The first step for starting a business in Texas is having a good business idea. Maybe you already have an idea picked out, or maybe you are still deciding on one. Regardless, you can check out our library of business ideas to get detailed industry information, trends, costs to start, tips, and lots more.

While each person will have different goals, there are a few things to consider as you are researching what business idea to go with.

Assess your passions and strengths: Begin by evaluating your interests, passions, and strengths. Consider what you enjoy doing, what you’re good at, and how you can use those skills to create a sustainable business. Aligning your business idea with your strengths will increase the likelihood of long-term success and personal fulfillment.

Identify market needs: Research the market to identify gaps and opportunities in various industries. Look for unmet needs or underserved areas where your business could potentially add value and fill a niche.

Analyze the competition: Study your potential competitors to understand their strengths and weaknesses. This will help you identify ways to differentiate your business and offer something that sets your business apart.

Test your idea: Before fully committing to your business idea, consider testing it through a minimum viable product (MVP) or a small-scale launch. This will provide you with valuable feedback, allowing you to fine-tune your offering before investing significant time and resources.

Seek advice and mentorship: Connect with experienced entrepreneurs and industry experts to gain valuable insights, advice, and guidance. Their firsthand experience and knowledge can help refine your business idea and avoid common pitfalls.

By considering these factors and seeking guidance from experienced mentors, you’ll be well-prepared to choose a business idea that has the potential for long-term success.

Once a solid business idea is in place, it’s time to start working on the business plan.

Writing a business plan is not only needed to get funding, but it also serves as a roadmap, guiding you toward achieving your desired results. Furthermore, having a well-crafted business plan increases your chances of securing funding from lenders or investors who require a detailed plan to evaluate your proposal. Business plans provide information regarding your target audience, competitive analysis, projected financials, and operational details required to make informed decisions.

Several studies have shown that businesses that write a formalized business plan increase their odds of success compared to those that don’t have one.

Related: How to write a business plan

The next step to starting a business in Texas is selecting a business entity (also called a legal of business structure). A business entity refers to how a business is legally organized and understanding the different options is important, as the choice can play a significant role in tax implications, the extent of personal liability, and other factors that influence a business’ operations.

In Texas, there are four common types of business entities: sole proprietorship, general partnership, corporation, and Limited Liability Company (LLC), and I’ll explain each further.

Sole Proprietorship: This is the simplest form of business entity, where the individual and business are considered the same legally. As a result, the owner has unlimited personal liability for the business’s debts and obligations.

Pros:
– Easy and inexpensive to establish
– Complete control over business decisions
– Minimal regulatory requirements
Cons:
– Unlimited personal liability for business debts
– Difficulty raising capital (can’t sell shares of the business)
– Lack of continuity in case the owner becomes incapacitated or dies

General Partnership: This entity involves two or more individuals who share the ownership, management, profits, and liabilities of a business.

Pros:
– Relatively easy and inexpensive to establish
– Shared decision-making and management responsibilities
– Potential for increased capital and resources
Cons:
– Unlimited personal liability for each partner
– Potential for conflicts between partners
– Lack of continuity if a partner leaves or dies

Corporation: A corporation is a separate legal entity, owned by shareholders. This entity provides limited liability protection to its owners, meaning their personal assets are separate from the business’s debts and obligations.

Pros:
– Limited liability protection for shareholders
– Ability to raise capital through the sale of stock
– Continuity in case of ownership changes
Cons:
– More complex and expensive to establish and maintain
– Potential for double taxation (profits taxed at the corporate level and dividends taxed at the shareholder level)
– Increased administrative requirements and record-keeping

Related: How to form a Texas corporation

Limited Liability Company (LLC): An LLC is a hybrid business entity that combines the limited liability protection of a corporation with the pass-through taxation of a sole proprietorship or partnership.

Pros:
– Limited liability protection for members (owners)
– Greatest flexibility in how the business is taxed
Cons:
– More complex and costly to establish compared to a sole proprietorship or partnership, though less than the corporation.

Related: How to form a Texas LLC

An important step when starting a business is to do your research and ensure you have all the necessary licenses and permits before opening. Some common registrations include:

Business Licenses: There is no state of Texas general business license; however, licensing may be needed at the local level. Licensing will vary by location and what the business does, but a business may need a local business license, building permits, zoning permits, and others.

Employer Identification Number: The EIN is a nine-digit tax identification number issued by the Internal Revenue Service (IRS). This number identifies a business operating in the U.S. and is used for paying payroll taxes, filing tax returns, and more. Much like what a social security number is to a person, the EIN is similar to a social security number for a business.

While most businesses will need to get an EIN, some do not.

Partnerships, corporations, and most LLCs OR sole proprietorships with employees MUST register for an EIN.

Sole proprietorships or single-member LLCs with no employees are NOT required to get an EIN. In these instances, the owner’s social security number is used to identify the business.

Business Name Registration: If you plan on operating a sole proprietorship or partnership under a different name than the owner’s legal name, you will need to file an Assumed Name Certificate, sometimes known as a DBA or Doing Business As with the County Clerk’s office where the business will be located.

Sales Tax Permit: Businesses selling products and certain services will need to register for a Sales Tax Permit with the Texas Comptroller.

Professional Licensing: Some services, such as therapists, tattoo artists, and food establishments, require licensing with the Texas Department of Licensing and Regulation. While this isn’t a license on the business, licensing is required to operate.

Related: What business licenses and permits are needed in Texas?

Keeping your business and personal finances in separate bank accounts is highly recommended for several reasons, a few of which are outlined below:

Reduces Risk of Commingling Funds: Depending on the type of business entity you’ve established, maintaining separate accounts helps protect your personal assets from any business liabilities. For example, if your business is an LLC or a corporation, keeping your finances separate ensures that the limited liability protection remains intact and your personal assets are not at risk in case of business debts or lawsuits.

Simplified bookkeeping: Maintaining separate accounts for business and personal finances streamlines your bookkeeping process, saving you time and effort. It also reduces the likelihood of errors that can occur when trying to separate transactions after the fact.

Tax compliance: Separating your business and personal finances simplifies your tax preparation process and helps maintain accurate records. It makes it easier to track deductible business expenses and report them on your tax returns. Mixing personal and business expenses can lead to confusion and potential errors, which may result in penalties or an increased likelihood of an audit.

Once the initial groundwork has been completed, the next step is getting the funds to launch the business. There are various funding options available, and each option has its own advantages and requirements, so it’s essential to carefully evaluate which one is best suited for your specific business needs. The most common ones include:

Personal Funds: Using personal savings, retirement accounts, or home equity to fund your business is the most straightforward option. This approach allows you to maintain full control over your company and avoid debt or share ownership. Although this option may appear straightforward, it’s important to closely examine your finances and have access to some extra cash just in case it costs more than expected to start or sales are initially lower than projected.

Conventional Bank Loans: Traditional bank loans are a popular source of funding for small businesses. To obtain a bank loan, you’ll need a personal investment (typically between 15% and 25%), a strong business plan, good credit, and collateral. Interest rates and repayment terms may vary depending on the lending institution and your creditworthiness.

SBA Loan Guarantees: The U.S. Small Business Administration (SBA) offers loan guarantee programs that help small businesses access financing through participating lenders. The SBA guarantees a portion of the loan, reducing the risk for lenders and making it easier for small businesses to obtain financing. The most popular SBA loan program is the 7(a) loan, which can be used for various purposes such as working capital, equipment purchases, or real estate acquisition.

Microloan Programs: Microloan programs provide smaller loan amounts to businesses that may not qualify for traditional loans due to a lack of credit history or collateral. These programs are often offered by nonprofit organizations or specialized lenders, such as Accion, LiftFund, or PeopleFund. Microloans usually have more flexible terms and eligibility requirements than conventional loans, making them more accessible to new or underserved businesses.
Investors:

Investors: Seeking investments from angel investors or venture capitalists is another option for small businesses. Angel investors are typically high-net-worth individuals who provide early-stage financing in exchange for equity in the company. Venture capitalists, on the other hand, are firms that invest in businesses with high growth potential. Both options involve giving up a portion of ownership and control in your business, but they can provide significant capital and valuable expertise to help your company grow.

Related: Understanding the different types of business funding

Hiring employees is a complex and often overwhelming process for a new small business owner, as there are several agencies to register with, such as the Texas Workforce Commission, Texas Department of Insurance, and Internal Revenue Service.

In addition to properly registering the business, employers are responsible for reporting new hires, verifying employees are eligible to work in the U.S., income tax withholding, unemployment insurance, unemployment taxes, and payroll withholding taxes, including Social Security and Medicare.

Related: Steps to hiring your first employee in Texas

Many small business owners overlook insurance, but adequate coverage can safeguard your company from various risks, including financial losses, legal liabilities, and unexpected disasters. A few types of insurance policies small business owners should consider when starting their business in Texas include:

General Liability Insurance: This type of insurance is essential for almost every small business, as it protects against financial losses resulting from bodily injury, property damage, or personal and advertising injury claims. General liability insurance covers legal fees and potential settlements, ensuring your business can continue operating even in the face of costly lawsuits.

Commercial Property Insurance: Property insurance covers the physical assets of your business, including buildings, equipment, inventory, and furniture. It provides protection against risks such as theft, vandalism, fire, and natural disasters.

Workers’ Compensation Insurance: While Texas does not require private employers to carry workers’ compensation insurance, it’s highly recommended to protect your business and employees in the event of work-related injuries or illnesses. Workers’ compensation insurance covers medical expenses, lost wages, and disability benefits for employees, as well as protecting against potential lawsuits.

Professional Liability Insurance (Errors & Omissions): If your business provides professional services or advice, you should consider professional liability insurance, also known as errors and omissions (E&O) insurance. This coverage protects your business from claims related to negligence, errors, or omissions in the services provided, which may result in financial losses for your clients.

Commercial Auto Insurance: If your business owns, leases, or operates vehicles for business purposes, commercial auto insurance is crucial. This type of insurance covers liability and physical damage resulting from accidents involving your business vehicles and provides coverage for uninsured or underinsured motorists. Personal auto insurance won’t typically cover a vehicle when used for business purposes.

Related: Types of insurance your business may need

Bookkeeping is a vital component of any business. While most commonly thought of as a way to stay out of tax trouble, bookkeeping provides insight into the financial health of your business and helps to make informed decisions regarding future investments, budgeting, and other financial endeavors.

There are several ways to organize and record financial information for a business. One method is to use accounting software, which can help streamline the process of recording data and generating reports. Another method is to establish a paper filing system, which can help to organize all physical documents related to bookkeeping. Small business owners can also outsource their bookkeeping process to professional accounting firms.

Whichever method is used, by maintaining accurate financial records and organizing them efficiently, you can set your business up for long-term success and financial stability.

Related: Setting up accounting for a business