Key Takeaways for Starting a Business in Texas:
- Texas offers a business-friendly tax framework, including no personal income tax and exemptions from franchise tax for sole proprietorships. This allows businesses to reinvest their profits and save significantly on taxes, making starting a business in Texas a favorable choice.
- Texas is one of only five states that do not levy any business tax, personal income tax, or fee on sole proprietors. This creates a conducive environment for new and small businesses to thrive and allocate more resources to growth.
- Texas exempts many small businesses from tax obligations, providing relief to enterprises with total revenues below a certain threshold. This encourages entrepreneurship and reduces the tax burden on emerging ventures.
- Eligible taxable entities with lower revenue can benefit from a reduced franchise tax rate, known as the “E-Z” rate. This additional incentive helps businesses save money and allocate funds towards expansion and innovation.
Starting a Business in Texas: What do I need to do?
- Choose a Business Structure- Decide on the most suitable legal structure for your business when you consider starting a business in Texas, such as a sole proprietorship, partnership, corporation, or limited liability company (LLC). Each structure has its own benefits and implications for taxation and liability.
- Name and Registration – Select a unique and memorable name for your business, ensuring it complies with Texas’ naming guidelines. Register your business name with the Texas Secretary of State and conduct a thorough search to ensure the name is available.
- Licenses and Permits– Starting a business in Texas requires determining the specific licenses, permits, and registrations required for your business activities. Check with local, state, and federal authorities to ensure compliance with all necessary regulations.
- Tax Obligations– Obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) for tax purposes. Familiarize yourself with Texas state taxes, including sales tax and franchise tax, and fulfill your obligations accordingly. Keeping this in mind when you’re starting a business in Texas will keep you in the clear from any penalties from the IRS.
- Financing – Don’t forget that starting a business in Texas requires you to determine the financial requirements of your business and explore funding options. This may include personal savings, loans, grants, or investments from partners or investors.
Does Texas have a state income tax?
No, Texas does not have a state income tax. It is one of the few states in the United States that does not impose a personal income tax on its residents. The state generates revenue through other means, such as sales taxes, property taxes, and various fees and licenses. The absence of a state income tax is one of the factors that contribute to Texas being considered a tax-friendly state for individuals and businesses.
Does Texas have a franchise tax?
Texas imposes a franchise tax on most types of businesses, including corporations. The franchise tax is based on the taxable entity’s margin or, in certain cases, a calculation based on the entity’s total revenue. The taxable entity is generally required to file an annual franchise tax report with the Texas Comptroller’s office. If the taxable entity has limited revenue, they are exempt from franchise taxes.
Does having a mailing address in Texas trigger a state income tax?
Having a mailing address in Texas alone does not automatically trigger corporate income tax or registration requirements for a business. However, if a business operates within the state of Texas, it may be subject to certain tax and registration obligations.
What are the Texas corporate filing requirements?
Texas corporate filing requirements are not complicated. Some forms are one-time-only, while others are required regularly. During Texas corporation formation, the Certificate of Formation for LLC or an Establishment Certificate for corporation must be submitted to the Texas Secretary of State.
What annual forms should be filed in Texas?
- Annual Report
- State Business Tax – In Texas, even LLCs have to pay franchise taxes.
- State Employer Tax – If the company hires employees, employer tax has to be paid as well as state unemployment insurance (UI) tax.
- Sales and Use Tax – If the entity is conducting business in Texas, it has to pay sales tax.
- Registration in Other States – If the entity is conducting business in other states, it needs to register and file corresponding documentation.
What are the tax considerations for marketplace providers?
Sales Tax – Marketplace providers conducting business in Texas must collect, report, and remit state and local sales and use tax on all sales made through a marketplace. Marketplace providers are required to certify to marketplace sellers that they will collect sales and use tax on their behalf.
Franchise Tax – A marketplace provider that is a taxable entity (corporation, partnership, LLC, etc.) must report and remit franchise tax if it has physical presence or economic nexus in Texas. A foreign taxable entity (i.e., out-of-state entity) with a Texas use tax permit is presumed to have nexus in Texas and is subject to Texas franchise tax.
What are the tax considerations for marketplace sellers?
Sales Tax – A marketplace seller is not responsible for collecting and remitting sales and use tax on sales through the marketplace if the marketplace provider has certified that they are assuming the responsibilities. If the marketplace provider does not issue any type of certification that it is collecting sales and use tax on behalf of the marketplace seller, then the marketplace seller should collect sales and use tax until a certification is received.
Franchise Tax – A marketplace seller that is a taxable entity (i.e. corporation, partnership, LLC, etc.) must report and remit franchise tax if it has physical presence or economic nexus in Texas. A foreign taxable entity (i.e., out-of-state entity) with a Texas use tax permit is presumed to have nexus in Texas and is subject to Texas franchise tax.
What are the changes for franchise tax nexus?
The Comptroller’s office has amended Rule 3.586, Margin: Nexus, for franchise tax reports due on or after Jan. 1, 2020. A foreign taxable entity with no physical presence in Texas now has nexus if, during any federal accounting period ending in 2019 or later, it has gross receipts from business done in Texas of $500,000 or more.
Additionally, a foreign taxable entity with a Texas use tax permit is presumed to have nexus and is subject to Texas franchise tax.
How do you dissolve a business in Texas?
Just as starting a business in Texas involves a lengthy process, so does dissolving a business in Texas. To satisfy all requirements to terminate or withdraw the entity, first submit these items to the Comptroller’s office, in order.
Step 1. File any Annual Franchise Tax and (Public or Ownership) Information Report forms.
Step 2. Pay any tax, penalty, and interest payments due.
Step 3. File a Final Franchise Tax Report to report your entity’s accounting data starting the day after its last annual report accounting period ended to within 60 days of the entity’s termination date.
Step 4. Complete and submit Form 05-359, Request for Certificate of Account Status to Terminate a Taxable Entity’s Existence in Texas or Registration (PDF), or request the certificate online using Webfile.
Then, submit these items to the Secretary of State (see Connecting with the Secretary of State section below) by the filing deadline on or before closing time the last business day of the year (usually Dec. 31) that your entity is terminating/withdrawing/merging.
Step 5. Submit Form 05-305, Certificate of Account Status to Terminate Texas Registration, once you receive it from the Comptroller’s office. This certificate is valid only through Dec. 31 of the year issued.
Step 6. Complete and submit Secretary of State Termination forms, and pay filing fees.
What are the due dates I need to remember in Texas?
- The annual franchise tax report is due May 15th. If May 15th falls on a weekend or holiday, the due date will be the next business day.
- Before getting a Certificate of Account Status to terminate, convert, merge, or withdraw registration with the Texas Secretary of State:
- A Texas entity terminating, converting, or merging, must file its final tax report and pay any amount due in the year it plans to terminate, convert, or merge.
- An out-of-state entity ending its nexus in Texas, must file its final report and pay any amount due within 60 days of ceasing to have nexus.
How much are the penalties and interest in failing to file in Texas?
- A $50 penalty is assessed on each report filed after the due date.
- If tax is paid 1-30 days after the due date, a 5 percent penalty is assessed.
- If tax is paid over 30 days after the due date, a 10 percent penalty is assessed.
- Past due taxes are charged interest beginning 61 days after the due date.
Can Cleer file my Texas Income or Franchise Tax?
YES! Every Cleer Corporate Income Tax Package includes BOTH Federal and State income tax filings. If you do business in more than one State, each additional state is only $175 each.
Cleer provides accurate, affordable, and efficient financial and tax services for U.S. businesses and subsidiaries to help entrepreneurs do it right from the start. We also offer all-inclusive bookkeeping packages that include monthly statements as well as your federal and state tax returns. If you have any other questions about forming your company or how to maximize your tax savings, book a consultation to discuss the best structure for your startup business, regardless of which state you register in.
Now that you are familiar with starting a business in Texas and the Texas corporate tax rate, be sure to explore our state tax guide. This comprehensive article provides crucial information on state-specific tax rates, filing requirements, and valuable tips for effectively managing your business taxes. Expand your knowledge and ensure compliance, no matter where your business operates.
