The Economics of Starting a Business in Texas

There’s a lot to like about Texas. The abundance of tacos, for one. But perhaps more important is the state’s staunch support of its business community. With the exception of Delaware, there may be no better place to start a small business than Texas, which has the advantage of the nation’s second-largest population and a number of fast-growing metropolitan areas.

Texas’ support for small business in particular is evident in its low business licensing fees, its lack of red tape, and an abundance of relatively cheap real estate. Few states can boast a similar lack of regulation that lets businesses be born almost as soon as they are conceived, with only a small out-of-pocket investment.

For Lone Star State residents (and even out-of-state residents) interested in starting a business, the path ahead is relatively straightforward. Using the state’s Small Business Handbook as a guide, let’s review the economics of starting a business in Texas.

Determine Your Business Structure and Name

You need to choose the type of legal, for-profit entity you want your business to be, which depends on a few factors, including what kind of business you’re starting, whether you’ll have employees, and your comfort with liability. Some structures are free to register, others have a low fee and are subject to the state franchise tax.

Some of the most common choices include:

Sole proprietorship: The most common and simplest form of business structure, a sole proprietorship is perfect for one person, owning all the business assets, who wants to engage in business activity. This person is 100% liable for the business. Their sole proprietorship assumes their name, unless they want to create a “DBA certificate” to give it another name, to be filed in all counties where business is conducted. These structures are not subject to the state franchise tax.

General partnership: Similar to a sole proprietorship, but it’s for two or more individuals. It’s a separate business entity from those people, but creditors can still hit up the partners’ personal assets to satisfy debts and liabilities. They are not subject to state franchise tax.

Limited liability company: An LLC is created by filing a certificate of formation with the Texas secretary of state. It’s an unincorporated business entity with more flexibility, providing owners with limited liability and pass-through tax advantages. LLCs are subject to state franchise tax, and the certification of formation for an LLC is $300. This should not be confused with a limited liability partnership, which is a general partnership registered with the Texas secretary of state and costs $200 for the certificate of formation per general partner.

For-profit corporation: “Corporations are people too.” It’s true: Corporations are people with limited liability, centralized management, perpetual duration, and ease of ownership transferability. Owners of corporations are shareholders, and managers of the business are directors. For-profit corporations must register with the Texas secretary of state, must pay a filing fee for the certificate of formation of $300, and are subject to a state franchise tax.

If your business was formed in a state or entity other than Texas but you want to “transact business” in the state, you need to file an application for registration with the Texas secretary of state as a foreign entity.

And here’s an obvious but necessary reminder: You need to choose a business name. If you open a sole proprietorship, your name can be the business name—otherwise, you need an Assumed Name (which comes via the DBA certificate). Give your name a lot of thought: It’s hard to change it up in the middle of your company’s lifespan.   

Request an Employee Identification Number

An EIN, or federal tax identification number, is the business equivalent of a social security number and is used to track your business dealings. It’s useful for establishing business credit, opening business checking accounts, and, if you have employees, filing their tax withholdings. You can register for your EIN with the IRS here.

An EIN is free to obtain; you can also contract a third-party like LegalZoom to ensure you’re 100% compliant with the law, including getting your EIN for you.

In addition to understanding your federal tax responsibilities, you also need to research your state and local taxes. The Comptroller of Public Accounts collects various state taxes—find out what they are here. The comptroller also imposes and collects franchises taxes, though most small businesses are exempt.

Business inventory tax is assigned to businesses that own fixed assets, to be paid to your local county appraisal district. You’ll want a quality inventory and fixed asset management system to ensure you know exactly how much you invested (and thus, what you’ll have to pay taxes on) in your equipment and machinery, if applicable.

Acquire Business Licenses and Permits, and Pay Necessary Fees

Texas doesn’t require companies to buy a “general business” license. But depending on the type of business you open, you might need a specific license or permit. Check out the Texas Department of Licensing and Regulation to see if your specific profession qualifies. If you’re unsure of what you need, contact your local county or city government to double check any additional requirements.

A variety of small fees are associated with obtaining various business filings and trademarks, such as a change of registered agent or a limited partnership periodic report. The full list can be found here—it works as a good checklist when starting out.

Check on Your Business Employer Requirements

This is specific to the type of business you open, including whether you have employees, but there are various labor, safety, and tax obligations to satisfy, too, such as federal and state mandates like the Americans with Disabilities Act, Equal Employment, and safety, wage, and labor requirements. You might want to hire a business or tax attorney to make sure you’re following the law here.

You’ve got a few other economic hurdles to clear as you start up and begin running your business in the state of Texas, particularly if you have employees. Here are a few of the most important—but be sure to refer to the full state handbook if you have further questions:

Insurance

• Texas doesn’t require most private businesses to have workers’ compensation insurance, though those that do obtain helpful legal protections, such as immunity from lawsuits by injured employees. Those without workers’ comp must also file an annual notice with the Texas Department of Insurance.
• Commercial property insurance, such as tenant coverage while renting or leasing a building, that will insure your on-premises property, is highly recommended.
• Offering health insurance isn’t a requirement for small employers in Texas, but those that do offer it need to make it available to all employees working 30 hours or more a week, year-round. Insurance companies usually require 75% of eligible employees to participate in their health plan. Note that the Patient Protection and Affordable Care Act requires all small employer group plans to cover essential health benefits like emergency services and prescription drugs. More information on small employer health care can be found here.

Texas Workforce Commission

The Texas Workforce Commission (TWC) and 28 local workforce development boards have teamed up to form Texas Workforce Solutions, to provide support services and administering unemployment benefits and tax programs. A few services to keep in mind:

• Skills for Small Business provides training funds for businesses with fewer than 100 employees—$725 for full-time existing employees and double that amount for full-time, new employees to aid in upgrading skills, preparing new hires, and increasing competitiveness. Training is also available at local colleges.
• Skills Development Funds are collaborative training programs customized to specific business needs. Companies can apply for this fund grant and customized curriculum.
• The Work Opportunity Tax Credit Program offers a tax credit reducing the federal tax liability of employers if they hire someone from target groups, such as SNAP recipients, ex-felons, veterans, and residents of rural renewal counties.

Unemployment Tax

The Texas Unemployment Compensation Act requires “liable employers” to pay unemployment tax. Most of the business structures discussed above fall under this category; non-liable employers include those who hire only independent contractors rather than full-time employees, and those whose employees are paid through a professional employer organization.

Once wages are paid out, employers need to register with the TWC within 10 days of becoming liable for the state’s unemployment tax.

Third-party Resources, Programs, and Lenders

You don’t have to go it alone in Texas. A number of state and federal resources, such as the U.S. Small Business Administration, offer business advice, low-interest loans, grants, and much more. There programs are geared toward helping veteran-owned, minority-owned, and women-owned businesses, and they’re worth exploring if you qualify.

The Small Business Handbook also recommends exploring avenues for finding working capital, such as nonprofit lenders, the Lift Fund, People Fund, BCL of Texas, a number of local credit unions, and alternative lenders.

A lack of working capital is often cited as one of the biggest issues small business owners face when starting up. Don’t leave home, or start a business, without it.

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If you’re a Texas resident interested in starting a small business in your home state, you’re definitely in luck: The barrier for entry is low and the number of resources at your disposal is high.

It may be really, really hot down there in the summer, but that’s a small price to pay for getting your foot in the door of the small business world and keeping it there.

Texas appears to have a vested interest in helping you succeed—don’t take that for granted. It’s hard enough to stay afloat in today’s economy, and a state government that has your back is a benefit few should turn down.  

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from Fundera Ledger https://www.fundera.com/blog/how-to-start-a-business-in-texas