Texas is undoubtedly a great place to start your business. It’s full of entrepreneurial spirit, has terrific tax benefits, and was placed No.1 in a 2019 report ranking the best states to start a business in. But how do you start a business in Texas? What are the intricacies and legal stipulations? And what services can you use to make the process of earning profit, money management, and tax-filing less daunting? In this article, we discuss all of this and more.
Starting a business in Texas? Follow these nine easy steps:
Starting a business is an exciting prospect, no matter where you do it. But that doesn’t mean you should speed ahead without dotting your I’s and crossing your T’s. Beyond all the fun stuff, there are still a number of legal matters and paperwork (boo tomato tomato) to sort out before you can call your business fully operational. That’s why we put together this guide, to make the legal stuff a little less scary and help you start doing what you really want to: running your business. Each step listed below will bring you closer to the finish line: your dream business being fully realized. From there, the sky’s the limit. So, let’s get into it!
1) Choose your entity type
The first step is to choose your business structure. This is important since your business structure determines the taxes you pay, your salary, and what kind of paperwork you will need to file as you go. In fact, this needs to be done before you register your business with the Texas Secretary of State, as there are different restrictions and liberties depending on your state, city, or county. Let’s take a look at all the options so you can decide which structure is right for your business idea.
A sole proprietorship is a business owned by one person. Some of the key features and benefits are:
- There’s legally no difference between the owner and the business itself.
- You work for yourself. For instance, a single freelance photographer could register as a sole proprietor. Basically, there’s nothing stopping you from being Employee of the Month every month. ;)
- It’s the easiest to digest as an applicant and to register for. But if you add another member to your team or create an LLC, you cease to be a sole proprietorship and will need to register for the appropriate option.
Limited liability company (LLC)
If you want the best of both worlds, an LLC gives you the luxury of being taxed as a sole proprietor but with the limited liability of a corporation. Here’s what this means for you as a business founder:
- You can start an LLC alone but also add as many (or as few) members and staff to your team as you want.
- There’s less paperwork and minute filing costs.
- How you pay yourself depends on what type of LLC you have. For single-member LLCs or partnership LLCs, you pay yourself through something called an “owner’s draw.” If you opt for your LLC to be treated as an S corporation or a C corporation, you must “hire” yourself as an employee and pay yourself a reasonable wage.
- Texas has its own requirements for how to set up an LLC; if you aren’t familiar with them, check out how to start an LLC in Texas.
A corporation is sanctioned by the state, run by a group of entrepreneurs (you cannot only have one member, like in a sole proprietorship), and is for profit.
- With this business structure, you get the benefits of personal liability protection, business security, continuity, and convenient access to your capital.
- The drawbacks are that it’s time-consuming, is doubly taxed, and has a lot of formal protocols to follow.
In short, corporations are a great option if you’re earning a certain amount of profit and have a team behind you. But it might not be the right move for a fledgling business owner, as profits are often not optimal to begin with. Moreover, once you register this way in Texas, your business will, of course, be treated as such.
In Texas, many non-profit businesses don’t have to file their businesses with the Secretary of State unless they are Veterans or Public Safety companies or are registering as corporations. This is because, in most cases, you have to register for charity funding status, which eliminates that necessity. To get into it, a non-profit corporation will file its certificate of formation as per the Texas Business Organizations Code, whereas a non-profit organization (not corporation level) does not. So it depends on your company’s needs.
What is a certificate of formation? In Texas, it’s called Form 205. It’s the document that an LLC organization must file with the Secretary of State in order to establish its creation officially. Corporations need to do it, and so do non-profit corporations and a couple of non-profit company types (listed above). Also, as you can probably tell from the name, non-profits are not permitted to distribute their profits to their members, employees, or founders.
2) Plan your business
Every business must assess and agree on its individual goals from the get-go, whether you do so alone (if you’re the only member of your business) or in agreement with your partners. From there, you can create your business strategy and figure out what your goals are. However, there are generally a few decisions to make before it can get going. Here they are:
Choose your business idea
The first and most important step is to pick your idea. Start with the general industry—what type of business are you going to run? Is it an online service platform? An art website? A business development company?
Once this is done, pick your niche, and figure out what you’re going to offer that’s different from your competitors. This is one of the most distinctive decisions you will make as a business owner—what do you offer that’s not already on the market or can be done better?
In no particular order of ranking, here are a few of the most lucrative business industries in Texas to get your creative juices flowing. Within each of these, there are a million unique ways to start a relevant business. It’s all about your individuality, vision, and determination.
1: Business services
2: Education and health
4: Financial services
7: Information and technology
Name your business
Every business needs a name. It needs to be concise, send the message of what your company offers, and will eventually be coupled with a catchy logo. Before you start, make sure you’re clear on Texas’s rules and regulations, as each business structure has distinct rules. For instance, if your business is an LLC, your name must contain “LLC” or one of the other abbreviations (LC, L.L.C, etc.) and must be distinct from any and all other businesses in the state. There are rules for every structure, so make sure you check and recheck before making a final decision.
Create a business plan
What is a business plan? It’s a solidified, typed (10-15 pages) plan of how you intend to achieve your business objectives. It’s a separate entity from a business strategy, which includes information on budget and profit and tends to be more thorough. Having a business plan creates a much more functional business model than going ahead without one. Imagine traveling in an undiscovered piece of land without a compass; that’s what it’s like to start a business without a plan. Remember, you can always change your business plan; nothing is set in stone, especially as your business and your goals evolve with time.
3) Register your business in Texas
Once you’ve crossed those things off your to-do list, you must register your business with the appropriate authorities. This is important as it establishes the existence of your business to the government, meaning that you’re officially operational. Sole proprietorships and partnerships require you to register and file your business name with the county clerk’s office. If you have written a thorough and encompassing enough business plan, then you will already have chosen your legal structure. You just have to take action on it.
4) Register for an Employer Identification Number (EIN)
Unless you’re a sole proprietor, you will need an EIN. An EIN is a number that is given to an organization to establish them with the IRS, mainly for tax filing purposes. This applies if your business structure is that of a corporation, if your business has employees, and for other reasons. If none of those reasons apply to you, you don’t need an EIN. The quickest and most convenient way to do this is to register online. But if you prefer the old ways, you can also do so via telephone or fax.
5) Register for taxes
Come rain or shine, taxes must be paid. Registering for taxes is how business owners make that happen. But how? There are a few methods, with the most convenient way being online through Texas’s government portal. When you go through the process, you will need to establish what kind of taxes you are registering for. In general, there are three major types of business taxes to know in Texas:
Sales and use tax
Sales and use taxes are used to legitimize the sales and use of your business’s services, products, or goods, and in Texas, they’re set at 6.2%.
Corporate income tax
This is a typical income tax where you must report your earnings and, from there, define how much taxes you’re liable to pay. All businesses need to do this.
Franchise tax is 0.375% for retail and wholesale and 0.75% for other businesses.
Conditions for sole proprietors
For sole proprietors, you don’t have to pay franchise taxes in Texas. But you do have to pay the federal income tax, which is estimated at around 22% of your business’s income.
6) Obtain licenses and permits
You don’t need a standard business license in Texas. That said, there are various licenses and permits required for different business types, and it’s important to take note of them and ensure you apply for the relevant ones. Depending on your business type and structure, you might need a specific business license to operate in Texas, fully and legally.
7) Check your business employer requirements
This is another area that depends on your specific type of business, whether or not you have staff, whether you employ staff with disabilities, and various other factors that might require you to oblige to state mandates. Here are a few examples:
1: Equal Employment
The Texas Workforce Commission is required to provide notice that it does not discriminate on any grounds such as race, gender, religion, and sexual orientation. To that end, each company established by it has to ensure the TWC that they are following this stipulation. That is what Equal Employment mandates do.
2: Safety mandates
This mandate requires you to ensure that all of your health and safety regulations are in check. Are the standard operating procedures being honored, is there a fire extinguisher on the wall? This is a must for any working environment that has multiple employees.
3: Labor necessities
You need to cover all bases in regards to your workforce. You may end up with employees in the future you didn’t have before, which will require you to take up some of the lesser employer statutes. For instance, if you employ somebody with a disability for that first time, that will require you to submit the appropriate form.
All that being said, the three most important types of insurance for any entrepreneur starting a business in Texas are as follows:
First, there’s business insurance. This is your protection against financial setbacks that may take place due to events out of your control, such as illness, bodily injury, or property damage, to name a few typical examples. In Texas, it isn’t mandatory, but it will keep you safe against outside claims if this happens.
If you have employees in your business, it’s advisable to sign up for workers’ compensation insurance. Likewise, property insurance is useful if you’re renting out a building as an office. Health insurance isn’t mandatory either, but if you do, you must make it available to employees working 30+ hours a week. It’s important to ensure you have the backs of your employees, so if you need to know more, read all about it here.
Texas Workforce Commission (TWC)
The TWC has a number of facilities available for entrepreneurs to upgrade their businesses and provide benefits to their staff. For instance, the Skills Development Funds can provide you with training programs that are catered to your specific business needs.
Similarly, Skills For Small Business is a robustly funded program dedicated to small businesses. The government has put $2 million into the program, with up to $1,800 available to small business owners for the purpose of training new workers, plus $900 for existing workers.
Then there’s the Work Opportunity Tax Credit Program. This benefit encourages business owners to hire “harder to place” candidates into their organization. The goal is to place more people in employment so that they can contribute to tax payments. It benefits the government by receiving more taxes, the business through tax benefits, and the workers by getting them places of employment.
The terms: business owners must select their candidates from specific populations in order for the program to select them.
The process goes like this: the company applies for the program, and then TWC will get back to them to define their targeted groups. Then, it’s a matter of finding and employing those people. This is an achievable tax break for any Texas business.
Every business owner is required to pay unemployment tax if they have over a certain number of employees, which is any number that exceeds zero. The reason for this is to support the state’s Unemployment Compensation Fund. In short, it’s a way for businesses that are functioning well to contribute to support funds. There are three kinds of employment: regular, domestic, and agricultural, and the liability of an employer’s taxing is different for each. Once again, depending on your business, you may be liable to pay more or less.
8) Get funding for your business
Need funding to get the ball rolling or to pay your employees? There are numerous resources in Texas that can help. Okay, don’t panic, but we’re about to use the L word now.
Just to make sure we’re on the same page here, we’re talking about loans. We know they have a bad reputation, but loans aren’t all dark and scary and don’t always take years to pay off. There are many loan options, including non-profit lenders such as Community Development Financial Institutions. In Texas, a few of your options are the BCL Of Texas, as well as LiftFund and PeopleFund. That’s just the beginning.
There are a number of small business grants in Texas that you can apply for and take advantage of. Getting a business grant from the state comes with many advantages. Aside from providing financial help, a state-funded grant gives your business a sense of professionalism and validity. Not all businesses get recognized by your local government!
There are also a number of federal grants which don’t need to be paid back, or if they do, it’s in a long-term fashion that can be factored into your business plan. There are other unique options you can try, like crowdfunding.
9) Set up banking and accounting
Business banking helps you to separate your personal funds from your business profits, which makes tax time and staying organized way easier. If you are worried about the usual issue of a business bank account costing you money, fret not! There are plenty of free banking options out there. When coupled with some effective accounting, a business bank account can make money management and tax filings less headache-inducing (and lower your blood pressure). When it comes to accounting, the best approach is always a user-friendly service that can simplify and manage the process.
Moving ahead with starting a business in Texas
Once that’s all sorted out, you’re past all the red tape! Marketing and promotion are equally important, depending on your goals. You may want to set up a website and social media handles and decide how you’re going to reach your customers. Whatever you choose to do next, your business is established, and it’s finally time to make your dreams come true.
If you need more guidance, consider consulting a professional resource like Wave Advisors, where you can ask your own personal, supportive (and non-judgemental) business and tax pro as many questions about starting a business in Texas as you want.
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The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.