A sole proprietorship is the simplest and most common structure for starting a business. It is an unincorporated business owned and run by one individual, with no legal distinction between the owner and the business entity.
Establishing a sole proprietorship in Texas offers significant advantages, including no state business income tax, complete control over business decisions, simplified tax preparation, and minimal regulatory requirements. Texas’s favorable business climate makes it an attractive option for many entrepreneurs.
However, the structure does come with risks that individuals should consider before deciding whether to choose one for their business. In this post, The Zimmerman Law Firm looks at how to form a sole proprietorship in Texas and how we can help should you have questions about the process.
What Is a Sole Proprietorship?
A sole proprietorship is the simplest and most common form of business ownership, where a single individual owns and operates the business. It is an unincorporated entity, meaning there is no legal distinction between the owner and the business. The owner is personally responsible for all debts and liabilities incurred by the business.
This structure offers easy setup, minimal regulatory requirements, and complete control over business decisions. However, it also means that the owner assumes full personal liability for any financial obligations or legal issues that arise. Sole proprietorships are ideal for small, low-risk businesses and individual entrepreneurs without employees.
How to Start a Sole Proprietorship in Texas
Step 1: Decide on a Business Name
Choosing a unique and appropriate business name is crucial to starting your sole proprietorship in Texas. Your business name often gives customers a first impression of your brand, so it should be distinctive and reflect your business’s values and services.
When naming your business, avoid names that imply false governmental affiliation and ensure the name is not misleading about the nature of your business. Selecting a clear and memorable name sets a solid foundation for your business’s identity.
Step 2: File an Assumed Name (DBA)
An assumed name, also known as a DBA, or “Doing Business As” name, allows you to operate your business under a different name than your own and is essential for branding and establishing a professional image. To file a DBA in Texas:
- Choose a name;
- Complete the Assumed Name Certificate from the county clerk’s office; and
- Submit the form with the required fee.
Processing times vary by county. In McLennan County, for example, the processing time is about two minutes and is handled at the same time the form is completed and submitted.
Step 3: Obtain Necessary Permits and Licenses
To operate a business in Texas, you must comply with various licensing requirements. Companies may require a general business license from the local city or county government. Additionally, industry-specific permits and licenses may be necessary, such as health permits for food-related businesses or professional licenses for trades like contracting.
Contact local authorities such as city hall or the county clerk’s office to determine the specific permits and licenses needed for your business. They can provide detailed information on the necessary permits and licenses for your business type and give you instructions on how to file applications for your Texas sole proprietorship.
Step 4: Get an Employer Identification Number (EIN)
The Internal Revenue Service (IRS) issues an Employer Identification Number (EIN) to identify businesses for tax purposes. Even sole proprietors benefit from having an EIN as it separates personal and business finances
To apply for an EIN, visit the IRS website and complete the online application, which provides the EIN immediately. Alternatively, submit Form SS-4 by mail or fax. Benefits of an EIN include establishing business credit and staying compliant with federal regulations.
Step 5: Register for State Taxes
Understanding your state tax obligations is crucial as a sole proprietor in Texas. While Texas does not impose a state income tax, other tax requirements, such as sales and employer taxes, may apply if you have employees.
To register for a sales tax permit, visit the Texas Comptroller of Public Accounts website and complete the online application. You must provide details about your business, including its name, address, and nature of business activities. Once registered, you will receive a sales tax permit to collect and remit sales tax. Other applicable taxes may include franchise and employer taxes.
Step 6: Additional Steps
Establishing your sole proprietorship may also involve additional crucial steps. If you plan to hire employees, comply with federal and state employment laws, including minimum wage, overtime, and anti-discrimination regulations. Setting up a proper payroll system is essential for tracking hours, withholding taxes, and providing benefits.
Opening a business bank account helps keep personal and business finances separate, simplifying accounting and improving financial transparency. To open an account, choose a bank, provide any required documentation, and deposit initial funds.
Maintaining proper business records is vital for financial health and legal compliance. Keep track of income, expenses, and tax filings. Utilize tools like accounting software to streamline record-keeping and ensure accuracy. By following these steps, you set a strong foundation for your business.
How Much Does Establishing a Sole Proprietorship Cost?
Setting up a sole proprietorship is generally inexpensive compared to other business structures. The primary cost involves filing for a DBA, which varies by county. Additionally, you may need various permits and licenses based on your business type and location.
General business licenses can cost around $50 to $100, while industry-specific permits range from $25 to several hundred dollars. Applying for an EIN through the IRS is free.
Registering for a sales tax permit with the Texas Comptroller of Public Accounts also has no associated fee. The total cost of setting up a sole proprietorship in Texas might range from $20 to $200, depending on your business’s specific requirements and permits.
Contact The Zimmerman Law Firm
Starting a sole proprietorship in Texas is exciting, but it is understandable if you have any questions or doubts. At The Zimmerman Law Firm, we are committed to providing legal advice tailored to your needs should you need assistance forming your business. Call our office or fill out our online contact form today to schedule a free consultation.
Where to find our Waco office
Michael Zimmerman
Michael was born in Houston, Texas. His education at Baylor and Texas State Universities earned him a Bachelor of Science degree in 1987. His major was in Biology with a Minor in Chemistry. He finished his legal education at Texas Southern University in 1990, earning a Juris Doctorate from Thurgood Marshall School of Law. He was admitted to the State Bar of Texas in 1990.
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