in Texas
Texas is truly a great state to start a business.
According to CNBC, it comes in at number two on the list of America’s Top States for Business 2014, with only Georgia coming out ahead.
The rankings were based on a broad range of criteria, including the cost of doing business, quality of life, business friendliness, and access to capital.
What is it that makes Texas so business-friendly, year after year?
It has a healthy economy as well as an excellent infrastructure. It ranks well regarding the cost of doing business, the availability of employees, and the overall economy. It’s also a leader in technology and innovation.
Forbes recently said that starting a business in Texas is advantageous, ranking it as number 6 on its roundup of the 2015 top states for business.
Factors that went into this decision include its $1.6 trillion economy, which is the second biggest in the U.S., and the fact that 121 of the 1,000 largest public and private companies are based in the state. Texas also has a cost of doing business that is 8% below the national average.
Also important to note, according to the Small Business Administration (SBA):
- Texas is home to more than 2.4 million small businesses
- Small businesses employ more than 4.2 million people in Texas
- Texas saw a stronger economic growth rate than the entire U.S. in 2013, with unemployment levels below the national average
- Small businesses make up 98.6 percent of all employers in the state
So, while you may realize it’s a great plan to start a business in Texas, you may also be wondering where to begin.
We put together this guide to starting a small business in Texas, which includes the information you need to determine and setup the proper legal structure as well as other helpful tips and a checklist.
This guide is designed to be comprehensive and provide you with a framework for starting a business in Texas, regardless of industry.
Legal Business Structure
When you’re researching how to start a small business in Texas, you’ll find the first step is to determine structure, which refers to the general legal structure your business will take.
This is an important area to focus your attention because this is the step that will eventually determine various financial issues, such as how you pay taxes, liability, and the type of leadership framework you’ll have.
Image Source: Starting a business in Texas
There are several different options available as you start a business in Texas, and these include:
Sole Proprietorship:
This refers to an individual who owns and operates the entirety of a company. When you opt for this approach as you’re starting a small business in Texas, it’s important to understand you’ll be personally responsible for everything associated with the company, including all debts.
There are no lines drawn between business and personal debt in this situation, and you can file a single tax return if you opt for this situation.
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If you choose to register a business in Texas under a sole proprietorship, you will have to file an Assumed Name Certificate with the County Clerk.
General Partnership:
This option refers to two or more people who start a business together with the goal of creating a profit. If the partnership operates under a name other than the names of one or more of the partners, it’s required that owners file an Assumed Name Certificate with the county clerk.
Corporation:
A corporation is formed when you file a certificate of formation with the Secretary of State. You’ll be provided with a form, and you can file online.
Some of the features of a corporation include limited liability, centralized management, and simplified transfer of ownership interests. The owners in the situation are referred to as shareholders.
Limited Liability Company (LLC):
Starting an LLC in Texas is one of the more common structuring options. Under this option, a company is created with a certificate of formation, much like starting a corporation, but it’s a unique situation that isn’t exactly a corporation or a partnership.
This is a viable option for doing business in Texas because your business would then have similar powers to a corporation and a partnership, but there are options to ease ownership and tax restrictions.
Other options include a limited partnership, which is similar to a standard partnership agreement, but there isn’t a partnership agreement that must be publically filed.
There are also limited liability partnerships.
How to Start an LLC in Texas
While we already touched on how to start an LLC in Texas above, it’s worth going into a bit more detail since it is such a common option for people researching on how to start a small business in Texas.
A few things to keep in mind when you’re forming an LLC in Texas:
- Texas law requires an LLC name to include the words “Limited Liability Company,” “Limited Company” or any one of the following abbreviations: L.L.C., LLC, LC, or L.C. You may abbreviate the word “limited” as “Ltd.” or “LTD.”
- Your LLC name needs to be unique from the names of other businesses already on file.
- You can fill out an Application for Reservation or Rental of Reservation of an Entity Name (Form 501), which will reserve a business name for 120 days.
- Forming an LLC in Texas requires you to file a Certificate of Formation with the Secretary of State, which should include the following: name, address of the LLC’s registered agent, whether it will be member or manager-managed, the name and address of the governing person or people, the name and address of the organizer, and the effective date of the certificate. The cost of filing is $300.
When you’re forming an LLC in Texas, you also have to appoint a registered agent who is the person or business body that will accept legal papers on the LLC’s behalf in the event of a lawsuit.
This person must be a Texas resident or a business permitted to do business in the state. There needs to be a physical street address, and an LLC cannot be its own registered agent.
If you’re forming an LLC in Texas, you aren’t required to create an operating agreement, but it’s recommended. If you do create one, file it with the certificate of formation.
If you’re considering how to start an LLC in Texas, as well as whether it would be beneficial to you, consider the following advantages which make it a popular option:
- You’ll have the protection of limited personal liability.
- An LLC can continue existing even if the owner dies because of perpetual existence, which is not something afforded by a sole proprietorship.
- You can deduct your business expenses from the income of your LLC, which results in lower taxes. You also have a certain level of tax flexibility with an LLC.
- There’s versatility in who manages an LLC, and there aren’t many complexities or formalities to forming an LLC in Texas, particularly when compared to other structures.
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How to Register a Business in Texas
Once you’ve considered the general logistics of your business, including not just the legal structure you’ll create but also the overall size, industry, and scope, you’re required to begin thinking about registering a business in Texas.
Any business that’s going to be operating as the following must register with the Secretary of State:
- Limited partnerships
- Registered limited liability partnerships
- Limited liability companies
- Corporations
- Professional corporations
- Nonprofit corporations
- Professional associations
You can refer to the Secretary of State’s Filing Guide, which provides comprehensive details and instructions on how to register a business in Texas.
When you register a business in Texas, the Secretary of State will do a name search to ensure yours is the only one with that name in the state.
For businesses that will be operating as sole proprietorships or general partnerships, the filing of an Assumed Name Certificate is required. This is a local registration filed with the county clerk in every county where a business location will be doing business.
It’s important to note that when you register a business in Texas, filling a local Assumed Name Certificate doesn’t protect your business from infringement but rather serves as a formal notice of your company.
Employer Identification Number and Tax Issues
Once you’ve filed the necessary paperwork for registering a business in Texas, you’ll then move on to requesting an Employer Identification Number (EIN) and setting up your tax information.
- The IRS issues your EIN, and it can be easily requested.
- You’ll also likely open a bank account specifically for your business, which will require you to present your Certificate of Formation (received during registration) and your EIN.
- As you’re learning how to start a business in Texas, it can be wise to partner with a professional tax advisor or a lawyer because these experienced professionals can help you navigate the intricacies of tax and financial issues that arise when you’re starting a small business in Texas.
As a small business in Texas, you aren’t required to pay state income because this tax doesn’t exist here, but there are several other taxes you may be responsible for paying:
Franchise Tax:
This is a general tax that you’re required to pay when you start a business in Texas. It follows a simple structure in which you’re typically taxed at a rate of 1% on taxable margins. This will mean the lowest of either 70% of total revenue, 100% of revenue minus the cost of goods sold, or 100% of revenue minus total compensation.
The only businesses not required to pay the franchise tax in Texas are sole proprietorships and some types of general partnerships. All corporations, LLCs, and limited liability partnerships are required to pay the franchise tax.
Sales Tax Permit:
If you’re selling taxable goods or services when you’re starting a business in Texas, you’ll likely need a sales tax permit.
Employment Taxes:
If you have employees, you’re required to pay employment taxes. If you’re self-employed, you’re also required to pay a self-employment tax on your income.
Local Taxes:
You may also have to report personal property used to generate revenue to your local appraisal district. Between January 1 and March 31 of each year, all business owners in Texas are required to report inventories, equipment, and machinery.
While it may seem overwhelming, Texas has some of the lowest business tax rates in the country, which is why it’s a place so many people enjoy doing business.
How to Get a Business License in Texas and Other Required Permits
Unlike many other states, when you’re starting an LLC in Texas or any other type of small business, you’re not required to obtain a general business license, but, depending on your industry and type of business, you may be required to become licensed to operate.
As you’re determining how to get a business license in Texas, begin by visiting the website of the Texas Department of Licensing and Regulation (TDLR). Here, you can do a search to determine what permits or licenses may be required in your specific situation. In some cases, these can also include air, water, and waste permit authorizations if your business will be producing pollutant byproducts.
You can also contact your local county or city government to do a check and ensure you’re fully licensed.
What You Need to Do as an Employer
As in any state, there are quite a few state and local laws, as well as federal statutes, that you may have to adhere to as you’re starting a small business in Texas.
Some of the employment issues to consider include:
- Equal Opportunity Employment Requirements: Both federal and state laws prohibit discrimination against employees. When you start a business in Texas, this is enforced by the Texas Workforce Commission, Civil Rights Division.
- A Safe, Hazard-Free Workplace: It’s your responsibility when you’re doing business in Texas to ensure you’re maintaining a safe work environment. You can take advantage of free services offered by the state’s Occupational Safety and Health Consultation program to ensure your employees are trained and any potential hazards are identified and remedied.
- Wages, Labor, and Hours Worked: When you’re an employer, you’re required to follow a variety of federal and state laws and regulations regarding issues such as minimum wage, overtime, and more.
- Workers Compensation: As a private employer in Texas, you can decide whether or not you’ll have workers’ compensation insurance, but you are required to report and notify the state government of certain activities under the Texas Workers’ Compensation Act.
Additionally, all employers are required to register with the Texas Workforce Commission. As a new business, the TWC will decide whether you’ll be required to pay state unemployment taxes, and it’ll give you a rate if you are required to do so.
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A Checklist of How to Start a Business in Texas
Now that we’ve covered the details, we have created a simple, easy-to-follow checklist that will show you in a few steps how to start a business in Texas.
- Decide on a legal business structure. Consider issues such as exposure to personal liability as well as taxes and company management.
- Create a business name following the guidelines of the structure you select.
- Register your business and its name with the Texas Secretary of State.
- File your business name in each county where you’ll be operating.
- Contact the IRS to request an Employer Identification Number (EIN).
- Open a business bank account (bring your EIN and Certificate of Formation).
- Understand your tax responsibilities regarding federal, state, and local requirements.
- Doing business in Texas doesn’t require a general business license, but you will need to search and make sure no special licenses or permits are required for your particular business.
- Research your responsibilities as an employer, including doing training on labor, safety, and discrimination laws.
- Register with the Texas Workforce Commission.
- Determine whether you’ll pay workers’ compensation or unemployment taxes.
There you have it – a simple, step-by-step guide to learning how to start an LLC in Texas or any other business.
We hope you’ve found that this guide gives you a strong foundation as you contemplate how to start a small business in Texas, particularly as it is one of the most business-friendly states in the country.
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