How to Start a Business in Texas
Starting your own business is one of the most rewarding experiences you can have. Not only will it allow you to explore your creativity and bring your ideas to life, but it can also be a reliable source of income that gives you a high degree of flexibility. Itâ€™s no wonder that so many people are ready to take the leap into entrepreneurship, but starting your own business isnâ€™t easy. There are legal implications, financial considerations and marketing considerations that all need to be taken into account before making the leap. This guide will equip you with everything you need to know about starting a business as a sole proprietor or LLC in Texas. From writing a business plan and accounting for taxes to learning about local licensing laws and finding potential partners, this guide covers it all!
Step 1 - Choose a Business Idea
When starting a business in Texas, the first thing you should do is develop a tangible business idea. This can be based on the doctrine that it would be challenging to start a business with no idea of what you plan to sell or what you plan to do. If you are still new and have no business ideas, you can consult friends or consider what makes you happy.
For example, if you are a real coffee fanatic, you can consider starting a shoe shop. If you love attending parties, you can consider creating an event organizing company. The options are limitless. You only have to think outside the box to come up with a real and workable idea.
Step 2 - Write a Business Plan
Once you have your business idea on paper, the next step is to compile a business plan. A business plan should not scare you since it is the same plan your lecturer or professor asked you to write back in college. The concept is the same, with the only difference being that you are not compiling the plan for college grading or graduation purposes but doing it for your business start-up.
Writing a business plan is integral because it allows business-oriented people to come up with various workable ideas. When writing such a plan, consider it to be the backbone or foundation for your business. Additionally, a good business plan will win you grants from government and non-governmental entities that may be looking for a company to finance.
Step 3 - Select a Business Entity
The next and most crucial step when starting a business in Texas is to select a business entity. There are usually four different business entities you can choose from, namely Sole Proprietorship, Limited Liability Company, Corporation, and Partnership.
If you plan to start your business as an individual, you should consider selecting sole proprietorship as your business entity. A sole proprietorship is vital because it allows you to enjoy the full advantages of the business. The downside is that you will be fully responsible if the business goes south.
On the other hand, if you have friends or family members you have considered including in your business, you can opt for the general partnership entity. The general partnership entity is vital because you get the opportunity to share profits and losses as a group. When it comes to paying taxes, the partnership does not pay tax from the business income. On the contrary, profits and losses are paid or incurred through the business owners' tax accounts.
As the name suggests, a corporate entity is an entity where the business is solely based on corporation input rather than individual or partnership input. An advantage of a corporate entity is that the business owners' assets are protected from any emerging legal issues. However, the downside is that the compliance requirements and administrative duties are time-consuming and expensive.
When forming a corporation, always ensure that you have correctly filled the Certificate of Formation collected from the Texas Secretary of State. Additionally, one has to ensure that there is a board of directors in place, minutes are taken when a meeting is held, and fully registered agents act as the company's representatives. When it comes to paying taxes, you can choose between S-corporation and C-corporation.
However, it is vital to integrate the input of professionals who will help you decide on the corporation to implement for your business.
You may consider the Limited Liability Company entity if you are looking for a form of liability protection. This can be based on the fact that the company's liability does not fall on individuals but the business as a whole with a limited liability approach.
Additionally, the LLC entity does not have numerous burdens compared to corporate entities. Tax flexibility is also an important aspect to consider when choosing LLC as your business entity. This is because LLC entities are subjected to the state's tax collection protocols through the state's comptroller of public accounts.
In the case of Texas, the franchise tax is overseen by the Texas Comptroller of Public Accounts. In the case of a corporation, a Certificate of Formation must be filled and signed with the Texas Secretary of State. A filing fee of $300 must also be deposited for the LLC to be incorporated.
Step 4 - Register a Business Name
Once you have chosen your preferred entity, the next step is to register your business. If you have selected sole proprietorship or general partnerships, and you want to operate it under your legal names, you are not required by law to file.
You can go a step further and protect your companyâ€™s name and trademark to avoid its misuse. If you plan to open the business as an LLC or Corporation entity, you must pick a name for your company at the time of filing. However, if you have chosen a name for your company, you must file with the relevant authorities to be issued an Assumed Name Certificate. This is usually achieved through the U.S. Patent and Trademark Office.
Step 5 - Get an Employer Identifcation Number (EIN)
Before you can set your company to be operational, you must get an Employer Identification Number issued by the IRS. This nine-digit number identifies any business operating in the U.S., thus enabling IRS to collect taxes. If you have chosen to open your company as an LLC or sole proprietorship and hire employees in the process, you must get an EIN.
However, if you will be the only person operating the business, an EIN is not recommended. On the contrary, your SSN will be used by the government for tax collection purposes.
Also See: How to Apply for an EIN
Step 6 - Open a Business Bank Account
It is highly advisable to open a business bank account once you have fully registered your company. This is important because it will be much easier to operate your business as you will not be mixing your business and personal finances. When opening a business bank account, be prepared to provide the bank with your identifying information such as your driver's license, trade name certificate, SSN/EIN, certificate of good standing, and operating agreement.
Step 7 - Apply for Business Licenses and Permits
Texas Business licenses and permits are mandatory, more so if you plan to open a business entity through LLC, Corporation, and Partnership. However, licenses are different, and the type of license you will be issued will be determined by the type of business you plan to open.
For example, if you plan to open a tattoo shop or a massage parlor, you must produce a practice license before getting an operating license.
Step 8 - Find Financing
If you don't have sufficient capital to start and operate your business, you may consider applying for a loan. This is where an excellent and well-thought business plan comes into play. However, it is of the essence to bear in mind that even though a good business plan may be your lifesaver, you must be well-versed with the terms and conditions that come with these loans.
In the U.S., the Small Business Administration is mandated with providing loans and grants to small business owners. The amount offered is determined by the number of employees you plan to employ and the type of business entity you have chosen.
Step 9 - Hire Employees
Once your business is up and running, the next vital step is hiring employees. This step is crucial because it is through these employees that your business will either prosper or collapse. As such, it is advisable to hire employees based on their experience and educational background.
Another essential aspect you should consider when hiring employees is registering with state organizations such as the Texas Department of Insurance and the Texas Workforce Commission. These state entities will provide you with some of the requirements that you as an employer must always follow.
For example, your employees must be eligible to work in the country, they must be insured, submit their payroll withholding taxes, and have Social Security and Medicare benefits.
Step 10 - Obtain Business Insurance
Your business, just like your car, home, or health, should be insured against natural calamities, bankruptcy, or events such as fire incidences. Getting insurance for your business is not mandatory but optional.
However, it is highly advisable to protect your company through an insurance cover. Failure to do this solely means that you will be fully responsible for any losses or damages. Some states usually mandate professional liability insurance for business entities that offer services such as medical services.
Insurance is essential because it will cover any expenses that may emerge from lawsuits brought against your company by employees or government agencies, theft, or property damage.
Step 11 - Setup an Accounting System
If you want to keep your business afloat, you must consider implementing an accounting system. These systems are essential because they will give you an idea of your business is making and losing. This is vital as you will have the opportunity to improve on areas that need improvement.
If you are not versed in accounting, you can always hire someone who is versed. If you are versed in accounting, you may consider doing the financial balancing yourself, but you must be aware of the time and commitment that such financial obligations need.
By implementing an effective accounting system that brings together an accounting software and a CPA professional, you will minimize your probability of getting into trouble with the IRS for falsified filing of taxes.
Starting a Business in Texas FAQ
How much does it cost to start a business in Texas?
There are many factors that affect the cost of incorporating a Texas business. For example, a certificate of formation to Texas for-profit corporations requires a $300 filing fee. However, Texas nonprofit corporations only need to pay a $25 filing fee.
Do you need a business license in Texas?
Texas does not require a general business license. It is necessary to identify the required licenses, permits certifications, registrations, or authorizations for specific business activities at the federal, state, and local levels. Please refer to the Business Permits Office Handbook for more information.
How much does a LLC license cost in Texas?
Texas Secretary of State charges $300 for filing fees and a 2.7% convenience fee to file an LLC certificate of formation. If you want to reserve your LLC name before filing the Certificate, it will cost $40.
How do I get a vendor's license in Texas?
Online, you can apply for a Texas sellerÃ¢â‚¬â„¢s permit through the Texas Online Tax Registration Application. Or fill out the Texas Application for Sales and Use Tax Permit Form (Form AP-201) and mail it to the Texas comptroller at the address on the form.