How to start a business in Texas
Everything you need to know to launch your startup in Texas
So, you’re a real go-getter. You’re energetic, skilled, and enthusiastic. It’s probably about time you went it alone and reaped the many benefits of having your own business.
If you want to start a business in Texas, this article is for you. It’s designed to break down that long and daunting to-do list. Things are easier when you’re dealing with manageable segments. Hopefully, this list will enable you to get your ideas and your business up and running – fast!
Texas for startups
The great news is that Texas is a fine state in which to start your own business. The tax laws are favorable, running costs are relatively low, and the economy is in good shape.
Texas is ranked number 2 in CNBC's 2019 Top States for Business, with strong marks for its economy, infrastructure, technology and access to capital. Its $1.645 trillion economy is 2nd only to California's in the US, and is 10th largest in the world.
Texas by the numbers
Texas is also incredibly business friendly. There's no corporate tax in the state, though there is a gross receipts tax. Texas also has no state personal income tax.
Texas has many great attributes if you’re looking to start a business. Many rural and city economies are thriving. Austin is known as a startup hub, and the Lone Star state is great at innovation.
Planning your business
What you do will define your day-to-day experience for many years to come. It has to be viable, but it should also be something you’re going to enjoy – if that’s possible. Try to find an idea that combines a gap in the market with an activity you’re happy doing. That might sound obvious, but many people overlook happiness and concentrate solely on revenue. The chances your venture will last the course can only increase if you enjoy what you’re doing.
If you're having trouble coming up with a good business idea, read our guide on how to develop a startup idea. It's also worth taking a look at some of the hot industries in Texas now:
- Banking and finance
- Food and beverage
- Retail sales
What’s popular doesn’t guarantee success. Your attitude, skills, and energy are more important than what’s trending. If you still feel stuck for inspiration, we have some resources to help.
Just like with anything. Planning ahead for your new business is a key factor in making it a success. Time spent on designing now will save much heartache and hard work in the future. You can read our complete guide on writing a business plan, but here are some of the elements your business plan will need:
- Value proposition
- Market opportunity
- Target market
- Competitor analysis
- Funding required
- Sales and marketing
- Financial projections
- Your team
Structuring and registering your business in Texas
You have a few options when it comes to forming a business in Texas. You can structure your business in any of the following ways:
- Limited liability company
- Sole proprietorship
We go into detail on all the different business structures and their implications in our complete guide on structuring your startup for success. The process you'll follow in Texas will depend on the business structure you choose, but there are a few steps you'll need to take regardless of your business structure.
Every company in Texas needs an Employer Identification Number (EIN) to operate. The Texas Department of Taxation and Finance is your best friend here. It’s always a great idea to check facts with local lawmakers and financial policymakers when you’re setting up a business. For the best registration and tax advice in Texas, visit the site.
If your new business is going to sell anything in the state of Texas, you’ll need to register for Sales Tax. You can do that here.
When your business needs to hire employees, it’s essential you’re registered for Unemployment Tax. You can sign up for that on the following link.
Getting the right permits for your specific business activities and premises is an important aspect of business in Texas. You can’t operate legally or safely without them.
Luckily, the process is made simple by excellent online guidance provided by Texas state government agencies. In fact, the state of Texas has a whole website dedicated to licenses and permits – and it’s easy to use. Check out Texas.gov for all the permit information you’ll ever need.
Texas Franchise Tax
Finally, if you're starting a Limited Liability Company, a Partnership or a Corporation, you'll need to pay the Texas Franchise Tax. The Texas Franchise Tax is 0.75% on taxable margin, or 0.375% for retail or wholesale businesses.
To calculate how much tax you owe, you'll first need to know your total margin. Your margin can be calculated in a few different ways:
- Total revenue minus cost of goods sold
- Total revenue minus wages and employee benefits
- Total revenue times 70%
- Total revenue minus $1,000,000
You'll choose whichever of these methods results in the smallest number. If your total revenue is less than $1,130,000 or your tax due is less than $1,000, you don't have to pay any tax.
Once you know your total margin, you'll determine your taxable margin. Your taxable margin is your gross receipts in Texas divided by your total gross receipts everywhere you do business.
If your total revenue is less than $20 million, you can use the EZ Computation method for figuring out your tax liability. You'll just deduct your taxable margin from your total margin and multiply the result by 0.00331. Easy, right? Right.
How to start a Limited Liability Company (LLC) in Texas
Being an LLC limits, as the name suggests, your personal liability for debts. LLCs also get better taxation terms from the state.
The owners of an LLC are called members. A member can be an individual, a partnership, a trust, a corporation or any other legal entity. An LLC is governed either by a designated manager or managers, or by members.
To start an LLC in Texas, you'll first have to pick a business name. As an LLC, your business name must include the words "Limited Liability Company," "Limited Company" or an abbreviation of one of those phrases.
You'll need to make sure your business name isn't already taken. You can search registered businesses in Texas on the Secretary of State's website, or email the Secretary of State's office directly to enquire if your business name is available.
Once you've found an available business name, you'll fill out Form 205, the Certificate of Formation for a Limited Liability Company.
The form will ask for your business name, the full name and address of any managers (if the LLC is governed by members, you'll need to fill out the names and addresses of each initial member) and the name and address of the person organizing the LLC.
You'll also need to include the name and address of the LLC's registered agent. A registered agent is the individual or organization nominated to receive any legal documents on behalf of the LLC. You can choose an individual who resides in Texas, or a business that provides registered agent services and is authorized to operate in Texas. You can act as your own registered agent, but just remember you need to be available at all times to receive legal documents on behalf of the business.
While it's not a legal requirement, you'll probably also want to draft an operating agreement. This document sets out the ownership and management of your LLC, as well as what happens if the LLC is dissolved. We go into operating agreements in detail in our guide on structuring your startup.
Once you've filled out Form 205, you can submit it electronically, mail it or deliver it to the Secretary of State's office for filing. There's a $300 filing fee.
Taxes for LLCs
LLCs are pass-through entities, which means the tax liability is passed through the business to the personal income of the owners. While you'll need to report profits and losses on your Federal income tax return, there is no personal income tax in Texas.
You will, however, need to file a Texas Franchise Tax Report the year after your business is formed, and every year thereafter.
Starting a sole proprietorship in Texas
A Sole Proprietorship is the simplest business structure. Under this structure, you operate as the sole owner of the business. Sole Proprietorships are pass-through entities, meaning you'll report any profit or loss on your individual income tax return. Since Texas has no state income tax and Sole Proprietors don't have to pay the Franchise Tax, this is an attractive structure.
The downside of a Sole Proprietorship is that you'll be personally liable for any business debts or legal complications.
Starting a Sole Proprietorship in Texas is incredibly simple. You don't have to file any documents with the state government. You'll simply have to choose a business name (you can use your own name for this if you'd like). If you choose a fictitious business name, you'll be required to register it at the local county clerk’s office in the county where your business is located. The Texas Secretary of State website is a mine of useful information. You should check it out here if you don’t plan to incorporate.
If you plan to employ anyone, it's a good idea to register for an EIN. You'll also need to check to see if you need a license or permit to operate your business. You can find out on the Texas state government website.
Starting a Partnership in Texas
A Partnership is a business formed by two or more parties. These parties are most often individuals, but can also be businesses. It's similar to a Sole Proprietorship in that it serves as a pass-through entity. This means profits and losses are reported on the partners' individual income tax returns.
There are three types of Partnership structure in Texas: General Partnership, Limited Partnership and Limited Liability Partnership.
Starting a General Partnership in Texas
The process for forming a General Partnership in Texas is similar to forming a Sole Proprietorship. You aren't required to file any forms with the state.
To form a General Partnership, you'll choose a business name. If you choose a name other than the surnames of the partners, you'll need to register your trading name with the county clerk's office in the county where your business is located.
You should also draft a Partnership Agreement. While this isn't legally required, it's still a very good idea. A Partnership Agreement sets out the rights and responsibilities of each partner. You can read about them in detail in our guide to structuring your business.
General partnerships typically aren't subject to the Texas Franchise Tax. The exception is if one or more of the entities in the partnership is a business. General partnerships formed by individuals don't have to pay the tax.
A Limited Partnership is a structure where one or more entities serve as General Partners and one or more serve as investors in the business who don't take an active role in the business' operation. The Limited Partner's financial liability is limited to their investment, but they also can't withdraw their investment without consent of the General Partners.
A Limited Partnership is slightly more complicated to form than a General Partnership. As with a General Partnership, you'll first have to choose a business name. It must include the initials "L.P." to designate it a Limited Partnership.
Next, you'll need to file Form 207, the Certificate of Formation for a Limited Partnership. This form will require you to fill out your business' name, the name and address of your registered agent, the name and address of each General Partner and the address of your business' principal office.
Once you've completed Form 207, you'll file it with the Secretary of State's office. You can file online, mail the form or file it in person. There's a $750 filing fee.
While it's not a legal requirement, you'll also want to draft a Partnership Agreement.
Limited Partnerships serve as pass-through entities, meaning the business' income will be reported on the Partners' personal Federal income tax returns. They're also subject to the Texas Franchise Tax.
Limited Liability Partnership
A Limited Liability Partnership is a structure that limits each partner's liability to the amount they invest in the business. It also legally protects partners from any legal liability for the actions of other partners. Unlike a Limited Partnership, all partners in a Limited Liability Partnership can participate equally in operating the business.
To form a Limited Liability Partnership in Texas, you'll first choose a business name. Your name must include the phrase "Limited Liability Partnership" or an abbreviation thereof.
Next you'll need to complete Form 701, the Registration of a Limited Liability Partnership. You'll provide your business name, your EIN if you've already received one, the number of General Partners in the business, the address for the business' principal office and a statement of what type of business the Limited Liability Partnership conducts. Unlike other business structures, you won't need a registered agent.
Once you've completed the form, you'll file it with the Secretary of State's office, either online, by mail or in person. The filing fee is $200 per partner.
A Limited Liability Partnership's income is reported on each partner's individual Federal income tax return. LLPs are subject to the state's Franchise Tax. They're also required to annually file Form 713, the Annual Report of a Limited Liability Partnership. This form requires the same information as Form 701. There's a $200 filing fee.
Starting a Corporation in Texas
Corporations are more complex business structures, serving as entities separate from their owners. This means they're taxed as entities rather than passing through their tax liability to their owners. They also have the ability to issue shares to investors.
There are several different types of corporations, each with their own Federal tax and liability implications. We walk you through all of them in our guide on structuring your business.
To start a corporation in Texas, you'll first choose a business name. Your business name must include one of the following:
Next you'll need to take care of some internal business. You'll need to draft corporate bylaws. There's a great guide on that here.
After you draft your corporate bylaws, you'll need to choose a board of directors and hold your first board meeting to accept your bylaws.
Next you'll complete Form 201, the Certificate of Formation for a For-Profit Corporation. This form requires:
- Your business' name
- The name and address of your registered agent
- The names and addresses of the company's directors
- The total number of shares the corporation is authorized to issue
- The par value of each share (the face value)
- The name and address of person organizing the corporation
Once complete, you'll file Form 201 with the Secretary of State either in person, by mail or online. There's a $300 filing fee.
As we mentioned before, corporations are taxed as entities. That means you'll pay Federal corporate tax. Texas doesn't have a state corporate tax, but your corporation will be subject to the Franchise Tax.
Starting a Nonprofit in Texas
The process for forming a nonprofit is similar to forming a corporation, with a few extra steps to cement your unique status.
First, you'll need to choose a name for your nonprofit. Then you'll need to choose at least three initial directors for your nonprofit.
Next, you'll file Form 202, the Certificate of Formation for a Nonprofit Corporation. This form will include:
- Your business' name
- The name and address of your registered agent
- The names and addresses of the company's directors
- Whether or not the nonprofit will have members
- The purpose of the nonprofit
- The name and address of person organizing the nonprofit
Now, this is where the process gets a bit trickier. After you've filed Form 202 with the Secretary of State (there's a $25 filing fee), you'll need to apply for 501(c)(3) status with the IRS by filing Form 1023. This process can be very complicated, but the IRS has provided videos and tutorials on their website to help walk you through.
The filing fee for Form 1023 is $850, and the processing time can be 3–4 months. But once processed, you'll receive your Letter of Determination.
After you've received your 501(c)(3) status, you'll file Form AP-204, the Texas Application for Exemption. This is the form to exempt you from any state taxes. You'll need to provide your IRS Letter of Determination. You'll file this form with the Texas Comptroller. There's no filing fee.
While nonprofits have to file annual reports with the IRS, there's no requirement to file a report with the Texas state government. The Secretary of State may request a periodic report once every four years. If requested, you'll fill out Form 802, the Periodic Report of a Nonprofit Corporation. There's a $5 filing fee.
Protecting your business in Texas
Insurance, as in many other walks of life, is essential for business owners. Policies protect your assets, employees, and reputation in an unpredictable world.
General Liability Insurance in Texas
Every business should at least have this type of policy in place. It protects your business financially if there’s an accident that’s a result of your work or products. Not having this policy is like driving a car without insurance. Sometimes an accident can happen, no matter how careful you are.
Texas Workers Compensation Insurance
This insurance is designed to pay for the cost of medical expenses and treatments for an employee who gets injured at work. It’s compulsory for many business types, so find out if you need it here.
Professional Liability Insurance in Texas
Professional Liability policies are advisable. However, they’re essential if you provide financial or professional advice or consultancy services in Texas.
There are a lot of great resources for startups in Texas. Here are some helpful links:
This guide offers a rundown of all the funding programs the state runs for businesses small and large.
The Texas government provides a handy list of startup incubators, accelerators and programs throughout the state.
The Secretary of State's website contains information and forms to help you register your business in Texas.
Our 7-part guide walks you through everything you need to know to effectively launch your startup, from idea to execution.