How to Start a Business in Texas
Do you plan to start a business in Texas? Many people look forward to starting a business in Texas because there’s no personal income tax and most businesses won’t need to pay Texas’s Annual Franchise Tax. Selling a product or service without filing formation documents makes you a sole proprietor. But, being a sole proprietor doesn’t grant you personal asset protection. If you want asset protection, knowledge of tax burdens, and greater privacy, follow our complete guide.
Ready to Start a Business in Texas?Let's Get You Started
Pick a Business Structure
Name Your Business
File Formation Paperwork
Draft Internal Records
Get Texas Business Licenses
Organize Your Money
Get Business Insurance
Understand Your Tax Burden
Build Your Business Website
File Texas Annual Franchise Tax Report
Apply for Trademarks
1. Pick a Business Structure
When you start a business without filing formation paperwork, you’re a sole proprietor. If you start a business with a partner and without filing paperwork, you’re a general partnership. With both business types, your business is you—which means that the business’s debts are your personal debts. If someone sues the business, your home, car, and savings are at risk.
LLCs and corporations are popular entity types for people who want personal asset protection.
Texas Limited Liability Company (LLC)
LLCs offer you flexibility in addition to asset protection and privacy. With an LLC, you’re taxed as a pass-through entity by default but you can elect to be taxed as an S or C Corporation, too. You can run the LLC yourself, or have members or managers run it. To start a Texas LLC, you’ll need to file paperwork with the Texas Secretary of State.
Corporations are similar to LLCs in that they offer asset protection and privacy. However, corporations are not as flexible as LLCs. Shareholders own corporations, but the officers manage the day-to-day tasks of the business. Corporations are also required to appoint a board of directors. Investors can buy, trade, and sell stock in a corporation and share in its profits. Investors are likelier to fund a corporation because corporations can offer stock options. To form a Texas corporation, you’ll need to file paperwork with the Texas Secretary of State.
Can an LLC be just one person?
Yes! A one-person LLC is called a single-member LLC. Single-member LLCs are one of the most common kinds of businesses in the country. For the most part, single-member LLCs are just like multi-member LLCs, but there are some slight differences in how they file taxes and protect personal assets.
Read all about Single-Member LLCs.
What about a Texas nonprofit?
You may want to start a business that serves the public or raises awareness about a social issue like domestic violence. If you want your business to help others, you can start a Texas nonprofit corporation. You can get started by filing a Certificate of Formation—Nonprofit Corporation with the Secretary of State.
Starting a nonprofit? Check out our Nonprofit Guide.
2. Name Your Business
Naming a business is an important step to getting your Texas company off the ground. If you’re a sole proprietor or general partnership, your business name is your human name (unless you get a DBA). But if you’re an LLC or corporation, you can choose your own business name as long as it’s available and follows certain state guidelines. For example:
- You must include the appropriate business identifier (e.g., “LLC” or “Ltd. Liability Co.” for a Limited Liability Company and “Inc.” or “Corp.” for corporation).
- You cannot mislead the public about your business’s purpose by choosing words that aren’t a part of your services (e.g., using “hair salon” if you’re a bakery).
- You cannot include government identifiers in your name like “FBI” or “bank” unless you get approval from the appropriate agency.
Find out if your desired name is available in Texas by searching Texas Taxable Entity Search.
Can I reserve a business name in Texas?
Of course! You can reserve a business name by filing an Application for Reservation or Renewal of Reservation of an Entity Name ($40) with the Texas Secretary of State. Your business name is reserved for 120 days. If you wish to renew your reservation, you must submit an additional reservation form at least 30 days before the end of the 120 day period.
What's a DBA?
A DBA is a name your business uses other than its legal name (which is the name you put on your formation documents). In Texas, DBAs are known as Assumed Names. If you’re a sole proprietor or general partnership, then your business name will automatically be your human name. So if your name is Janet Prescott, then name of your business will be Janet Prescott—unless you get a DBA. Sole proprietors and general partnerships often use DBAs when they want their business name to sound more innovative or have more privacy. LLCs and corporations might also want a DBA if they’re changing their brand or moving to a different state where their legal name is already taken.
What about trademarked names?
It’s a good idea to check with the US Patent and Trademark Office (USPTO) to make sure your business name hasn’t been trademarked by someone else. If it has, and you use it anyway, there’s a chance that the business could come after you for infringement.
3. File Formation Paperwork
If you’re a sole proprietor or general partnership, you don’t need to file formation paperwork with the Secretary of State because you and your business are one and the same.
However, if you want to start a Texas LLC or corporation, you must file paperwork with the Secretary of State. Filing paperwork takes your LLC or corporation from being an idea to officially existing.
- To form a Texas LLC, file Texas Certificate of Formation — Limited Liability Company.
- To start a Texas corporation, file Texas Certificate of Formation — For Profit Corporation.
These forms require listing a Texas registered agent to handle your legal mail.
Note: The information you list on your formation documents will become part of the public record. That means the names and addresses you provide will be posted on the Texas Secretary of State website for anyone to find.
How do I keep my information off the public record?
If you want to keep your private information off the public, you’ll need a third-party registered agent who will list their address on the public record instead of your own. (Good News: Northwest Registered Agent does that!)
What is a registered agent?
A registered agent is the individual or agency responsible for receiving legal mail on your business’s behalf. Your registered agent must have a physical Texas street address and be a Texas resident. They must also be available to receive your legal mail during standard business hours. Many businesses hire a registered agent service, so the business owners can go on vacation without worrying about whether someone is present to receive their business’s mail.
4. Draft Internal Records
So far in this guide, we’ve dealt with public forms that you’ve had to file with the Texas Secretary of State. Now, it’s time to organize your internal records. These are the documents your business will keep on record within your company.
Though these documents are internal, you’ll likely need to show them to third parties like the bank or—if you start a nonprofit—the IRS.
Here are the major internal documents you need to organize for LLCs and corporations:
Texas LLC Operating Agreement
This is your LLC’s rule book. It defines how your LLC will do things like make decisions, distribute money, manage operations, and appoint officers. Your operating agreement plans for every big picture scenario your LLC is likely (or unlikely) to face, including dissolution.
Drafting an operating agreement is hard, and the internet is full of shabby templates that have been copy and pasted from who knows where. So we had our attorneys draft a Texas LLC Operating Agreement template that you can use as a solid foundation.
Texas Corporate Bylaws
Bylaws are the rules your corporation will adopt and follow internally. Bylaws detail how your corporation will appoint directors and officers, hold shareholder and board meetings, and handle emergencies, among other things. Unlike operating agreements, corporate bylaws are required by law in Texas (See TX Bus Orgs § 21.057 (2021)).
As with operating agreements, you can find plenty of bylaws templates online. But bylaws are pretty serious, so you don’t want to just use the first template you come across. Our attorneys drafted a Texas Corporate Bylaws template you can use to get started.
Starting a nonprofit? Learn about Texas nonprofit bylaws.
5. Get Texas Business Licenses
Texas doesn’t have a one-size-fits-all business license, but it does require most businesses to get a Sales and Use Tax Permit.
Texas may also require you to get additional licenses to offer professional services or do business within a certain municipality.
Texas State Business License
You will likely be required to obtain a Sales and Use Tax Permit to operate your Texas business if any of the following is true:
- you sell, lease, or rent (tangible) personal property in Texas.
- you sell taxable services in Texas, such as credit reporting, telephone answering, or personal services.
- you live outside Texas and sell or lease tangible personal property or taxable services in Texas and earn a minimum of $500,000 (within twelve months) from Texas customers.
Any additional licensing requirements will be based on the services your business offers and where you are located.
Professional Business Licenses
You’ll need a professional license if you offer services that require extensive education or specialized training, such as engineering, accounting, or teaching. You’ll get your professional license from the board that regulates your profession typically after taking any necessary exams required in your field. For example, you’ll need to pass the Texas Bar Exam (or get waived in) before becoming a licensed attorney.
You can find out more about professional licenses via the Texas Department of Licensing and Regulation website.
Local Business Licenses
Many Texas counties don’t require local business licenses. However, you may still be required to get other documents to operate your business. For example, cities like Dallas, Houston, Brownsville, and Austin require you to get a Certificate of Occupancy to prove your building is safe to do business in and meets current housing/building codes. This will be especially important if your building has recently been updated or remodeled.
Learn more about How to Get a Business License.
How do I get a Texas business license?
You may submit an application online through the Texas Comptroller website to obtain a Texas Sales and Use Permit. However, sole owners, partners, and officers/directors who don’t have a social security number will need to file a paper form. Online submissions will take about 2-3 weeks to process. Paper forms may take longer.
Other business licenses can be obtained from the department that regulates your goods or services. For example, to get a Sign Permit for a business that provides advertising services, you’ll contact the Texas Department of Transportation.
How much does it cost to get a Texas state business license?
The Texas Sales and Use Tax Permit is free. However, you will likely need to pay a security bond towards the permit. The security bond will be $100,000 or four times your average monthly tax liability—whichever is higher. You can calculate your monthly tax liability by using online services or subtracting your tax deductions from your taxable business income, and applying the appropriate tax burdens for your entity type.
How do I get a professional license in Texas?
Professional licenses are obtained by contacting the appropriate board that oversees your profession. For example, an engineer would get their license from the Texas Board of Professional Engineers and Land Surveyors.
How do I get a local business license?
The best way to get a local business license is to contact your local county clerk to see what you need. After all, different counties have different requirements. Some counties don’t require you to get a local business license at all, such as Houston and Garland.
6. Organize Your Money
The liability protection you get from forming an LLC or corporation is only as strong as the separation between you and your business. At a minimum, you’ll need to open a bank account for your business. And if you’re going to hire employees, you’ll need to tackle payroll, too.
Open a Business Bank Account
To keep your business spending separate from your personal spending, you’ll need to open a business bank account. If you don’t, a court could find that your business is not actually separate from you, the owner, under the Alter Ego Doctrine. Also known as piercing the corporate veil, this is the outcome when a judge finds that a company is not a separate entity but rather an alter ego of the owner. If this ever happens, you could lose your limited liability status.
Opening a business bank account as a sole proprietor is important, too. Though sole proprietors and general partnerships have no limited liability status to protect, both will benefit from organizing their business finances come tax season.
How do you set up a business bank account?
Do I need a business bank account to accept credit card payments?
Probably. Payment processors require you to provide them with a bank account. This is where they’ll deposit funds from transactions. Most of the time, this needs to be a business bank account.
Some payment processors may let you get away with listing a personal bank account, but it’s not a great idea. Mixing your business finances with your personal finances erodes the separation between you and your business, weakening your liability protection. It also turns tax season into a nightmare.
Learn more about Payment Processing.
Set up Payroll
Everyone wants to get paid—including any employees or independent contractors your business hires. So you’ll need to set up payroll to pay your workers. Here’s how:
- Get your federal employer identification number by creating an account with the Electronic Federal Tax Payment System.
- Register with the Texas Workforce Commission (within ten days of being eligible for unemployment compensation).
- Decide how to do your payroll process (manually or through an online service).
- Gather your employees’ W-4 forms and independent contractors I-9 forms.
- Pay your workers.
Keeping track of overtime, missed days, and pay schedules can be difficult. That is why many employers prefer to use a payroll service or software that tracks all of this information for you.
What forms do my employees need to fill out?
Your new employees will need to fill out a W-4 to determine how much you’ll withhold and an I-9 to verify that the employee is eligible to work in the US.
What’s the difference between an independent contractor and an employee?
It’s important to understand the difference between an independent contractor and an employee. That’s because for employees, you’ll need to withhold and pay income, social security, and Medicare taxes. Independent contractors pay these taxes on their own.
An independent contractor is self-employed—how they complete their work is not directly controlled by an employer. An independent contractor may perform the same kind of work for other businesses, and can do the work when and how they choose.
An employee, on the other hand, performs their work how and when their employer chooses.
If you’re unsure, you can file Form SS-8 with the IRS and let them decide.
Learn more about hiring independent contractors.
How do I get a Texas Employer Account Number?
You will get your unemployment tax account number after you register with the Texas Workforce Commission and answer questions about your business. You may need an EIN to login. If you don’t complete your registration, the incomplete application will be saved for a year after you start.
7. Get Business Insurance
Forming an LLC or corporation protects your personal assets. But if anything disastrous befalls your business—like a lawsuit, burglary, flood, or fire—your business is on the hook to pay. Business insurance can help cover the costs.
But not every state requires you to have workers’ compensation insurance. Here’s a breakdown of the most commonly purchased business insurances in Texas:
Workers’ Compensation Insurance
Most employers in Texas don’t need to purchase workers’ compensation insurance—unless they hire employees to do government work or contract with government entities.
However, it is a good idea to protect yourself and your employees by buying workers’ compensation insurance. Workers’ compensation insurance will pay your employees’ expenses if they suffer a work-related injury. Without this insurance, you could be on the hook for paying for their medical and attorney fees.
This covers the costs of claims against your business for injuries or damages to the property of others, like clients or customers. This includes medical expenses, legal fees, settlements, and judgments. Whether or not you need it depends on whether your business is likely to be sued and how many assets your business needs to protect. If it’s just you and your computer in your basement, you might feel comfortable skipping liability insurance. Or maybe you won’t. Beyond general liability insurance, you can purchase or add on more specific types, like professional, cyber, commercial, home-based business, or product liability insurance.
Do business owners need workers' compensation insurance in Texas?
Texas law does not require business owners to purchase workers’ compensation insurance for themselves. However, business owners and self-employed workers, such as independent contractors and sole proprietors, may choose to purchase workers’ compensation insurance if they’d prefer. Workers’ compensation insurance is a worthwhile purchase in case you get injured on the job—especially since your personal insurance could deny coverage for any work-related injuries.
Do I need business insurance for my home-based business?
Probably. That’s because you can’t count on your homeowners’ or renters’ insurance policy to cover damages related to your business. Most insurance companies offer a home-based business insurance plan.
8. Understand Your Tax Burden
Texas has a sales and use tax rate of 6.25%. Plus, you’ll need to file an Annual Franchise Tax Report. However, most businesses won’t have to pay anything. But this isn’t the end-all be-all. There are other important taxes you need to know about. Here’s the lowdown.
- LLCs. Single-member LLC? By default, you’re taxed similar to a sole proprietor. More than one LLC owner? You’re taxed as a general partnership. Either way, your default tax status is “pass-through,” which means you don’t pay corporate taxes. Instead, your LLC’s owners report profits and losses on their personal tax returns. Texas doesn’t asses a personal income tax, so you’ll have to pay the 15.3% federal self-employment tax. However, an LLC can file paperwork with the IRS to be taxed as an S-Corp or C-Corp as well.
- Corporations. Corporations are taxed as C-Corps by default. This means that corporations pay the 21% federal corporate tax rate.
To pay your federal taxes (and take a good deal of other steps required to start a business), you’ll need to get an Employer Identification Number (EIN). You can apply for one with the IRS or hire us to get one for you.
Do I need an EIN if I’m self-employed?
If you’re operating a sole proprietorship or single-member LLC that doesn’t employ anyone else and you don’t need to file excise or pension plan returns, you don’t legally need an EIN.
However, you can still get one—and you probably should. Otherwise, you’ll have to use your own social security number to do business. Plus, you’ll likely need an EIN to open a business bank account.
How do I get an EIN?
To get an EIN, you can either apply online or file form SS-4 by mail with the IRS. Getting an EIN is free.
Check out our guide to applying for an EIN.
What is an S-Corp?
An S-Corporation is a federal tax election. Registered business entities like LLCs and corporations start out with a default tax status, but can file paperwork with the IRS to be taxed as an S-Corp. Like LLCs, S-Corps are taxed as pass-through entities. Like corporations, S-Corps can make distributions that aren’t subject to the 15.3% self-employment tax.
Learn more about the S-Corp tax election.
What is a C-Corp?
A C-corporation is the default federal tax election assigned to corporations. Most corporations are taxed as C-Corps, but LLCs can also apply for C-Corp tax designation by filing paperwork with the IRS. C-corps file federal corporate income taxes and state corporate income taxes (Texas has no state corporate income tax). C-corps can pay their shareholders in distributions, and the shareholders report those profits on their personal tax returns.
Learn more about the C-Corp tax election.
Local Texas Business Taxes
In addition to state the sales and use tax (6.25%), you will likely pay an additional local sales tax depending on where you conduct business. For example, companies in Elkhart must pay another 1.25% in sales and use tax whereas businesses in Lufkin must pay an additional 1.5% in sales and use tax—making the grand total 7.75%.
9. Build Your Business Website
If you want Texans to find your business, they have to be able to find you online. This means you’ll need a website, a business email account, and social media accounts. Don’t worry if you’re not especially tech-savvy—you don’t have to be a web developer or an influencer to establish a robust online presence. You’ll just need the following:
- Domain name. Your domain is the address where your website will live. You’ll want a domain name that is short, unique, local, and—most importantly—available. If your domain is trademarked, you could face legal trouble.
- Domain registrar. Once you’ve decided on a domain name, you’ll want to register it with a domain registrar. Some domains are more expensive than others. Some domain registrars also offer hosting and most will provide you with a business email that includes your domain name (“[email protected]”).
- SSL certificate. An SSL certificate signals to your users that your website is secure. If your website will use forms—like a sign-up form or a “contact us” form—an SSL certificate is critical. But even if you don’t you use forms, you’ll still probably want one—it allows an encrypted connection, which means your users’ data is transported securely. There are several types of SSL certificates, and you can often get one through your domain registrar.
- Site design. The easiest option is to use a free website creation tool—there are a number of free options available. Most are easy even for a newcomer to use, with styles and built in templates. For a more custom design, you can hire a web designer to work on your website, but this will be much more expensive.
10. File a Texas Annual Franchise Tax Report
LLCs and corporations must file the Annual Franchise Tax Report with the Texas Comptroller of Public Accounts by May 15th each year. Your tax rate will be determined by how much your business earns each year and the type of business you own. However, if your business earns $1,230,000 or less in annual revenue, you won’t need to pay any taxes! Hurray! But, you’ll still be required to file a Franchise Tax Return. Also, the thresholds may change from year to year, so it’s important to check the Texas Comptroller website before filing.
Read more about How to File a Texas Annual Report.
What if I don’t file an annual franchise tax report in Texas?
Texas imposes a $50 late fee for each tax report that is past due. For example, if your report is 1-30 days late, the state will charge you an additional 5% of your total tax due. If your report is more than thirty days late, the state charges you an additional 10% of your total tax due.
11. Apply for Trademarks
A trademark is a design, symbol, word, phrase—or any combination thereof—that represents a brand’s goods or services exclusively. Only some businesses register trademarks.
You can apply to register your trademark with the State of Texas or federally with the U.S. Patent and Trademark Office (USPTO). Registering your trademark in Texas is cheaper and easier than registering with the USPTO, but doing so only protects your trademark in Texas.
You can only register a trademark once you’ve started using it (so slap it on that website you just made), and not all applications are approved. Trademark law is complex, and the strength of a trademark application (and the trademark itself) depends on many factors.
Our attorneys can review your application, offer advice, and prepare and submit the application for you—Check out our Trademark Service.
How do I register for a trademark in Texas?
You can register your trademark with the Texas Secretary of State by filling out Form 901. To successfully register your trademark, your mark must already be in use and be noticeably distinctive (i.e., not similar or identical to) from any mark that’s already registered (whether by Texas or the USPTO). You must attach three specimens to prove that your mark is in use and connected to your goods or services.
You must describe your mark exactly how it appears in use and attach a drawing of your mark. It costs $50 per good or service classification (e.g., Chemicals, Jewelry, Hotels and restaurants) to file Form 901.
Can I register a trademark before I use it?
No. But you can file an application with the USPTO under Intent-to-Use status. This gets your application in line before you’ve actually used the mark, which could be helpful if you’re worried someone else might register your mark before you’ve had a chance to use it.
For your trademark to become official, you’ll eventually need to show proof that you’re using it. An Intent-to-Use application buys you some time to do that.
Learn more about filing an Intent-to-Use Trademark.