How to Start a Business in Texas
Make sure your business is legally registered in the Lone Star state.
- December 2, 2019
- Starting Your Business
- 12 min read
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The Texas economy has been booming in recent years, drawing thousands of people and businesses to the Lone Star State — in fact, it’s one of the best states to start a business, according to a new study by Seek Capital. Tons of major companies are headquartered in Texas, such as AT&T, Exxon Mobil, Texas Instruments, American Airlines, GameStop and many more. As with many other states, however, small business remains the backbone of Texas’s robust economy.
Texas is a prime epicenter for startups and small businesses of all types and industries. If you want to start a business in Texas, you will have to complete the proper procedures, fulfill certain requirements and adhere to policies in order to get your company up and running. Different business types require different paperwork, and certain businesses need licenses and permits to operate in Texas.
If you’re thinking of starting your own business in Texas, it’s important you understand all the steps to take beforehand to avoid making any potentially expensive mistakes. Read on to find out how to start a business in Texas.
Texas has a reputation of being a pro-business state. Many state laws and policies are favorable to business owners, but you’ll still need to fill out all the requisite paperwork and do your due diligence before starting your business. To help make this process easier, there are certain steps you should follow in a particular order regardless of the industry your business is in.
Here’s are the steps to take to start a business in Texas:
It’s very unwise to start a business without writing a business plan, which is why it’s the first step to starting a business in Texas.
Though business plans vary from company to company, your business plan should outline fundamental features of your business, such as:
- The main purpose of your business
- Your business structure
- Startup financing
- Competitive advantage in the market
Your business plan should also describe how your company will be organized and managed. No matter what type of business you want to start, make sure you include all the essentials you need to create your business plan.
Choose Your Business Structure: Incorporate or form an LLC for as low as $79
Figuring out which of the types of business structures work best for your new company is a critical step for starting a business in Texas. According to the IRS, there are six business structures:
- Sole proprietorship
- Corporations, also called C corporations
- S corporations
- Limited liability companies, also called LLCs
- Non-profits, also called 501(c)(3)s
There are other business structures, such as limited partnerships, limited liability partnerships and professional corporations, you can form depending on your company. One thing to note about LLCs is that they are regulated by state statute. Hence, each state may have different laws and policies pertaining to forming an LLC.
Settling on a company name can be more frustrating than you’d anticipate. A poorly chosen company name can give rise to legal and business problems down the line. What’s especially costly is attempting to change your company’s name after it’s already been in existence for some time. You can lose out on business during the transition and hurt existing relationships while also spending more money to market your new name.
Here are some tips for picking a business name in Texas:
- Do a basic search of the internet for your desired name, using different search engines like Google, Bing, Yahoo and DuckDuckGo. This will help avert problems later on if it turns out your proposed name is already taken. It’s a good idea at this point, even if you don’t plan to do business solely online, to decide on your company’s domain name and register it.
- Next, do a trademark search with the US Patent and Trademark Office (USPTO). A good strategy when searching is to also search misspellings, plurals, variations of spelling, similar-sounding words and other versions of your proposed name to avoid accidentally choosing an existing business name.
- Finally, search the Texas Comptroller of Public Accounts business entity database to ensure the proposed name for your business isn’t already taken. Like with searching the USPTO, use variations of spelling, plurals and misspellings in your search since the state may reject a name that is too similar to an existing one.
As with most other U.S. states, Texas imposes restrictions on how certain types of businesses can be named. A basic example of this is the requirement of business entity identifiers in your company name. For instance, if your company is an LLC in Texas, then it needs the term “limited liability company” spelled out or abbreviated within the business’s legal name. For a company that’s incorporated, the required corporate identifier is “Corporation,” “Incorporated” or an abbreviation. You can check out Texas’s naming policies at the Secretary of State’s Name Filing page.
If your company has one name yet conducts business under another, then you need to file an Assumed Name Certificate in the County Clerk’s office for the county where your business is located. An Assumed Name Certificate is also called a DBA, or “doing business as.” Your DBA must be notarized and contain original signatures when you file it with the appropriate County Clerk in Texas. You can find a list of all Texas County Clerks at the Secretary of State website.
Choosing a location for your company depends very much on the type of business you want to operate. A restaurant might require a place with heavy foot traffic, like a downtown. A trucking company might need large amounts of space for a fleet of trucks, and thus would probably be better outside yet near a city center.
An important step when choosing your business location is to research local zoning regulations and business license requirements. Beyond that, study the economy and demographics of the cities that you’re interested in for your new business. Factors like the age and educational attainment of the population, and their incomes as well, are critical since this can impact who your customers and potential employees will be. Also research factors such as employment, unemployment, major occupations and industries in the area you’re interested in.
Other important factors that vary based on business location are local taxes, utilities, proximity to other businesses and services, accessibility and parking, transportation, ordinances, among other things.
Each state has its own requirements for business registration. In Texas, for example, a sole proprietorship and a partnership need to register their business with the County Clerk’s office. Before registering your business, it is important that you’ve decided on your business name, structure and location already since you’ll need to include that information when you register your business.
Here are the key requirements to register a business in Texas:
To form an LLC in Texas, you must file a certificate of formation with the Texas Secretary of State. The document you need to fill out and file is Form 205 with the Scretary of State. This form, the certificate of formation, must include your LLC’s name, how it will be governed and organized, its address, as well as the name and address of the registered agent you’ve designated to handle legal issues such as service of process for your business. There’s a filing fee of $300 for a certificate of formation in Texas.
Incorporating a business in Texas is not too different from forming an LLC in Texas. In both cases, you file a certificate of formation with the Texas Secretary of State. You can file a certificate of formation online through SOSDirect. There’s a $300 filing fee for a certificate of formation for a corporation in Texas.
When forming an LLC, corporation or limited partnership in Texas, the Texas Business Organizations Code requires that you designate a registered agent that handles legal matters like service of process on behalf of your company. So, if your business gets sued, your registered agent receives the legal paperwork rather than your company directly. Your business cannot serve as its own registered agent. Additionally, your company’s registered agent must have a physical street address in Texas.
Though there are exceptions, usually you need to obtain a federal Employer Identification Number, also called an EIN, from the IRS when you start a business. You are required to get an EIN if your business has employees or is taxed separately from you as an individual. If your business does not operate like this, then an EIN isn’t necessarily required. However, getting an EIN is highly recommended for business reasons. It is very common for banks to require an EIN in order to open a bank account in the business’s name. Having an EIN is also important for processing payments when you do business with another company.
If you form a corporation or LLC, then an EIN is required for your business. Getting an EIN is fairly simple and can be completed by filling out an online application via the IRS in a few short steps with no filing fee. You’ll receive your EIN immediately once the IRS has verified all the information in your application.
At this step in the process, it’s helpful to research how your business will be taxed. The way you file taxes for your business will change depending on the business structure you choose. There’s also unemployment taxes and other employer taxes you’ll need to be aware of.
No matter which state your business is located, you’ll have to pay business taxes to the IRS. Beyond the federal level, you’ll need to pay state taxes and local taxes in Texas when operating a business. The Comptroller of Public Accounts administers and collects state taxes in Texas. The Texas Comptroller levies sales tax on all retail sales, services, leases and rental goods. Additionally, the Texas Comptroller collects franchise taxes on businesses chartered or organized in Texas, though most small businesses are exempt from this tax. You can find out more about Texas franchise tax, tax rates, thresholds and deduction limits at the Texas Comptroller franchise tax page.
Local business taxes are important in Texas. A local Business Inventory Tax is collected by the County Appraisal District in the county your company conducts business. For this tax, business owners are required to report all inventories, equipment and machinery to their County Appraisal District for assessment.
Here’s how different business entities are taxed, as well as how to file taxes for them in Texas:
- Sole proprietorships: With sole proprietorships, you file business profit and losses with your individual income tax returns. This is done at the federal level because Texas does not levy a state income tax.
- Partnerships: Partners pay taxes on partnership income on their personal tax returns, but only at the federal level, since there’s no individual income tax in Texas. Often partnerships, such as those whose partners include a business, are subject to Texas’s franchise tax. If the partnership is comprised solely of natural persons, then your business is generally not charged a franchise tax.
- LLCs: Members of this business type pay federal taxes on their share of LLC income on their personal tax returns. Again, since Texas does not levy a state income tax, you won’t have to file a state tax return for your LLC. In Texas, however, LLCs are subject to the state’s franchise tax.
- Corporations: Texas does not currently have a corporate income tax. That said, corporations in Texas are charged the franchise tax, and the state also collects a gross receipts tax of 1 percent on gross income over $1 million.
If you’re starting a business in Texas that will have employees, then you’ll likely have to pay state Unemployment Insurance (UI) tax. The Texas Workforce Commission (TWC) administers Texas’s unemployment tax and defines which businesses are “liable employers,” and therefore have to pay unemployment tax. The main exception to being considered a liable employer is if your business uses independent contractors instead of employees.
In Texas, the state does not require you to get a general business license to operate a business. However, many types of businesses do require business licenses or permits to operate, and local authorities may have their own policies to comply with. For example, a doctor needs a professional license to establish a medical practice business. You can find information on state permits and business licenses needed at the Texas Economic Development and Tourism’s Business Permit Office (BPO). They have a comprehensive permit guide online that lists all permits required for a person to start and run a business in Texas.
A crucial step no matter which state you’re starting a business in is to open business bank accounts for your enterprise. Having designated business bank accounts is highly advisable because it keeps your company’s finances separate from your personal accounts. This goes for credit accounts, checking and savings accounts, loans and other expenses as well. Separating business and personal accounts makes for good bookkeeping, not to mention protects your personal money from getting intertwined with that of the company.
Opening a business credit card is another good financial step to take when starting a business in Texas. Like opening a business bank account, getting a business credit card keeps business charges separate from personal credit card use. But even more important is that getting and using a business credit card builds your business credit profile. By building a business credit history, down the line, you’ll be able to access a wider variety of financing options. As with any credit card, be sure to watch your spending so you don’t saddle your company with debt.
One of the more traditional methods for funding a small business is through partners, investors or through a Small Business Administration (SBA) loan. Unfortunately, partners and investors aren’t always available to new entrepreneurs. And SBA loans have very strict requirements to qualify, and only a fraction of businesses attain funding in this manner.
In Texas, however, the Governor’s Office of Small Business Assistance works with many partners to identify ways for new and existing businesses to acquire funding. Texas has nonprofit business lenders, such as ACCION and BCL of Texas. There are also state programs, such as the Texas Product Development and Small Business Incubator Fund, and Capital for Texas (C4T), which help businesses obtain financing when traditional routes are not feasible.
Beyond these, there are still more options available to you to fund your business. If you have a good credit history, you can qualify for financing via a business line of credit or credit card. What’s more, you can liquidate certain credit cards into cash and deposit it directly into your business checking account. Funding your business using a line of credit or credit card is often more accessible and affordable than other methods for many entrepreneurs.
This checklist covers the most fundamental steps you need to take when starting a business in Texas. Once you’ve knocked out these steps, you will likely encounter new ones that you’ll need to address as your business gets up and running like hiring employees and marketing your new business.
Another prime example is business insurance. In Texas, you are not required to offer workers’ compensation coverage. However, if you chose to not provide coverage, you must make it abundantly clear, both in the physical office and in all employment paperwork, that there is no worker’s compensation at your business. Other types of insurance may apply to your company, such as commercial auto insurance for a business that has company-owned vehicles. Commercial liability insurance, such as general liability insurance or professional liability insurance, is very useful to get to protect yourself in case of workplace accidents and injuries.
Make sure that you stay up to date on all ongoing, recurring or annual costs, certifications and records that Texas might require for operating your business. Fortunately, Texas provides tons of easily accessible information for small business owners to cover all their bases. Each year, Texas releases the Office of the Governor’s Small Business Handbook that addresses all the crucial aspects of starting and running a business in the state.
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