How to start a business in Texas in 8 steps
Future small business owners living in the Lone Star State often have a wealth of enthusiasm for their startup. Whether you’re going to open an authentic Tex-Mex restaurant or you want to sell handmade goods through a home-based business, you have a multitude of options in front of you in this diverse and expansive part of the nation.
You may have already given some thought to your new business needs, but starting a company in Texas can be far more complex than many imagine. Let’s take a look at the 8 steps required to start a business in this state and identify the best business resources available for your new venture. We’re going to explore financial and operational aspects to consider and the state requirements you need to fulfill for you to open your doors.
1) Think about the type of business you want to start
Coming up with a new business idea is a feat in and of itself, but unfortunately, most budding entrepreneurs need more than creativity to enjoy longevity in their industry. Before you start looking at retail spaces or even coming up with a business name, we recommend that you complete some market research.
Who will your competition be? What’s gone right for them, and where did they go wrong? Sometimes, new business owners believe they are immune to common challenges solely because of their passion, but this fallacy can be expensive. Ask yourself if you’re prepared for all of the ups and downs that come with this venture — mentally, emotionally, and financially.
It’s important to have big dreams because entrepreneurship might not be right for you if you don’t. At the same time, being realistic about your goals is an important part of owning a small business. Individuals who are confident that this is the right path for them have quite a bit of work ahead of them, with the potential for even greater rewards.
2) Set up your legal structure
Every Texas business once went through the process of determining its business structure. You have at least six options to choose from, each with its own set of benefits and considerations, which are largely financial in nature:
- Sole proprietorship: Perhaps the easiest way to start a business in Texas, this type of structure is intended for situations where only one person owns and runs the business. Sole proprietors do not have employees and do not share any profits or incur any debts in conjunction with anyone else. If you decide to use an assumed name — a moniker used for your business that differs from your legal name — you’ll need to file a DBA certificate with the local county clerk.
- General partnership: Any business entity run by two or more individuals can be formed as a general partnership, with profits and losses shared among these parties. This type of organization may also use a DBA if they so desire. It’s important to note that both sole proprietors and general partners do not need to file formal documentation with the Texas Secretary of State; however, these individuals are held personally responsible for any debts incurred by the business.
- Corporation: Larger businesses are often formalized as corporations with their owners required to file a certificate of formation with the Texas Secretary of State. Corporations are more complex in nature with shareholders and directors rather than traditional “owners.” An array of documents, including bylaws and operating agreements, are often created under this type of structure. Some groups may also choose to function as an S corporation, an election noted with the IRS.
- Limited Liability Company (LLC): A blend of both a partnership and a corporation, an LLC is a popular choice for Texas business owners. It’s perhaps one of the more flexible types of business structures and doesn’t require the same type of reporting as a corporation. An LLC protects the owner’s personal assets should the business incur debt and can be managed by a board of directors if desired.
- Limited Partnership: If you’re interested in starting a Texas business but aren’t in a position to take on much risk, a limited partnership may be a great option. While you’ll still get to enjoy the benefits of having a business partner without having to file much in the way of official paperwork, you’ll also have increased liability protection. Individuals in a limited partnership are not held responsible for business debts like in a general partnership.
- Limited Liability Partnership: Similar in design to a limited partnership, a limited liability partnership or LLP allows all partners to take equal responsibility in managing the small business. Unlike a limited partnership, where one partner is considered a general partner and the other a limited partner, LLPs are meant to reflect a “50/50” model of ownership.
Some small business owners may find that a nuanced version of one of these structures (like a nonprofit) is more appropriate to fit their specific business goals. Ultimately, entrepreneurs must take the time to formalize their venture in a way that suits them best and develop a general business plan. There are many aspects to consider, from financial milestones to operational needs, and putting everything down on paper is your best chance for success.
3) Name and register your business
All aspects of opening a business in Texas are equally important, but there’s almost nothing that’s longer-lasting than the name you select for your startup. Depending on the business structure you select, you may have a range of options, or you could be limited to using your own name as your business name. Sole proprietors, for example, typically operate using their legal name unless they’ve filed a DBA, allowing them to use a different moniker.
General partnerships must include the legal last names of all owners involved, while both LLCs and corporations have to follow specific state guidelines. Neither of these entities can use a name that could be confused with a government agency or one that’s already in use by another organization. LLCs must include a notation such as LLC, Limited, or Ltd., while corporations must use the phrase corporation, company, or incorporated.
Once you’ve settled on a name for your small business, you can use the taxable entity search on the Texas Comptroller of Public Accounts website. As long as your desired name isn’t being used already, you can register your business with the Texas Secretary of State. Different documents may be required depending on the structure you select.
4) Apply for licenses and permits
Many business owners are under the impression that obtaining business licenses is a must, but, unlike other states, there is no actual statewide licensing system in Texas. Most organizations must apply for a Sales Use and Tax Permit, particularly if you rent property in the state or sell services or products in which sales tax can be applied.
Even if you work remotely in a home-based business somewhere else, but you sell products in Texas, you’ll be responsible for obtaining these permits. Unlike other types of permits, there is no filing fee required, and you can complete the application process fairly easily online. It should be noted that you cannot apply for a Sales Use and Tax Permit if you are a sole proprietor but do not have a Social Security Number.
Depending on the type of business you want to open, you may need to apply for specific permits from the Texas Department of Licensing and Regulation, located in Austin. Barbers, electricians, towing operators, and a wide range of other professionals should fully explore the permits needed before they formally start their business.
5) Choose a location
There are a lot of perks that come with owning your own business, including setting your schedule (to a certain extent), determining how you want to market yourself, and choosing a brick-and-mortar location that’s convenient for you. While many entrepreneurs like to start with this step and feel that securing space demonstrates their momentum, it’s not always the best place to begin.
You can keep your eyes out for a prime retail spot while you work on your business development and know that there’s no rush to move your operations to a storefront. Many entrepreneurs are very successful in running home-based businesses, but of course, certain industries will necessitate that you rent a space as soon as possible. Figure out what’s right for you and your business before taking this step, as it can be an expensive one.
6) Open a bank account and prepare for future taxes
Opening a small business in Texas certainly keeps you busy on the paperwork front with a range of financial aspects to consider and several tasks to complete. If you haven’t already applied for an employer identification number, or EIN, from the Internal Revenue Service, now’s the time. Sole proprietors may use their social security number instead of an EIN, while most other businesses will require this number when filing their tax returns.
It’s smart to get yourself ready with a business bank account before you officially start your business as well, as it not only allows you to separate your business income from your personal funds but also makes it easier to pay company expenses without mingling money. Some opt to open a business credit card at this time, too, as there can be great deals, including cashback and points toward purchases.
Entrepreneurs can certainly enjoy their day in the sun once profits start rolling in, but it’s recommended that you keep in mind your business tax obligations right from the start. In Texas, most companies will be responsible for paying a franchise tax each year along with your federal taxes. Thankfully, the Lone Star State does not require that you pay state taxes.
7) Purchase business insurance
You might be tired of filling out paperwork at this point, but Texas entrepreneurs can’t lose steam at this important step. For most types of business structures, you must purchase small business insurance to offer you peace of mind and protect your personal assets if something unexpected happens.
You’ll have several options when it comes to your policy, including workers’ compensation insurance (in the event an employee gets hurt on the job), commercial auto coverage (similar to personal car insurance but this one’s for your business vehicles), and general liability protection (for the random circumstances that no one can plan for).
8) Create a marketing plan, hire employees, and more
Some Texans may find that this final step is optional, depending on the industry you’re in and the type of business you’ve created. Others may want to open up their retail doors and see how things go before they dive head-first into all things marketing and beefing up their workforce by hiring employees. Again, as the business owner, you get to decide what’s right for you.
When it’s all said and done, you should be proud that you made it to your first day in business, as some individuals find the paperwork involved in starting a business to be too overwhelming.
While you’re giving yourself a much-earned pat on the back, make sure you visit Huckleberry to explore your small business insurance needs. Startups can get a quote in about 5 minutes and complete everything online, making your life just a little bit easier.