Forming a Sole Proprietorship In Texas: Everything You Need to Know
Forming a sole proprietorship in Texas allows you to create the most common, basic type of small business without filing any state paperwork.3 min read
2. Establishing Legal Operation
3. Managing Business Finances
4. Drafting a Business Plan
Forming a sole proprietorship in Texas allows you to create the most common, basic type of small business without filing any state paperwork. With a sole proprietorship, you can legally engage in business activity in the state but do not need to establish a formal business entity. The exception is for a sole proprietorship that uses a business name other than the person's legal name. In this case, you must file a DBA (doing business as) assumed name certificate with the county clerk's office where business is conducted.
Naming Your Business
As stated above, you must file with the county clerk's office if you plan to use a trade name for your sole proprietorship. You must choose a DBA that is not similar to a name registered by another business. You can conduct a name search using these resources:
- U.S. Patent and Trademark Office
- Texas Comptroller of Public Accounts
In most cases, using your last name is sufficient if you don't plan to advertise. If you do choose a name, the filing fee will vary by county. You may also want to trademark your name to provide additional legal protection.
Establishing Legal Operation
Depending on the type of business you have, you might need specific licenses. Check with the resource maintained by Texas Occupational Licenses and Permits to determine if you need a professional or business license for your sole proprietorship. If you have a physical location, you might also need zoning clearances and/or building permits.
Certain types of businesses, such as those that sell goods in the state, may need to register to pay sales or use tax. You can apply for your sales tax permit with the state of Texas online.
If your sole proprietorship will hire employees, you need to register for an employer identification number (EIN) with the IRS. Otherwise, you can use your social security number to pay both business and personal taxes. In some cases, you might need an EIN to open a business bank account or credit card.
If you do hire employees, you will need to report their names to the Texas Child Support Division within 20 days of hiring or be subject to a $25 fine. You are required to pay unemployment tax for your employees through the Texas Workforce Commission.
Managing Business Finances
Keep personal and business finances separate by maintaining a separate business bank account. If you have a home-based business, you likely need separate business liability insurance. This protects assets such as your home if someone sues your business and wins. Working from home may qualify you for a tax deduction, but if you regularly meet with clients you may want to rent office space.
Drafting a Business Plan
A business plan helps you solidify the direction of your business and the steps you'll need to take to meet these goals. It's especially important to create this document if you plan to apply for a business loan. The business plan should detail:
- The purpose of your business
- A market analysis, including identification of your target customer and assessment of competitors in this sector
- A marketing plan describing how you will connect with your target audience, whether through traditional or digital forms of advertising
- Operations and management information
- Financial information including at least three years of projections with balance sheets and cash flow analysis
When you're drafting your business plan, it's a good time to decide whether you need professional help with certain aspects of your company. This could include a bookkeeper to manage the daily finances of your business, an accountant to help with tax planning and financial projections, and a business lawyer to advocate for the interests of your company.
If you need help with establishing a sole proprietorship in Texas, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.