The Lonestar state is a haven for starting a business. In 2020 more than 750,000 businesses opened in Texas, ranking it third highest in the U.S. for new business formation. In recent years, Texas has also become a hub for tech entrepreneurship, ranking behind only California. Since there are no personal or corporate income taxes in Texas, it ranks as one of the lowest – when taking into account state-local effective tax rate Texas ranks as 4th best in the country. These combined with a massive population are why Texas is a great place to do business.
- Research and Plan your Business
- Choose a Business Structure
- Choose your Business Name
- Register your Business
- Get an EIN
- Complete Texas State Tax Registrations
- Apply for Texas Business Licenses and Permits
- Open a Business Bank Account
- Set Up Credit Card Processing
- Establish an Accounting System
- Get Business Insurance
- Hire Employees and Set Up Payroll
|Doing Business in Texas
Key Business Stats
|Texas New Business Formation|
|New Business Formation Rank||3|
|Businesses Formed in 2020||769,197
(26.06% vs 2019)
|New Business Formation Per Capita Rank||16|
|New Businesses Formed Per 1,000 Population 2020||26.53|
|Business Formation Statistics generated using data from US Census Bureau|
|Cost of Doing Business in Texas|
|LLC Formation Cost||$300|
|Corporation Formation Cost||$300|
|DBA (Assumed Name) Filing Cost||$25|
Before getting into the details of how to start a business in Texas, you need to have a clear idea of what you want your business to be. You should spend some time researching your business idea, as well as creating a business plan to outline your goals. To do your due diligence, you should take your time and make sure you’re not what you’re doing. Start with conducting market research and competitive analysis to get the lay of the land. This will help you to understand who your audience is, similar businesses that are already out there, and how your business is going to stand out by doing something different.
After conducting some initial research, you will be in a better position to develop a business plan. A business plan gives you a roadmap for building and growing your business, so you don’t want to miss it out. You might be tempted to skip writing a business plan, but it’s not a great idea. In fact, a business plan could improve your chances of success by 16%, according to one study by the Harvard Business Review.
You can keep your business plan brief. A few pages are plenty, and some startups might even have a business plan as short as one page. When you’re writing your business plan, aim to answer key questions about your business. Consider things such as what needs your business is addressing and how you’re doing it in a different way from competitors. Briefly outline who your target audience is and what their needs are. Outline how your business will be making money, how you’re going to promote it, and what you need to launch your business. If you want more information you can learn more about creating a good business plan here.
There are several business structures that you can choose when you’re starting a business in Texas. A number of factors are influenced by the legal structure that you choose, including your personal tax liability, tax status, and the ways in which you can raise money for your business.
The most common types of business structures are:
An LLC is type of business structure that legally separates the business from the people who own it. This means that the business’s owners (called members) have limited personal liability protection that means their personal assets are protected if the business has legal or financial issues, such as getting sued or falling behind on debt payments. LLCs have preferred pass-through taxation by default, meaning that taxes are paid on your personal income, not the earnings and losses of the business. There is also the flexibility to choose C-Corporation or S-Corporation taxation. This protection and flexibility means that LLCs are the preferred choice for many small business owners.
A corporation is owned by shareholders and the business is a separate legal entity from the shareholders. Each shareholder holds a proportion of stock that represents their ownership interest. Corporations offer strong liability protections, which can be beneficial to some businesses, but there is also a downside for smaller businesses. Corporations are subject to higher taxation due to the fact that they must pay tax on their profits at the corporate tax rate before the profits are distributed to shareholders.
For those starting a business in Texas who want to keep things as simple as possible, a sole proprietorship may be the best choice. This basic business structure is designed for single owners of businesses and is easy to set up. You don’t need to register your business, although you might still need some licenses or permits to conduct your business. Sole proprietorships can seem like the easy option, but they could cause trouble later. As they are not a separate legal entity from their owner, the owner has unlimited personal liability risk. This means that if they have any business debts or are sued, their personal assets can be used to pay any expenses.
When your business has two or more owners, a general partnership offers the most basic option. A partnership is a pass-through tax entity, which means that the owners pay tax on their personal tax returns and the business itself does not owe any taxes. This informal business structure is similar to a sole proprietorship in that it’s not a separate legal entity. Therefore, owners of partnerships also have unlimited liability, which puts them at greater risk.
If you would like more information on the different types of business structures available to you and which might be best for your business, take a look at our guide, which provides a more in-depth look.
Choosing a name for your business is one of the most important parts of planning, and it can often be one of the most difficult too. Once you have named your business and started to grow it, it’s not easy to make a name change. The name that you choose can affect how you’re seen, so it’s worth taking your time.
If you’re finding it hard to think of a good name for your business, there are three key things to keep in mind:
- Choose a name that creates an identity for your business
- Pick something memorable
- Use a name that’s easy for people to search for online and find elsewhere
For more tips on how to come up with a business name, visit our guide to learn more.
The advice above is useful if you’re setting up a new business anywhere, but now it’s time to consider how to start a business in Texas, specifically. It’s important to know how to register a business in the state that you’re in, and the process of registering your business name differs depending on the structure of your business.
Form an LLC in Texas
Forming an LLC in Texas requires you to file Articles of Organization with the Texas Secretary of state. This will cost $300. Before you can complete your filing, you first need to check that no other business is using the name that you want to use. Carry out a Texas business name availability search to do this, and you can file your Articles of Organization if your name is available. If not, you will have to come up with a new one.
Your filing needs to include the name and address of your LLC, as well as the owner’s or owners’ contact information. It is also necessary to appoint a Texas registered agent. At this stage, it’s also smart to create an operating agreement to outline how your business will operate, who owns how much of the LLC, and what voting rights owners have.
For a full, detailed guide on starting a Texas LLC, visit our guide, where we go over all the steps you need to complete to form your LLC.
Form a Corporation in Texas
To form a corporation in Texas, you must file Articles of Incorporation with the Texas Secretary of State. As with the fee for filing Articles of Organization, you must pay $300 for this. Appointing a registered agent to receive service of process documents is another necessity for forming a corporation. Additionally, the creation of a corporate bylaws document will give you a document that sets out the internal operating rules of the corporation.
Register a Sole Proprietorship in Texas
Starting a sole proprietorship in Texas is simple. You aren’t required to file any documents at the state level, but there are some formal steps that you might need to take. If you want to use an assumed business name or trade name, instead of your own name, you need to register your assumed business name with the county clerk. To get a Texas DBA (doing business as name), you need to fill out an Assumed Name Certificate and mail it to the county clerk’s office, as well as pay a small fee of around $10 (this may vary). Visit this page for a full guide on starting as a sole proprietorship in Texas.
Register a Partnership in Texas
A general partnership in Texas does not require any formal filings to start. However, it is a good idea to write a partnership agreement document. Although it’s not legally required, it ensures you are clear about how decisions are made within the business. This can help to deal with disputes later. If the partners’ last names are not used in the business name, you will also need to file an Assumed Name Certificate with the country clerk.
An EIN is an Employer ID Number. This is used to identify your business to the IRS when you file your taxes, as well as for employment purposes. It’s a unique identification number given to each business, much like a social security number is given to each individual. You must acquire an EIN if you form your business as a Corporation, Partnership, or multi-member LLC. Other business owners should still strongly consider getting one. An EIN is necessary for many types of business filings and you can use it instead of your social security number.
Getting an EIN is easy. Simply use the IRS Online EIN Assistant for free. You can also learn more about EINs by visiting our guide on them, where we go over their uses and how to complete the online application.
As well as considering your federal tax implications, you also need to ensure you are complying with Texas State tax regulations. The necessary regulations can vary depending on the type of business that you conduct but you will most likely need to consider sales tax and employer taxes. Texas sales tax is probably a necessity if you sell physical goods, while the Texas Workforce Commission employment tax is needed if you hire employees. If you have a tax nexus in Texas, you are required to collect and remit sales tax to the Texas Comptroller of Public Accounts.
In Texas a general business license is not required, however, you will still need to determine if you require licenses specific to your business activity at the federal, state, and local level. Other business licenses or permits at a city or county level might also be required, depending on your business. These might include building permits, signage permits, or professional licensing. For more specific information you can refer to the Texas Economic Development and Tourism’s Business Permit Office.
Separating your personal finances from your business finances helps to protect you and keeps all of your money organized. Mixing them up can lead to big issues, so it’s best to have a separate business bank account. If you don’t you could make bookkeeping and accounting more difficult and even lose your limited liability status (if your business is an LLC or Corporation). If your business is sued, it could be argued that your personal money and assets are fair game.
We have an in-depth guide to opening a business bank account to give you all of the details you need to get it done. It will help you to choose a bank and get all of your documents in order.
To learn more about opening a business bank account, visit our detailed how-to guide. Our guide goes over how to choose a bank account provider and the documents you’ll need to open your account.
Accepting payments via card is essential for most modern businesses. Most transactions over $10, around 60%, are now processed by card. This makes processing card payments essential if you want to compete in today’s market.
For more information, see How to Accept Credit Card Payments.
Setting up an accounting system allows a business to track business expenditures and create reports to gain insight into your business’ performance. By establishing an accounting system, you can quickly and easily create budgets, manage cash flow and generate the required financial reports to know how your business is doing.
For a more in-depth breakdown, visit our Small Business Accounting 101 guide. Covered in the guide are the steps to do small business accounting, including how to choose between cash basis and accrual basis accounting methods.
One of the most overlooked aspects of starting a new business in Texas is obtaining business insurance. Having the proper business insurance coverage helps to mitigate your risk so that you’re covered in the event of an accident, natural disaster, or lawsuit.
In our Small Business Insurance Guide, we go over the six types of business insurance so that you can make sure you’re covered.
If you want help running your business, you’ll want to consider hiring employees and setting up a payroll. Employers are responsible for reporting new hires and verifying their employment status. To hire employees in Texas you’ll need to register for unemployment insurance with Texas Workforce Commission.
City Specific Guides for Texas
Looking for a city-level guide for starting a business in Texas? We’ve created guides for cities in Texas that you can use for more local-centric focus to help start a business: