How to start a business in Texas
They say that everything is bigger in Texas, and while your big idea may be to start a small business, the Lone Star State offers a vast population of potential customers to keep your lights on and turn a handsome profit.
Texas is arguably one of the best locations for your new small business or startup with many entrepreneurs choosing major cities like Dallas or Austin to set up shop. With a diverse economy, a young and talented labor pool and impressive tax incentives, what more could you want?
But before you can build a fruitful enterprise, you'll need to understand how to build a legal one. Luckily for you, learning how to start a business in Texas and how to take care of the fine details starts right here.
What are the steps to opening a business in Texas?
Step 1: Develop your business idea
It's likely that you already have an idea for a business, and determining how to start a business in Texas is next on your to-do list. But it's important to note that your business idea should be fully fleshed out before you get started.
This means taking care of a few essential tasks before heading out into the street with a hope and a prayer (or a megaphone):
- Research your audience to understand their needs and desired outcomes.
- Identify how your product or service will serve as a solution to your audience.
- Mold the result into a sustainable business idea and seek out honest feedback.
Feedback is critical, even if some people think you're crazy for venturing out from the norm. Ask for honest feedback from trusted advisors such as your spouse, family, friends and existing business owners in similar industries.
Step 2: Create your small business plan
When starting a Texas business, the force driving you forward is your vision of success, right? Well, if success is the driving force, your business plan is the roadmap that you'll craft strategically to make it happen.
Every business needs a business plan, and producing a well-written plan will enable you to attract partners, secure funding and help you achieve sustainable profits.
Your business plan should tell the whole story of your business, from outlining your goals and objectives to describing how you'll achieve them. This means including details about your financials, marketing strategies, and operational structure.
The more you focus on what to include in your business plan, the more robust it will be. This will also make it easier to follow your plan as you progress. As a rule of thumb, all business plans should include:
An engaging overview of your business plan that outlines your unique selling points and describes what your business is all about.
A description of the legal structure of your business, where it's located and any relevant company history.
The purpose of your business, its core values, the goal you're setting out to achieve and the passion behind the idea.
Information about your target audience, geographical location, demographics, competition and relevant industry trends.
Details about the business owners and others involved in your company if you plan to have employees or partners.
Products and services
A description of the products or services that your business sells, as well as information about manufacturers and suppliers.
Financials and funding
Every financial detail you can muster, including revenue projections, expenses, funding requirements, and financial risk assessments.
Sales and marketing plan
Details about which marketing channels you plan to use (social media, local newspaper), and any planned promotional strategies or collaborations.
Anything that doesn't fit into the above sections, such as customer surveys, permits or licenses that you've obtained, or branding mockups.
Step 3: Secure necessary funding
Purchasing inventory, leasing commercial space and outfitting a storefront all require dedicated capital. If your business needs a little extra (or a lot extra) to get off the ground, you'll need to consider your funding options.
Borrowing from family and friends or shopping your business plan around to local banks might not be the best option as you could find yourself ruining relationships if things were to go sideways.
That's why countless small business owners choose to pursue dedicated capital lending solutions that are designed specifically to aid new small businesses with startup costs.
How to get a small business loan: The entrepreneur's handbook
These kind of solutions can give even startup businesses access to cash amounts from as low as $5,000 to as high as $5 million, and lines of credit to help ease the pressure of operational expenses until you're making steady sales.
This step is important because understanding how to start a business in Texas with the right funding will ease the initial stress and give you more peace of mind so you can focus on running your business.
Step 4: Choose your business name
Choosing a business name is an exciting process because you are deciding how your business will be represented in your local community and how it will be perceived by your customers. For this reason, deciding on a name that accurately reflects what your business does and who it serves is essential.
You may have already chosen a name for your new small business, but unfortunately, calling dibs doesn't carry any legal power in Texas (or anywhere, for that matter). Your business will require a unique name that hasn't been registered by any other business in your state. It will also need to be different enough from any similarly named businesses that operate in the same industry.
To register your business name, you'll need to visit the Texas Secretary of State website and create an SOSDirect account. Search for your chosen business name to see if it's available. There is a $1 fee per search for this service. If you aren't ready to form your legal entity just yet, you can reserve your business name for a fee as well.
Once your name has been registered or reserved, a good piece of advice is to seek out a website domain name that your business can use to reach customers online.
Everybody is on the internet these days, and ensuring that you have a reputable-looking domain name is a crucial step in building a trustworthy online presence.
Step 5: Identify your business structure and business entity type
Choosing a business structure is perhaps the most critical component of learning how to start a business in Texas. Your business structure can have a direct impact on your success, as the business entity type you choose will impact how your business operates, what regulations you must follow, and how your small business will be taxed.
A sole proprietorship is an unincorporated business typically owned by a single individual. This type of business is the same as self-employment, where the owner may either use their legal name or register a trade name to do business locally. All profits generated by the business are reported on the owner's personal income tax return.
Unlike the other entity types below, sole proprietorships do not offer any liability protection, meaning that any assets are the property of the business owner, not the business. If a tough financial situation arises, the business owner may have to sell personal assets to pay their debts.
Limited liability company (LLC)
A limited liability company, or LLC, is the most common choice for those looking to start a small business in Texas. LLCs offer pass-through taxation, meaning that all profits are distributed between the owners and taxed as personal income.
But perhaps one of the biggest selling points of an LLC is that it offers limited liability protection to its owners. This provides a separation between the owner's personal assets and assets owned by the business, meaning that the owner's assets (such as their primary residence) are safe in the event that the business is sued or owes significant debts to creditors.
Subchapter "S" corporation (S corp)
You'll rarely hear an S Corp referred to as a Subchapter "S" Corporation, but that's how it's written in the Internal Revenue Code, just so you know. S Corps can enjoy the benefits of limited liability protection, issuing stock (only one type), and can have up to 100 shareholders. But they also have the flexibility to determine how they are taxed.
For example, an S Corp may opt for pass-through taxation like an LLC where all profits are reported as personal income tax by the owners. This enables them to avoid the double taxation that comes with forming a C Corporation.
Subchapter "C" corporation (C corp)
C Corps are often larger companies that plan to issue stock and trade shares publicly by means of an Initial Public Offering (IPO). Big corporations with more than 100 shareholders that trade on the National Association of Securities Dealers Automated Quotations (Nasdaq) or the New York Stock Exchange (NYSE) are C Corps.
C Corps have limited liability protection, can be owned by whoever stock is issued to (investors, various institutions, and the general public), and have a lot of rules to follow, such as electing a board of directors and holding annual meetings.
C Corps also face double taxation. When tax time comes, C Corps file corporate tax returns based on the profit they earn. After this, the shareholders are issued dividends which they must then report on their personal income tax returns.
Nonprofit organizations, like the other entity types listed here, have limited liability protection—but they aren't in business to make a profit for their owners or shareholders. They are instead focused on building, creating, or changing something in the interest of the general public or a specific group or cause. Any profit generated by a nonprofit organization must be put back into the company to further its mission.
An important note here is that nonprofit organizations are exempt from paying federal taxes on any profit that is earned while conducting activities that relate to the goal or purpose of the organization. There's a lot of paperwork involved, and pristine records must be kept to avoid penalties.
Step 6: Register your small business in Texas
To register a small business in Texas, you'll need to choose a registered agent, file articles of organization (sometimes called a certificate of formation or other similar names) with the Texas Secretary of State, and pay the state fee for incorporation. The fee to register as an LLC or corporation in Texas is $300.
What is a registered agent?
A registered agent is a designated party that is responsible for receiving legal correspondence and compliance-related documentation on behalf of the company. Your registered agent must be a resident of Texas and use a physical address (P.O. boxes are not accepted). You can designate yourself or another member of your company to be your registered agent, but there are third-party agent services that will ensure important correspondence is always delivered on time.
What are articles of organization?
Articles of organization, articles of incorporation, and certificate of formation all refer to the same legal documents that you'll provide to the state of Texas when you form your legal entity. These documents establish your business within the state and detail the rights, responsibilities, liabilities, and other legal obligations of your business and its owners.
Articles of organization must include specific details that will be reviewed by the office of the Texas Secretary of State. These include:
The name and address of the business
The primary activities and purpose of the business
The name and address of the designated registered agent
The names of all members, owners, managers, and directors
You can discover filing options and information as well as file your articles of organization on the Texas Secretary of State website using its SOSDirect interface.
Step 7: Apply for an Employer Identification Number (EIN)
If your business plans to open business bank accounts, hire employees, or operate as a corporation, you'll need to apply for and obtain an Employer Identification Number (EIN). An EIN is a unique federal tax identification number that is used by the IRS to identify your business.
Obtaining an EIN can help you prevent identity theft, avoid tax penalties (if you were supposed to have one but didn't get one), establish business credit for your company (and therefore expedite business loan applications), and build trust with your vendors.
Obtaining an EIN is free, and if you apply online with the Internal Revenue Service (IRS), you can receive your EIN immediately.
Step 8: Open your small business bank account
Keeping your business finances separate from your personal accounts will save you a lot of headaches as your business grows, and it's a simple process to complete. As mentioned in Step 7, obtaining an EIN will enable you to open specific business accounts with your local bank of choice where you can keep track of all transactions that are made to keep your business running.
If you opt to use personal credit cards for business expenses, it could make things messy when it comes to tax time and you run the risk of missing out on deductions for business expenses. If you're hiring employees and have payroll to worry about, a business bank account is a must.
Step 9: Obtain your business licenses and permits
Each type of business that operates in the state of Texas must follow specific rules in order to remain compliant. While the state itself doesn't require a general business license, your municipality likely will, and they may require you to obtain additional permits that certify your legal permission to conduct certain business activities and operations in your area.
There's no one-size-fits-all for business licenses, so to obtain one, you'll need to visit your municipality's website for information on how to request your license, as well as the types of licenses and permits required for your specific business type.
Step 10: Understand your Texas business taxes
Business owners in Texas enjoy comparatively low taxes compared to other states, and of course, there's no state income tax on personal income. But it's important to understand the tax obligations that you do have in order to remain on the right side of the IRS.
Sales and use tax
Texan business owners are required to pay a 6.25% sales tax on physical products sold, as well as on some specific services including insurance, laundry and garment services, security services, and a whole list of others. Use tax is also 6.25%, and applies to businesses that purchase products that are sold outside of Texas from retailers or distributors that do not charge Texas sales tax.
The Texas franchise tax is a tax paid for the privilege of operating your business in the state. The rate depends on your revenue, and your business will be required to file a franchise tax report and TX Public Information Report with the state each year.
Frequently asked questions
How much does it cost to start a business in Texas?
The state fee to register a small business with the Texas Secretary of State is $300.
How do I start a self-employed business in Texas?
You can start a self-employed business or sole proprietorship in Texas without the need to file any legal paperwork. As long as you track and report your income and pay personal income taxes, you can operate your sole proprietorship as soon as tomorrow.
How much does a business license cost in Texas?
Is it legal to run a business from home in Texas?
Texas doesn't prohibit business owners from running their operations out of their homes, though each local municipality may require a specific license or permit to allow home-based businesses. You may also be required to obtain liability insurance if you'll have customers visiting your home.
Start a small business in a big state and reap massive rewards
Building a small business or startup should be an exciting journey, and understanding how to start a business in Texas will offer you peace of mind as you work through the necessary steps to forming your legal entity in this great state.
Looking for more information or support as you start your journey toward becoming a successful business owner in Texas? Take the Start-Up Path for Entrepreneurs. It’s a resource built for dreamers and go getters who have a desire to create something great but may not have the experience or know-how to go about building a thriving business.
The Start-Up Path is a free course, jam-packed with interesting content about how to start and grow a business, including interactive worksheets, planning tools and advice from real entrepreneurs who have been in your shoes. Too busy to read tips or watch videos? You’ll love our Entrepreneur’s Studio podcast featuring been there done that advice from inspirational entrepreneurs like Danny Meyer, founder of Shake Shack, Tim Tebow, former NFL quarterback and philanthropist, and the duo behind the up and coming Sugar + Spoon cookie dough food truck.
If you’re looking for technology solutions for your business, Heartland can help with that too.
Heartland is the point of sale, payments and payroll solution of choice for entrepreneurs that need human-centered technology to sell more, keep customers coming back and spend less time in the back office. Nearly 1,000,000 businesses trust us to guide them through market changes and technology challenges, so they can stay competitive and focus on building remarkable businesses instead of managing the daily grind. Learn more at heartland.us