Why Form a Business in Texas?

Texas has become one of the most business-friendly states in the United States, attracting entrepreneurs and corporations from around the world. Understanding the formation and compliance requirements is essential for long-term success.

Business Structure Options

Sole Proprietorship

Simplest structure:

Advantages:

Easy to establish
Complete control
Minimal compliance
Lower costs

Disadvantages:

Unlimited personal liability
Difficult to raise capital
Business dies with owner
All income taxed personally

Partnership

Two or more owners:

General Partnership:

Shared management
Pass-through taxation
Unlimited liability for all partners

Limited Partnership (LP):

General partners (management, liability)
Limited partners (investment only, limited liability)
More complex structure

Limited Liability Company (LLC)

Corporation

For larger businesses:

C Corporation:

Separate legal entity
Limited liability
Double taxation
Unlimited shareholders
More formalities required

S Corporation:

Pass-through taxation
Limited liability
Shareholder restrictions (100 max, US persons only)
More compliance requirements

Formation Process

Name Selection

Requirements:

Availability: Search Texas SOS database
Distinguishability: Not confusingly similar to existing names
Designator: Must include entity type (LLC, Inc., Corp., etc.)
Prohibited words: Certain terms restricted
Name reservation: Can reserve for 120 days

Certificate of Formation

File with Texas Secretary of State:

Required Information:

Entity name
Registered agent and address
Management structure (member/manager-managed for LLC)
Purpose statement
Organizer information
Duration (perpetual or specific term)

Filing Options:

Online (fastest)
Mail
In-person (Austin)

Registered Agent

Requirements:

Texas address: Physical street address (no P.O. Box)
Business hours: Available during normal business hours
Acceptance: Consent to serve required
Ongoing: Must maintain at all times

Options:

Owner or member
Employee
Professional registered agent service

Federal Employer Identification Number (EIN)

Obtain from IRS:

When Needed:

Multiple members/shareholders
Employees
Banking purposes
Tax filing requirements

How to Apply:

Online (immediate)
Fax (4-7 days)
Mail (4-5 weeks)
Phone (international applicants)

Operating Agreement / Bylaws

LLC Operating Agreement

Not filed but essential:

Key Provisions:

Ownership percentages
Capital contributions
Profit/loss allocation
Management structure
Voting rights
Admission of new members
Transfer restrictions
Dissolution procedures

Corporate Bylaws

Internal governance document:

Typical Contents:

Board of directors
Officer positions
Shareholder meetings
Voting procedures
Stock transfer restrictions
Amendment process

Texas Franchise Tax

Overview

Texas charges franchise tax:

Basis: Total revenue
Threshold: $1.23 million (2024) – no tax owed if below
Rate: 0.375% (most entities) or 0.75% (specific entities)
Due date: May 15 annually
Initial report: Due within 90 days after formation

Calculation Methods

Choose between:

Total Revenue:

Simpler calculation
Multiply revenue by applicable rate

EZ Computation:

For entities with $20 million or less in total revenue
Simplified calculation

Cost of Goods Sold:

Subtract COGS from total revenue
Better for businesses with high COGS

Ongoing Compliance

Annual Report

Texas requires:

Public Information Report (PIR):

Due May 15 annually
Filed with franchise tax report
Updates entity information
Registered agent confirmation

Filing Methods:

Online through Webfile
Combined with franchise tax report
No separate fee (included with franchise tax)

Required Records

Must maintain:

Corporate Records:

Ownership records
Meeting minutes
Financial statements
Tax returns
Contracts and agreements

LLC Records:

Member information
Capital contributions
Distributions
Operating agreement amendments

Licenses and Permits

Depending on business:

State Level:

Professional licenses
Sales tax permit
Industry-specific permits

Local Level:

Business license
Zoning approval
Health permits
Building permits

Tax Obligations

Federal Taxes

Comply with IRS requirements:

Income Tax:

Corporation: Form 1120 (C-Corp) or 1120-S (S-Corp)
LLC: Form 1065 (multi-member) or Schedule C (single-member)
Individual: Owner’s personal return

Employment Taxes:

Federal income tax withholding
Social Security and Medicare (FICA)
Federal unemployment tax (FUTA)
Quarterly deposits and annual reports

Texas Taxes

State obligations include:

Sales Tax:

Register with Texas Comptroller
Collect on taxable sales
File monthly, quarterly, or annually
Rate varies by location (6.25% state + local)

No State Income Tax:

Major advantage for businesses
Only franchise tax on entities

Banking and Finance

Business Bank Account

Essential requirements:

Documentation Needed:

Certificate of Formation
EIN confirmation
Operating Agreement/Bylaws
Photo ID of signers
Initial deposit

Best Practices:

Separate business and personal finances
Maintain adequate records
Reconcile monthly
Multiple signers if appropriate

Business Credit

Building business credit:

Steps:

Obtain EIN
Open business bank account
Apply for business credit card
Establish trade credit
Monitor business credit reports

Employment Matters

Hiring Employees

Required steps:

Federal:

I-9 Employment Eligibility Verification
W-4 federal withholding
Report new hires
Workers’ compensation insurance

Texas:

New hire reporting to Texas Attorney General
Unemployment insurance registration
Workers’ compensation (if required)

Independent Contractors

Proper classification:

Key Factors:

Control over work
Financial relationship
Type of relationship

Documentation:

Written agreement
W-9 form
1099-NEC at year-end

Foreign Entities

Qualification in Texas

Out-of-state entities doing business in Texas:

When Required:

Maintaining office in Texas
Entering into contracts
Meeting with clients regularly
Having employees in Texas

Process:

File Application for Registration
Pay filing fee
Appoint registered agent
Comply with ongoing requirements

Maintaining Good Standing

In home state and Texas:

File annual reports in both
Pay all fees and taxes
Maintain registered agent
Update information promptly

Compliance Calendar

Key Deadlines

Mark your calendar:

January:

W-2 and 1099 forms to recipients (January 31)

March:

Annual corporate meeting (as specified in bylaws)

April:

Federal income tax (C-Corp) (April 15 or extended)

May:

Texas franchise tax and PIR (May 15)

Quarterly:

Estimated tax payments
Payroll tax returns
Sales tax returns (if applicable)

Common Compliance Mistakes

Avoid These Errors

Don’t:

Commingling funds: Keep business and personal separate
Missing deadlines: Set reminders for all filings
Inadequate record-keeping: Maintain thorough documentation
Ignoring formalities: Hold required meetings and document
Failing to update: Keep information current with state

Amendments and Changes

When to File Amendments

File with Texas SOS when:

Changing business name
Changing registered agent/office
Modifying management structure
Amending purpose statement
Converting entity type

Process

Certificate of Amendment:

State the changes
File with Secretary of State
Pay filing fee
Update internal documents

Dissolution

Closing the Business

If needed:

Winding Up:

Cease business operations
Notify creditors
Pay debts and obligations
Distribute remaining assets

Formal Dissolution:

File Certificate of Termination
Final franchise tax report
Cancel permits and licenses
Close bank accounts
Final tax returns

Working with Professionals

Build Your Team

Essential advisors:

Attorney:

Formation assistance
Contract review
Compliance guidance
Dispute resolution

Accountant/CPA:

Tax planning
Financial statements
Bookkeeping
Payroll services

Registered Agent:

Receive legal documents
Compliance reminders
Professional appearance

Conclusion

Forming and maintaining a business entity in Texas involves numerous steps and ongoing obligations. While Texas is business-friendly, compliance is essential to maintain limited liability protection and avoid penalties.

Proper formation, diligent record-keeping, timely filings, and professional assistance ensure your Texas business remains in good standing and positioned for long-term success. Whether you’re a startup entrepreneur or an established business expanding into Texas, understanding these requirements is crucial to your success.