How to Start a Business in Texas

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.

Texas corporation

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.

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.

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.

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.

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.

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.

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.

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.

Liability Insurance

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.

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.

Federal Taxes

• 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.

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%.

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.

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.

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.