How To Start a Business in Texas
There are a number of advantages to starting a business in Texas that go way beyond the state’s unique culture and expanding population. Texas offers a straightforward process to help new companies get registered, licensed and ready to open their doors. There are currently 2.6 million small businesses in the state, which employ 4.7 million people.
If you’re wondering how to start a business in Texas, there are a number of tasks you’ll need to cross off your to-do list. Though Texas is one of the easier states to start a company, there are still parts of starting a business in any state that can be tricky for a first-timer to understand.
- How to establish a business entity in Texas
- Costs of starting a business in Texas
- How to finance the costs of starting a business in Texas
- The bottom line
How to establish a business entity in Texas
The good news is that state lawmakers have adopted regulations that make it easy to establish a business entity in Texas. In fact, Texas doesn’t require a general business license on a state level, and many towns and cities don’t require them as well.
Still, that doesn’t mean that you’re completely exempt from filing paperwork and registering for certain licenses while establishing a business entity in Texas. Here’s what you’ll need to do to get started.
Decide on a business structure
Determining the right business entity for your Texas-based company to-be is a complex process. There are several options at your disposal, each with different benefits depending on the scenario.
- Sole proprietorship: A sole proprietorship is a common, simple option for people who wish to conduct business, but do not need to formally organize a company to do so. Sole proprietorships can conducted either be under your own name, or an assumed name, which is often called a doing business as, or DBA. When using an assumed name, it’s required for any business entity, including a sole proprietorship, to file an assumed name certificate with the office of the county clerk.
- General partnership: When starting a business with two or more people, you may want to pursue a general partnership. In Texas, general partnerships are allowed to operate without needing to be on-file with the state, though typically they operate with a partnership agreement in place.
- Corporation: Corporations are often more complex than sole proprietorships and general partnerships. They require business owners to file a certificate of formation with the Texas Secretary of State, as well as articles of incorporation and more official titles within the company’s governing structure (such as shareholders and directors).
- Limited liability company: Limited liability companies, also known as LLCs, provide the flexibility of partnerships with the liability protection of corporations. An LLC can be a great option for many small business owners who are working alongside other owners within a company, as it provides more individual asset and liability protections than a simple general partnership. This business entity also requires that you file a certificate of formation with the Texas Secretary of State.
- Limited partnership: Limited partnerships are formed by two or more people and governed by a partnership agreement that does not need to be on record with the state. Limited partnerships do, however, need to file a certificate of formation with the state secretary, adding a bit more paperwork to the process than a simple general partnership might.
- Limited liability partnership: A limited liability partnership provides more personal protections within its corporate structure than a limited partnership, which allows for the company’s general partners to create even more daylight between their personal and business affairs. Limited liability partnerships also require registration with the Texas Secretary of State.
Name your business
Starting a small business invariably begins with finding the right name. In Texas, you’ll have to make sure your prospective name is different than any of the others that are currently on file.
The state currently allows for business name reservations, which allow you to secure a name for your company before fully committing to the registration process. Whether you opt to reserve your name first, or to dive right in and register, you’ll need to make sure that your name is distinguishable from existing companies in the state. Texas’ Taxable Entity Search portal can help you research existing business names.
Register your business
Depending on which business structure you chose from the list above, your next step may be to register your new business entity with local and state bodies. Businesses that need to register with the Texas Secretary of State can take care of most requirements online, straight from the department’s homepage. Business registrants can also submit their materials via fax or mail. There are also expedited options for filers who need to get their business registered faster than the average waiting period.
You’ll want to be sure that you’ve applied for an employee identification number (EIN) with the IRS at this point. An EIN allows you to file federal taxes and ensures that your business is on record with the IRS.
Obtain required licenses and permits
Not every business type in Texas requires a small business license, permits or insurance, but many do — and some requirements may vary depending on where in the state the business is located. You’ll need to check to see if certain business licenses are needed for your business, as you will have to have these on file and valid before you open your doors. Permits will ensure that your business has all the required signage, security and safety precautions in place; you will likely need to re-file for them by set periods of time.
Be sure that you also have the appropriate licenses required by municipal boards for other business locations, too. If you run a contracting business out of cities like Dallas, Austin or San Antonio, for example, you’ll need to have a permit on file with the cities to conduct business there. Licenses may not be needed for every type of business, so you may want to consider working with a local attorney to make sure you’ve covered all your bases.
Find a location
Much like with other legal aspects of starting a business in Texas, the Lone Star State’s zoning laws tend to vary depending on where you are. For example, Houston has voted against several attempts at enacting zoning laws, which has led to businesses and residences being side-by-side across the sprawling city. Other municipalities in the state have clearer zoning restrictions, however, so be sure to check the local laws in your area before setting up shop.
Bear in mind that you may still be subject to zoning and commercial regulations if you’re operating a business out of your home. You may need to have an occupational permit even if you run your business from a home office, and you could be barred from operating a business out of your residence depending on what kind of company you’re looking to start. For example, the city of Austin prohibits businesses like dance studios and auto body shops from being run out of a residence. Be sure to consult with a legal professional to make sure you’re in compliance with all local, state and federal laws.
Costs of starting a business in Texas
The Lone Star State is known for being relatively tax-friendly for businesses and individuals since it charges no state-level income tax. However, there are still other small business taxes and expenses that you’ll want to factor in if you start a business there. Since Texas state government tends to leave legislation up to towns and municipalities, many of the variables below will be more or less important to you depending on where you plan to start your business.
Federal and state taxes
Taxes are an unavoidable part of running a business, even if you’re in a tax-friendly state. Though Texas does not impose a state income tax, there are other taxes for which you may be liable. You will need to research local, state and federal requirements before you get down to business.
In general, though, business owners may owe:
- Federal income taxes
- Estimated tax (what you anticipate your business will make in income, paid quarterly)
- State and federal self-employment tax
- Employee tax (if you have employees)
- Excise tax (depending on your industry)
- Unemployment tax
The state also charges a franchise tax, if applicable. This tax is levied as a fee for setting up and/or operating a business in the state. Most businesses are only taxed at a rate of 1%, although others may be charged more based on their business entity or annual revenue. Most sole proprietorships and some general proprietorships are exempt from this tax.
There are also local taxes that may vary by municipality, which will affect you differently based on where you are.
Required insurance policies
Compared to other states, Texas doesn’t have strict business insurance requirements. In fact, the state does not mandate that businesses get commercial general liability insurance, nor does it require businesses to purchase a workers’ compensation insurance plan either. The state largely allows businesses to determine how much coverage they want, and in which areas of their business.
However, there are several small business insurance policies that you may want to consider purchasing for your new Texas-based company. Some of these are universal, such as a business owner’s policy that consists of general liability insurance as well as business property insurance. This protects business owners from general liabilities, such as theft or a slip-and-fall accident on the company’s premises.
Other policies are geared more toward specific industries, such as workers’ compensation or risk engineering insurance for large-scale businesses. Be sure to get any insurance policies mandated by the state, as well as those that could help safeguard your business from an accident or unforeseen circumstance later on.
How to finance the costs of starting a business in Texas
Getting the funding required to wade through all of the startup costs associated with a new business can seem challenging. Thankfully, there are several options to finance your small business in Texas.
The Texas Economic Development Corporation lists several programs that offer money to new ventures, depending on your line of work and both personal and professional business history. Business owners working in rural areas, towns with military bases and communities that have adopted the state’s economic development sales tax are all eligible for different kinds of financing. There are also funding programs for businesses making products or conducting business in Texas, as well as revenue bonds for qualified construction projects and government-sponsored venture capital companies that reinvest in Texas-based businesses.
Alternatively, there are several loan-based financing options available as well. A highly coveted small business loan option is a Small Business Administration (SBA) loan. SBA loans offer competitive interest rates, high loan amounts and longer repayment terms. Plus, their total value can be guaranteed up to 85% by the SBA, which makes it less risky for banks to provide loans to small business owners.
There are also more conventional loan options for those who don’t qualify for (or don’t want) an SBA loan. These include short-term and long-term loans, in which lenders provide borrowers with a lump sum in exchange for repayment plus interest over a set period of time. Bank term loans are often easier to get than SBA loans, but they tend to come with higher interest rates and shorter repayment periods.
Last but not least are two alternative financing options: equipment financing and business lines of credit. Equipment financing allows borrowers to get the money they need to buy a piece of machinery, with the equipment itself acting as collateral to secure the loan. The balance must then paid off, with interest, within a predetermined period of time.
Business lines of credit function similarly to credit cards: they provide borrowers with a set limit of funds from which they can borrow repeatedly, so long as they have not borrowed the full sum available to them (and haven’t missed payments on the money they’ve borrowed).
The bottom line
Texas can be a great place to start a new business. The state’s relatively tax-friendly laws provide unique opportunities for entrepreneurs to reinvest more of their own money into their businesses, and fewer legislative hurdles make it straightforward to get your business going. So long as you know what you need to do to get started, you’ll be on your way to opening the Lone Star State’s newest business venture in no time.