How to Start a Small Business in Texas: A Complete Step by Step Guide for New Entrepreneurs

Starting a business in Texas is thrilling! But it can also feel like you're piecing together a puzzle without all the pieces. Texas is one of the most business-friendly states in the country, making it an incredible place to kick off your entrepreneurial journey. The key is knowing the right steps, understanding your legal and tax responsibilities, and building a solid financial foundation from day one.

This guide walks you through every major part of starting a business in Texas. It's crafted specifically for real Texas business owners, not generic national advice. Whether you're planning to run a construction company in Georgetown, launch an online shop in Austin, or start consulting from your home office, this roadmap will help you start confidently and avoid costly mistakes.

Step One: Choose the Right Business Structure

The structure you choose affects your taxes, liability protection, bookkeeping requirements, and even how you pay yourself.

Sole Proprietorship

You operate under your own name or a DBA. There’s no legal separation between you and the business. This is the simplest option but offers no liability protection.

Limited Liability Company (LLC)

This is the most popular choice for Texas small businesses. An LLC gives you personal liability protection and flexibility in how you're taxed. You may remain taxed as a disregarded entity or elect S Corporation taxation once your business becomes profitable.

Corporation (C Corporation or S Corporation)

Use this structure if you plan to issue shares, raise capital, or build a more formal structure. S Corporation is a tax status, not an entity type, and must be elected with the IRS.

General Partnerships or Limited Partnerships

These are available if you have multiple owners. However, most small partnerships in Texas choose an LLC taxed as a partnership since it offers better protection.

If you’re unsure which option fits your situation, KB2 Bookkeeping and Tax can help you evaluate your goals and choose the right structure.

Step Two: Form Your Business with the Texas Secretary of State

If you choose an LLC or Corporation, you must register the entity with the State of Texas. Here’s what you need to do:

• Search for a unique business name on the Texas SOS website.

• Select a registered agent (this can be you or a third party).

• File your Certificate of Formation on SOSDirect.

• Pay the state filing fee.

• Save your formation certificate once approved.

  
  

Most filings are approved within a few days, although processing times can fluctuate during the year. Once approved, you’re officially a legal business entity in Texas.

Step Three: Obtain Your Employer Identification Number (EIN)

Your EIN is like a Social Security number for your business. You need it to open a business bank account, hire employees, file taxes, and elect S Corporation status if applicable.

The IRS issues EINs for free online. Never pay a third party for this. If you have multiple owners or plan to grow, you will absolutely need an EIN.

Step Four: Register with the Texas Comptroller for Franchise Tax and Sales Tax

Texas Franchise Tax Requirements

Every taxable entity in Texas must file an annual Franchise Tax Report, even if the business does not owe tax. Once your formation is complete, the Comptroller will automatically create a taxpayer number for your business and mail you a welcome letter.

You will use this taxpayer number to file two annual requirements:

• Franchise Tax Report

• Public Information Report

  
  

Both are due every year on May 15.

Sales Tax Permit

If you sell taxable goods or services, you must apply for a sales tax permit with the Texas Comptroller. This is free and can be done online. Texas requires quarterly or monthly sales tax filings depending on your revenue.

Step Five: Open a Dedicated Business Bank Account

This step is non-negotiable. Keeping personal and business transactions separate is essential for tax accuracy, legal protection, and clean bookkeeping.

Open the following if possible:

• Business checking account

• Business savings account

• Business credit card for expense tracking

  
  

If you formed an LLC or Corporation, mixing your personal and business finances could jeopardize your liability protection. It also complicates bookkeeping and increases your risk of IRS issues.

Always use your EIN when opening business accounts.

Step Six: Set Up Your Bookkeeping System

This is where many new owners struggle. Proper bookkeeping is the foundation of clear financial health. Starting with a clean system will save you thousands in taxes and headaches later.

Your bookkeeping setup should include:

A Chart of Accounts That Makes Sense for Your Industry

Your accounts should be tailored to what you do. A construction company needs job materials, subcontractor labor, equipment rental, insurance, and fuel categories. A retail shop needs inventory, merchant fees, shipping, and sales categories. A service provider needs advertising, software, continuing education, dues, insurance, and travel.

A Bookkeeping Software System

Many Texas businesses choose QuickBooks Online because of its flexibility and integration options.

Receipt Tracking

Digital storage is acceptable to the IRS. Use your bookkeeping software, Google Drive, or a receipt management app.

Monthly Bank and Credit Card Reconciliations

If you’re not reconciling monthly, your numbers won’t be accurate at tax time.

Mileage Tracking

Texas business owners often drive significant miles. Tracking mileage can save hundreds or thousands in tax deductions each year.

Payroll Setup if Needed

If you plan to hire employees or elect S Corporation status, a payroll system such as Gusto is required. If you need help setting up a clean bookkeeping system or want to avoid a messy start, KB2 Bookkeeping and Tax can set up your chart of accounts, monthly workflow, receipt system, and automations for you.

Step Seven: Understand Your Federal and State Tax Responsibilities

Every business owner in Texas will have several tax obligations depending on the type of business they run.

Federal Income Tax

You’ll pay tax on your net business profit. This varies based on your entity type.

Self Employment Tax

Sole proprietors and LLCs taxed as disregarded entities pay self-employment tax on their profit. S Corporation owners do not pay self-employment tax on the distribution portion, which is why payroll compliance is important for S Corporations.

Texas Franchise Tax

Most new businesses fall under the no tax due threshold but must still file annually.

Sales Tax

Only if your goods or services are taxable under Texas law. This is filed with the Texas Comptroller.

Payroll Tax

Required if you hire employees or have an S Corporation salary. Understanding your obligations from day one helps you avoid penalties and keeps your business compliant.

Step Eight: Protect Your Business with the Right Insurance

Depending on your industry, insurance may include:

• General liability insurance

• Professional liability insurance

• Workers compensation insurance

• Commercial auto insurance

• Property insurance

• Cyber liability insurance

  
  

Insurance protects your business from unexpected financial risks and is often required for contracts, leases, and commercial projects.

Step Nine: Choose How You Will Pay Yourself

Your payment method depends entirely on your entity type:

• Sole proprietors and LLCs without S Corporation election pay themselves through an owner draw.

• S Corporation owners pay themselves through payroll and can take owner distributions.

  
  

Paying yourself correctly prevents IRS issues and maintains clean financial records.

Step Ten: Build Your Support Team

Starting and operating a business is much easier with the right professionals in your corner. You may need:

• A bookkeeper

• A tax professional

• An attorney

• A payroll provider

• A marketing professional

• A banker

  
  

You don’t need to do everything alone. A strong support team helps you stay compliant, protected, and organized while you grow.

Final Thoughts: You Can Build a Successful Texas Business with Confidence

Texas is one of the best places in the United States to start a business. The process is manageable when you know each step and understand the requirements.

If you’re starting a business and want expert support with bookkeeping, tax compliance, or entity setup, KB2 Bookkeeping and Tax is ready to help. We serve clients across Texas and simplify the financial side so business owners can focus on doing what they love.

You can reach us at info@kb2bookkeeping.com or 512-843-2320.

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