Texas is home to over 3.2 million small businesses that account for 99.8% of the businesses in the state, employing 44.3% of Texas's workforce. As one of the largest and fastest-growing economies in the U.S., Texas offers unmatched opportunities for businesses across a range of industries, from technology and energy to healthcare and logistics. The state’s favorable tax structure, pro-business policies, and access to a large workforce make it a top choice for entrepreneurs. Top industries in 2023 included construction and services (including professional, technical, and scientific).
Here's a primer on how to start a business in Texas.
Costs associated with forming a business varies by business entity type and by state the business was formed in. We aim to cover here the basic costs specific to the state for starting a business. We also touch upon other costs in order to stay compliant and continue to doing business in the state, such as paying various state taxes or complying with local minimum wage laws when hiring in-state.
We cover in broad strokes the following costs:
There are several types of business structures you can choose from when forming your business. Which is best for your business depends on a variety of factors, like ownership in the business, taxation, and more.
No State Filing: There are two types of structures which can be automatically formed without any filing with the state. Sole proprietorship and general partnership falls into this category, and they are a popular form of self-employment.
Formed or Incorporated: Three most common business entities that require some formation or incorporation with the state are corporation, limited liability partnership (LLP), and limited liability company (LLC). Each structure has its own one-time formation or set-up cost.
Texas offers the basic entity types that businesses can choose from in any state when filing for a domestic entity setup: Corporation, LLP, LP, and LLC. There are additional variations for each of these entity types as well as other structures. Sole proprietorships and general partnerships do not need to be registered with the state (unless a sole proprietorship is using a DBA or assumed name).
If forming a corporation or LLC that will be performing professional services, the business may be required to form as a professional entity (although partnerships are not subject to the same restrictions on performing professional services). In Texas, one can form a professional corporation, professional association, or professional LLC. Professional corporations and LLCs may be owned by a professional individual or professional organization. A professional association must be owned by a professional individual.
Professional associations can only be formed by doctors of medicine, doctors of osteopathy, podiatrists, mental health professionals (like psychologists, family therapists, and licensed professional counselors), optometrists, therapeutic optometrists, chiropractors, dentists, or veterinarians for a $750 filing fee. Professional associations must include “associated,” “associates,” “association,” “professional association,” or an abbreviated form of these choices in the name.
The name of a professional corporation must contain the word “corporation,” “company,” “incorporated,” “limited,” “professional corporation” or an abbreviation of one of these terms.
The name of a professional LLC must include “professional limited liability company” or an abbreviation.
Domestic and foreign entities can be formed predominantly online in their SoSDirect Portal, operated by Texas’s Secretary of State. Follow their New Business Checklist to form an entity.
Across all US states, the average cost of formation is roughly $100 with some states costing as little as ~$50 to create a corporation and some as high as $500+ to form an LLC.
Here are the formation costs (up to date at the time of this writing) for three most common entity types for businesses filed with the state:
Franchise taxes are state fees that businesses pay in order to have the right to operate in those states. They are paid in addition to state and federal income taxes. Failure to file can cause a business to lose its good standing with the state, making it difficult to operate, get loans, and may cost the business clients if clients require this information.
Here are the franchise tax fees for each business entity structure in this state as of the time of this writing.
Taxes, taxes, and more taxes. Although income taxes may seem far off concern when starting a business, the truth is that not withholding enough for income taxes is a material cost to business owners. Here we briefly cover state income taxes. For a better overview of self-employment taxes, you can read more on Small Business Tax Planning.
Pass-Through Entities: Pass-through entities are boon to small business owners. A pass-through entity is a business structure where income passes directly to the owners or investors, and they report it on their personal tax returns. This allows the business to avoid paying corporate taxes, making it a more tax-efficient option for small businesses. This also makes filing taxes significantly simpler as only one return is needed.
By default, sole proprietorships, LLCs, and partnerships are considered pass-through entities. In the case of LLCs, LLCs are usually referred to as disregarded entities. However, owners can choose to get their LLC be recognized and treated differently for tax purposes with the IRS.
Corporate Income Tax: Most states (44 out of 50) levy a corporate income tax.
C-Corps pay a C-Corp state income tax rate. If the income tax is pass-through, as with S-Corps, use your personal income tax rate.
Limited Liability Companies: For LLCs, the tax rate depends on the how you set up the LLC business structure.
Business owners who sell goods or services within a state are typically required to collect and remit state sales tax. Each state has different rules regarding what is taxable, so it’s crucial to understand the state’s specific requirements. Most businesses aren't at significant risk of non-compliance with sales tax until they reach the state's economic nexus threshold.
Economic nexus refers to the threshold of sales or transactions in a state that, once exceeded, obligates a business to collect sales tax, even if they don't have a physical presence there. Once a business achieves economic nexus, they must register with the state’s tax authority and start collecting sales tax on applicable sales. Failing to comply with these requirements can result in penalties and back taxes. Economic nexus is particular important when it comes to online sales for e-commerce companies.
Local jurisdictions can add up to 2% of their own sales tax, bringing the total sale taxable rate to possibly 8.25%.
If you're considering hiring employees for in-person work, then knowing your state's employment laws are important.
One important to factor is knowing the local minimum wage, which varies depending on state and sometimes even by city or county. Note that in addition to the hourly rate, employers should also consider payroll taxes, workers’ compensation insurance, and potential benefits costs.
Here we just provide a review in the table below costs specific to the state, namely the state's specific minimum wage, any applicable exceptions to the minimum wage, and recurring payroll taxes.
*LLP Filing Fee Note: The fee is $200 per member.
In addition to the New and Existing Business Checklists, the Texas SoS offers a Business Services dashboard for easy access to company obligations, as well as a Guides and Resources list.
Veteran Owned Businesses: When registering a business, be sure to note if it is veteran owned to avoid certain fees for the first five years of operation. While the state boasts diversity in business ownership (with only Florida having a higher percentage of Hispanic ownership [30.9% to 33.2%]), veteran ownership could well be increased at just 6.4%.
The SoSDirect Portal allows for the reservation of business names for 120 days. Certificates of Fact (aka Good Standing) can also be requested through the portal, with instructions listed here.
The idea of starting a business can be exciting, but the plethora of choices, jargon, and costs associated with the pure act of setting up a business with the state can be an unnecessarily daunting and time-consuming process.
Although this guide can't setup your business entity for you, it provides an overview so you can get a head start. We hope this article has sheds light on the essential costs involved and provides guidance on how to manage them effectively, setting you on a path towards entrepreneurial success.
DISCLAIMER: Information on this site is for educational purposes only. LeHerring LLC does not provide, legal, accounting, tax or investment advice. Although care has been taken in preparing the information provided to you, we are not responsible for any errors or omissions, and we accept no liability whatsoever for any loss or damage you may incur. Always seek financial and/or legal counsel relating to your specific circumstances as needed for any and all questions and concerns you now have or may have in the future.
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