The Lone Star state attracts entrepreneurs because of its business-friendly environment, minimal tax burden, reasonable cost of living, robust infrastructure, and other factors. If you’ve been wondering how to start a small business in Texas, this article will walk you through some of the most important steps.
As you explore entrepreneurship opportunities in Texas, make sure you seek the legal, accounting, and tax advice you need from licensed professionals. This article is for informational purposes only and is not meant as legal, tax, or financial guidance.
Ten Steps to Help You Understand How to Start a Small Business in Texas
1. Choose a business name.
This crucial step often serves as the foundation of a company’s brand identity. Most small businesses use their business name in marketing materials and directly tie it to the products and services they provide. Corpnet’s free corporate name search tool can help identify if another Texas business has already claimed the desired business name. A trademark attorney familiar with Texas and federal trademark law can help in this effort as well.
2. Choose a business structure.
The business entity type affects personal liability of the business owners, has tax implications, and determines how much compliance complexity is involved in keeping the business in good standing.
Selecting the right business structure requires understanding the pros and cons of the choices based on your particular situation. Asking for guidance from an attorney, accountant, and tax advisor can help you determine the best entity type for your business.
Most businesses in Texas operate as one of the following entities:
A sole proprietorship is when a single individual (or married couple) runs a business without registering a formal entity with the state. If the business will operate under an assumed name (a name that doesn’t include the legal name of the owner), it must file an Assumed Name Certificate with the county where it maintains a premise. If the sole proprietor doesn’t maintain a business presence, then it must file assumed name certificates in all counties where it conducts business under the assumed name. Costs to file assumed name certificates vary by county.
Because the business and its owner are considered the same legal and tax-paying entity, the owner is personally liable for debts and legal issues of the Sole Proprietorship and all business profits and losses flow through to the owner’s individual tax return. Sole proprietors must also pay self-employment taxes (Social Security and Medicare Tax) on all business profits.
A General Partnership is established when two or more people associate to conduct business for profit. Partners are personally liable legally and financially for the business.
There’s no state filing requirement for a General Partnership in Texas. Usually, business owners (partners) operate the partnership in accordance with a partnership agreement that describes all roles, responsibilities, allocations of profits and losses, dispute resolution, and other details about how the business should be operated. If conducting the partnership under an assumed name, the business owners must file an Assumed Name Certificate with the county where it maintains a physical premise. If no physical premise, then it must file for assumed name certificates in all of the counties where the partnership conducts business under the assumed name.
Profits and losses flow through to the partners’ personal tax returns. In addition to paying income tax, partners must also pay self-employment taxes (Social Security and Medicare Tax) on all company profits.
A C Corporation is a legal entity that provides owners (shareholders) with limited liability. It may raise funds by selling shares (stock) of the company. A board of directors manages a C Corp’s affairs, and bylaws set forth the provisions that the directors must follow in overseeing the organization. A corporation is its own tax-paying entity, so it files its own tax returns. Shareholders report their income (wages and salaries and distributions) on their personal tax returns. Some of a corporation’s profits undergo what many refer to as “double taxation.” Dividend income distributed to shareholders gets taxed first at the corporate level as company profits and then again on the shareholders’ personal income tax returns. To avoid this double tax situation, if it meets the federal requirements, a corporation may elect to be taxed as an S Corporation instead (more on that shortly!).
A C Corporation’s name becomes registered with the state when the organization files to form its entity by submitting a Certificate of Formation for a For-Profit Corporation to the Texas Secretary of State office.
Limited Liability Company
An LLC is a legal entity that’s a hybrid between a sole proprietorship or partnership and a corporation. It limits the liability of owners (members) while keeping compliance requirements simple and providing management and tax treatment flexibility.
A Limited Liability Company can be a single-member LLC or a multi-member LLC. Members may be individuals, partnerships, corporations, trusts, or another legal or commercial entity. Either the LLC’s members or managers may manage the company.
By default, an LLC receives pass-through tax treatment. Members can instead choose to be taxed as an S Corporation, through which members only pay self-employment taxes on the income they receive as wages and salaries. Profits paid to them as distributions are not subject to Social Security and Medicare taxes.
To establish an LLC in Texas, members must file a Certificate of Formation for a Limited Liability Company with the Texas Secretary of State.
An S Corp is not an entity type, but rather a federal tax election requested through IRS Form 2553. Corporations and LLCs that meet the IRS’s eligibility requirements may choose to be taxed as S Corporations. An accountant or tax advisor can help you determine if S Corporation election could be financially advantageous for your company.
An LLP has two or more owners, with one or more being general partners and one or more limited partners. General partners assume personal liability for the business and are actively involved in running it. Limited partners are liable for the company only to the degree of their investment in it. A partnership agreement sets forth how the business should be conducted. Profits and losses of an LLP flow through to the partners’ personal income tax returns. Partners must pay self-employment taxes on their share of the business profits, as well.
A Certificate of Formation for a Limited Partnership must be filed with the Texas Secretary of State to create an LLP.
Other Statutory Business Structures in Texas
The other business entity types that Texas recognizes include:
- Limited Liability Partnership
- Nonprofit Corporation
- Professional Corporation
- Professional Association
- Professional Limited Liability Company
- Series Limited Liability Company
2. Write a business plan.
Have you ever heard the saying, “Have a plan or plan to fail?” Without a business plan, entrepreneurs miss an opportunity to map out what they want their business to be and where they want it to go. A business plan is a roadmap to business success. It’s a dynamic document that captures the purpose of the business, the industry outlook, description of the company’s products and services, competitive strengths and weaknesses, operational structure, financial projections, funding needs, and other essential details to help business owners guide their activities and priorities. Not only do business plans serve an important purpose internally at a company, but also lenders and investors want to see one before agreeing to finance a business.
You can find many business plan examples and templates online, so you don’t have to start 100 percent from scratch when creating yours.
3. Get a registered agent.
Any formally organized business in Texas must appoint a registered agent to accept service of process (official government notices, legal notices, and other essential documents) on its behalf. An owner, employee, or officer may serve as the registered agent for its business, but a company may not serve as its own registered agent. Although an officer, owner, or employee may serve as an entity’s registered agent, an entity may not serve as its own registered agent. Many businesses contract a separate company that offers registered agent services to ensure all requirements are covered. Registered agents must meet specific criteria such as being available Monday through Friday from 9 to 5 p.m. and maintaining a physical address in the state. If a business is or plans to operate in more than one state, it can be helpful to use the services of a company (CorpNet, for example) that is authorized as a registered agent in all 50 states.
4. Register Your business in Texas.
Here’s a recap of the business formation forms in Texas and the filing fees associated with them:
- Certificate of Formation for a For-Profit Corporation – $300
- Certificate of Formation for a Limited Liability Company – $300
- Certificate of Formation for a Limited Partnership – $750
- Certificate of Formation for a Professional Corporation – $300
- Certificate of Formation for a Professional Association – $750
- Certificate of Formation for a Professional Limited Liability Company – $300
5. Protect your brand with a trademark.
According to the Texas Secretary of State office, registering your business in Texas does not automatically give you ownership of your company name or prevent other businesses in the state from using it.
“Filing a formation document with the Secretary of State to create a corporation or other entity with a given legal name only prevents the Secretary of State from filing a formation document that states a legal name that the Secretary determines is not distinguishable in its records. Simply filing a formation document with a legal name does not authorize you to use the legal name in violation of someone else’s rights to the name. It does not prevent someone else from using that name in Texas commerce. It does not prevent the Secretary of State or county clerk from filing the same name as an assumed name. It does not prevent the Secretary of State from registering a mark that is the same as or similar to that legal name.”
Registering a trademark with the Texas Secretary of State, however, shows that an entity has claimed ownership of a mark in the state in connection with the goods and services it offers. If approved by the state, a certificate of registration serves as proof of the exclusive right to use the mark in Texas.
Registering a trademark with the United States Patent & Trademark Office offers protection in all 50 states.
6. Obtain an EIN.
Most businesses need an Employer Identification Number (EIN) even if they don’t plan to hire employees. An EIN, also called a Tax ID Number, identifies a business when filing federal taxes. Most banks require an EIN before they will open a business bank account. The IRS issues EINs at no charge. Note that only individuals with a Social Security Number or Individual Taxpayer Identification Number may apply for EINs.
7. Open a business bank account.
If owners mix their personal and business accounts, things can get messy at tax time. Moreover, if a formally registered company gets sued, the business owners could lose personal liability protection if the court determines they failed to keep their personal and business affairs separate. That could put the owners’ house, car, retirement savings, and other personal assets at risk.
Bank accounts and credit accounts exclusively for the business help to maintain a clear separation between “personal” and “business,” and they make accounting and tax filing less cumbersome.
8. Register to pay taxes in Texas.
One of the most attractive features of running a business in Texas is that the state does not charge income tax. However, there are other state and local tax responsibilities to be aware of. The Comptroller of Public Accounts handles state tax filings, and each county’s appraisal district or tax assessor-collector can answer questions about local business and property taxes.
Some tax obligations businesses should have on their radar include:
- Texas Sales Tax – Texas imposes a sales tax on retail sales, rentals, and leases of most goods and on some services. Businesses that sell taxable goods and services must apply for a Sales Tax Permit to register, collect, report and remit sales tax. Some counties and local municipalities charge sales tax, as well, with a maximum of 2 percent so that a business’s total sales tax does not exceed 8.25 percent.
- Texas Franchise Tax – The state also imposes this privilege tax formed, organized, or doing business in Texas.
- Unemployment Tax – Businesses that hire employees in Texas, must register for and pay unemployment taxes. The taxes paid support the state’s Unemployment Compensation Fund, which provides unemployment benefits to eligible workers who become unemployed through no fault of their own.
9. Get the necessary business licenses and permits.
To operate legally, businesses must obtain whatever required licenses, permits, certifications, registrations, or authorizations apply to them at the federal, state, and local level. The Texas Business Permit Office (BPO) offers insight into the requirements in the state, and CorpNet can assist business owners in applying for licenses and permits.
10. Stay in good standing.
Maintaining compliance by completing all ongoing reports and filings when they’re due is essential. The requirements vary according to the business structure, type of business conducted, location, and other factors. The CorpNet Business Information Zone, our free online compliance portal, can help you stay on top of what you need to file and when your deadlines are approaching.
Ready to Start a Small Business in Texas? These Resources Can Help
Now that you know the basics of how to start a small business in Texas, keep a list of resources handy that you can turn to for more information. Below are several that you will want to keep top of mind:
My team at CorpNet is here for you, too! We can help you complete and submit all of your business formation paperwork, license and permit applications, EIN application, compliance filings, and more. We’re also an authorized registered agent in Texas and every other state in the U.S.
If you want to keep your legal fees to a minimum while having the peace of mind that your forms and documents are completed accurately and on time, contact us today!
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