Texas is more than just another state: it’s practically its own country, boasting the 10th largest GDP in the world. Though the Lone Star state is a haven for big business — 54 Fortune 500 companies call Texas their home–small businesses thrive in the state, as well. In fact, Texas is home to 2.7 million small businesses, which is more businesses than 15 U.S. states have people.
To help you on your path towards entrepreneurial success in the Lone Star state, we’ve put together this comprehensive guide to starting a business in Texas. We’ll take you through each step of the process, from developing your idea into a business plan to registering your business with the state and acquiring licenses and permits that you’ll need to operate legally.
Starting a Business in Texas? Check out our ranking of the Best Cities to Live in Texas.
Texas small business statistics at-a-glance
- 2.7 million small businesses operate in Texas, which is 99.8% of the state’s businesses.
- 4.7 Texans are employed by small businesses, accounting for 45.1% of the state’s private workforce.
- Texas’s economy is growing faster than the national economy, expanding at an annual rate of 3.7% in the third quarter of 2018, compared to the U.S. rate of 3.4%.
- Texas small business owners employed at their own incorporated firm made an average of $52,126 in 2017.
- Tax Foundation rated Texas 13th in its 2020 Business Tax Climate Index, with the state’s 6th ranked individual income tax rate accounting for its high placing.
- 79.17% of Texas startups survive their first year of existence.
- Texas startups create 5.74 new jobs on average in their first year, which places it among the top 10 states in early job creation rate.
- Texas has the 4th highest rate of new entrepreneurs in the nation.
Sources: Tax Foundation, Kauffman, U.S. Census, Bureau of Economic Analysis
Starting a business in Texas in 12 steps
1. Develop an idea
Every successful business starts with a good idea. Ask yourself these questions:
Determine your personal strengths and interests: developing an idea that suits your personality and positive traits will provide motivation to put in the long hours necessary in addressing the myriad challenges you’ll face in getting your business off the ground.
Figure out how to market your expertise: if your business idea is not something you totally believe in and can sell effectively, it will be much harder to succeed.
- Which product or service can your business provide that doesn’t already exist on the market?
- How does your business idea refine an existing product or service?
2. Do the research
Once you have an idea, it’s time to put it through the wringer and decide if it’s viable in the market. Conduct market research to arrive at answers to these key questions:
Coming up with satisfactory answers may require refinement, or even a total overhaul, of your original idea. Be patient: you’ll only want to proceed with the next steps after determining that a niche exists in the Texas market for your business idea.
- Is there a demand for your product/service in Texas?
- Who is your target market?
- Do existing businesses in Texas offer a similar product/service?
- What makes your business unique compared to the competition?
3. Draft a business plan
Now it’s time to write the blueprint of your business. A great business plan should chart the path of your company from infancy to success while being able to attract investors to provide financing.
Your business plan ought to include the following sections:
- Executive summary – An overview of your business and why it will be successful
- Description of business – Explain the advantages of your business and the problems it solves
- Market research – Provide research on your industry, target market, and potential competitors
- Organization and staff – Detail the nuts and bolts of your business; how it’s structured and who will run it
- Product or service description – State what you are selling or offering
- Marketing plan – Explain your strategy for attracting customers
- Fundraising – The money you’ll need in the next five years to grow your business and how you’ll spend it
- Financial forecast – Data and balance sheets providing a financial forecast for your business
- Appendix – An optional section with supporting and/or requested documents like resumes, letters of reference, permits, etc.
4. Secure funding
Every business needs money to get off the ground. In fact 82% of businesses that fail do so because of a lack of cash flow, U.S. Bank found in a recent study. Your business plan should include a detailed estimate of the funds you’ll need to cover expenses for at least a year, so now it’s time to acquire the money.
If you aren’t wealthy enough to self-fund your business, you can choose from a number of other funding options. These include a loan from the U.S. Small Business Administration, taking out a loan from a commercial bank, launching an equity crowdfunding campaign, or securing funding from an angel investor or venture capitalist group active in Texas.
An angel investor is a wealthy individual who invests their personal finances in a startup, typically in the beginning stages, whereas a VC is a group of investors that will fund a business throughout its existence.
Which route you choose depends on the specifics of your business: angel investors typically invest smaller sums to help get a startup off the ground, while VCs invest larger sums of money in exchange for a greater say in the operations of a business. Smaller startups usually opt to pursue funding from angel investors. Plenty of both types of investors are operating in Texas.
Texas Angel Investors and VCs
- Central Texas Angel Network – The self-proclaimed “most active” angel network in the United States. The Austin-based network has invested $108 million in 174 companies since its 2006 founding.
- Cowtown Angels – A 50-member strong Fort Worth-based angel group that has applied its “collective capitalism” philosophy towards investing $18.1 million in 37 companies, to date.
- Dallas Angel Network – Established in 2010, DAN is always open to entrepreneur pitches, sending its investors 3-5 companies to evaluate every several weeks, and holding quarterly pitch meetings.
- Houston Angel Network – Another Texas angel network that claims to be the “most active” in the U.S. Whether or not this is verifiable, the group’s $96 million in early-stage investments presents a strong case.
- North Texas Angel Network – A non-profit, state-wide network that acts as a facilitator: connecting investors with entrepreneurs through well-attended pitch meetings.
- Tyler Texas Angel Network – A group of accredited investors based in the Tyler area. Its ideal company has 2-5 employees and several years of experience in product development.
Additional Investor Resources
- AngelList: Texas Angel Investors – A directory of 5,246 seeking the opportunity to invest in an early-stage Texas-based country, 1480 of which live in the state.
5. Decide on a legal business entity
The form of business entity you choose will affect many factors going forward. There are 3 main options to decide from:
Nowadays, LLCs are the option of choice for small business owners as they are easy to manage and provide the benefits of a corporation while lacking their complex structure. Taxwise, they operate more like a sole proprietorship.
You may want to consult with an attorney to help decide which entity works best for your business.
- Sole proprietorship – The name for running a business by yourself. Legally, you and your business are one and the same, with no separate legal entity for your business. A partnership is legally identical to a sole proprietorship, except that it comprises two or more people.
- Corporation – A complex legal structure that is a separate entity (providing legal protection to owners) from the owner and comprises directors, officers, and shareholders.
- LLC – AKA “Limited Liability Company”, this is a hybrid entity between a sole proprietorship and a corporation that possesses advantages of both. An LLCs provides the liability protection of a corporation, yet isn’t subject to double taxation as the profits go through your personal tax return.
6. Register your business
Once you decide which entity is right for your business, you can register it with the state of Texas. This procedure is different depending on the structure you want your business will take.
For sole proprietorships
Sole proprietors operating under their own name in Texas are not required to make any special filing with the state government, however, those using a business name separate from their legal name must register an assumed business name with their local county clerk.
Before you register, use the Texas Comptroller of Public Accounts Taxable Entity Search to make sure your chosen business name is distinguishable from others on record. If your name is free to use, head to your county clerk’s office in the county in which your business is located and fill out an Assumed Name Certificate and submit it. The filing fee is typically $10, although the exact price varies between counties.
Check this directory of Texas county clerks to find the address and telephone number of the county clerk’s office nearest you.
For LLCs and corporations
The first step in forming either a corporation or an LLC in Texas is appointing a registered agent to handle process notices and other government correspondence on behalf of your business. This is mandatory in Texas and most other states. Your registered agent must have a physical address in the state.
Next, perform a search to confirm that your business name is distinguishable from others on record in the state. After these two steps are completed, you may file the appropriate documents to form your new business in the state.
To create an LLC in Texas, file a Certificate of Formation of a Limited Liability Company with the Secretary of State. This can be done online, or through the mail (form available here). The fee is $300.
To create a corporation in Texas, file a Certificate of Formation for a For-Profit Corporation. You can file online, or via postal mail (here’s the form). The filing fee is $300.
7. Acquire federal and state tax IDs
Now you should obtain a Federal Employer Identification Number (EIN), which is like a social security number for a business and allows you to open bank accounts, handle payroll, and file taxes.
For sole proprietorships, an EIN is optional, although it is required for corporations and LLC’s. You can apply online for your EIN through the IRS website, or fill out and mail this form.
Each state has its own laws and taxes regarding businesses. Most businesses in Texas (with the exception of sole proprietorships, general partnerships, and a few others) are subject to a state franchise tax. Visit the Texas Comptroller’s Franchise Tax Overview for more information.
Thankfully, Texas makes it easy for business owners to file and pay the franchise tax and other state taxes, offering a variety of methods to do so, along with instructions on how to complete the process.
8. Open business banking and credit accounts
Opening a bank account for your business is crucial because it allows you to separate company assets from your personal assets, and makes filing taxes a lot easier. This is a recommended step, even if you are operating a sole proprietorship.
It’s also a wise idea to obtain a credit card for your business because it will help you isolate business expenses and build up credit for your company, which may help in securing investment in later stages.
Banks operating in Texas good for small businesses
9. Get the necessary licenses and permits
Depending on the type of business you are opening, you may need to apply for a number of permits and licenses to operate legally. For example, a restaurant will need a liquor license, and a pawn shop will need a reseller’s license. The paperwork may prove a hassle, but it’s a necessary ordeal that will protect you from fines, lawsuits, and other legal hazards.
The Texas Department of Licensing and Regulation hosts an easy-to-use website where small business owners can apply for or renew occupational licenses, permits, and certifications. Check their Online Services page for an alphabetical listing of licenses that can be applied for online.
Small business owners are also encouraged to check with their local county clerk’s office to learn about municipal licensing/zoning laws and requirements.
10. Choose a location
Whether you are running an online business or opening a restaurant, location is everything. Be aware of the demographics of the neighborhood or town that you are considering: Are the local residents likely to visit your business? Will nearby competitors take a share of your potential profits?
Texas has a handful of large cities, all with high-performing economies, so it can be tough to decide which urban area to launch your business in if you’re migrating from out of state. However, our pick for the Lone Star state’s most small business-friendly city is state capital Austin.
Austin has led the nation in population growth for large cities for nearly a decade, with a similarly expanding economy, which creates plenty of opportunities for entrepreneurs. The city’s excellent nightlife and restaurant scene ensures that life in Austin is enjoyable and well-rounded, as well.
11. Get insured
No matter what type of business you form, buying insurance coverage to protect yourself in the case of property damage or legal action is a good idea. In fact, businesses with employees are required by the federal government to have two types of insurance, while others are strongly encouraged, or required at the state level, depending on your business type. Consult with a licensed insurance agent to find out which types of insurance you should get.
Required forms of insurance:
- Workers’ compensation: Covers medical costs and disability benefits if an employee is injured or becomes ill on the job.
- Unemployment insurance: Provides benefits to workers after a loss of job through no personal fault.
Recommended forms of insurance:
- Professional liability insurance: Covers losses as a result of property damage, medical expenses, libel, slander, and negligence claims.
- Commercial property insurance: Covers property damage to business owned properties and possessions as a result of fire, theft, or storm.
- Disability insurance: Provides short-term benefits for employees suffering an illness or injury. Required in certain states such as California, New York, and Hawaii.
12. Develop an internet presence
Establishing an identity on the web is an important investment in a business’s future development. Here are some key steps in the process:
- Register a domain name for a company website (You can use domain.com, Bluehost, GoDaddy.com, Namecheap.com). Design the website and fill it with content.
- Create profiles on the popular social media services (Twitter, Facebook, Instagram)
- Register a Google profile for your business
- Create accounts on review sites such as Yelp, Google Reviews, and TripAdvisor
Texas small business resources
Texas SCORE chapters
The Nation’s leading business mentoring network has many chapters through Texas: