It’s easy to start a sole proprietorship in Texas; you just start working.
However, when things seem too easy, there’s usually a catch or two!
For example, you don’t have to register your sole proprietorship with the Texas Secretary of State’s office or pay a fee. However, you might need specific licenses or permits at the state or local level.
Nor do you need an EIN, but 2 essential reasons exist for why you might get one.
And besides licenses and an EIN, you should consider taking other steps (while only sometimes necessary) that could benefit your new sole proprietorship business.
I’ll explain everything next and provide step-by-step instructions on how to start a sole proprietorship in Texas.
A sole proprietorship is an informal business structure with one owner. You are the sole, and your business is the proprietorship.
Sole proprietors (the owner) and the proprietorship are one entity, meaning you are liable for everything your business does.
While a sole proprietorship has many advantages, there are disadvantages you should know about!
Most entrepreneurs choose a sole proprietorship for the benefits; however, because of the disadvantages, many later change to an LLC to avoid them.
So, let’s see if a sole proprietorship is suitable for you:
The first advantage of starting a sole proprietorship is that, as a non-legal entity, you do not register it with Texas State, so you don`t need to complete any legal documents or pay a filing fee.
But you must register for a local license (AKA, your tax business registration number); we’ll look at that later.
The next advantage when you start a business using the sole proprietorship structure compared to legal entities (like a limited liability company or partnership) is you can use a single bank account and mix your and the business’s finances.
You see, legal entities must keep their finances separate to maintain their liability protection, and as sole proprietorships don’t have any, it’s not a requirement.
However, there’s a big downside: no liability protection!
As sole proprietorships aren’t separate entities from their owners, you avoid filing a business tax return; instead, you report all profits and losses (using Schedule C) on your Form 1040 tax return, meaning you might not (depending on your circumstances) need to pay an accountant.
A sole proprietorship comes with one tremendous disadvantage and several minor ones.
Let’s start with the main one:
You don’t get liability protection as sole proprietorships, so if someone sues your business or you go into debt, your assets (like your bank account, car, or home) are up for grabs.
For this reason, many entrepreneurs start a business in Texas using the LLC structure.
Credibility is crucial for convincing prospects and vendors to do business with you. The problem with a sole proprietorship not being a formal business structure is that it often lacks credibility compared to a separate legal entity.
Okay, now you know the advantages and disadvantages. Let’s look at how you start a sole proprietorship in Texas.
You now know you can start a sole proprietorship in Texas without filing legal documents with the Secretary of State’s office. In other words, you don’t need to register a sole proprietorship in Texas.
However, the following 4 simple steps can help you prepare your business for any eventuality. Those are:
By default, your name is your sole proprietorship name. However, you can do business using a different name by filing an Assumed Name, also called a Doing Business As (DBA); more on that next.
But first, you must choose a niche, product, or service-relevant business name for your brand. For that, you must ensure it is trademark-free and available in Texas.
To ensure your chosen business name is available, run a quick search using the Texas Secretary of State’s online business name search tool.
Trademark infringement is a serious legal problem, so you must ensure your chosen business name isn’t too similar to any already registered with the United States Patent Trademark Office (USPTO).
You check that by running a name check on the United States Patent and Trademark Office’s database.
For more information on trademarks, read my `Why Trademark Your Business Name` and `What’s The Difference Between A DBA And A Trademark` posts.
Speaking of a DBA, let’s look at how you register yours in Texas next:
A DBA is a name you can use for your sole proprietorship instead of your name.
For example:
My name is Terry O’Toole, and my first sole proprietorship was a landscaping business, but my name didn’t get the message across. So, I used the DBA, Dublin Landscaping Services, which was location and niche-specific.
To register your DBA (aka a Texas Assumed Name), you must file it with the County Clerk’s office relative to your location, which can be:
Check out this list of Texas County Clerks to find the right one for your business, then complete the Assumed Name Certificate and mail it to the county clerk’s address.
Note:
DBA fees and forms differ by Texas county, but most charge under $20.
Texas doesn’t have a general state business license, so if your business needs one (or several), you must apply with the relevant state and local government departments.
Some licenses and permits you might need depending on your sole proprietorship business activities:
Sole proprietors don’t need an EIN to operate; however, two valid reasons exist for getting one.
Hiring employees:
It might sound contradictory, but sole proprietorships can have employees!
To hire people, a sole proprietor must first get an Employer Identification Number (EIN) from the IRS to report and pay their employee’s payroll taxes.
Safety:
Sole proprietors (without employees) report their taxes, do business with vendors, and open bank accounts using their Social Security Number (SNN).
However, giving out your Social Security Number increases the risk of identity theft, and some banks require an EIN to open a business account; an EIN removes these problems.
Okay, that’s how to start a sole proprietorship in Texas, but once you’re in business, there are 4 more things you should do!
So, we’ll finish with those:
Even though your sole proprietorship is easy to start, it requires the same maintenance as any business structure.
The first 3 on the following list are optional but help run an efficient business; the last one is compulsory on the Texas state and federal levels.
A business bank account is optional when starting a sole proprietorship. However, having one can make your life easier during tax time because it helps separate your personal and business finances, simplifying reporting your business deductions on your tax return.
A sole proprietorship’s lack of limited liability means you’re at financial risk should someone sue your business.
General liability insurance helps reduce that risk by protecting you against client injury or property damage claims. Depending on your business operations, you may also need other policies, like commercial auto and property insurance.
Most US states require sole proprietorships to keep specific records, but Texas doesn’t.
That said, it’s prudent business practice to maintain the following just in case you need them:
Of course, as a new business owner, you won’t have those records, but the earlier you start, the better it will be for your business.
Taxes are obligatory, and the better you plan for them, the easier it will be to run your sole proprietorship.
Some taxes you may need to pay include sales and use, employment payroll, and local, state, and federal.
An efficient way to control your tax requirements is to use accountancy software that helps you maintain accurate financial records.
To learn more about your Texas tax requirements, read my post on `How to start a business in Texas.`
Nothing, as you don’t register a sole proprietorship with Texas State. However, businesses must register for a tax ID with local government authorities, and fees vary depending on the location.
While Texas doesn’t have a general state business license, your sole proprietorship (depending on your niche) might need a local business license, a sales and use tax license, and relevant permits to operate.
Once you’ve chosen your business idea, your next move should be to validate it using a business plan. Once you know your business idea is viable, follow the 4 steps in this post.
It only takes 4 steps to start a sole proprietorship in Texas.
And that’s how to start a sole proprietorship in Texas.
But remember, while you don’t have to register your sole proprietorship at the state level, you should register it with your local municipal government revenue department, choose an appropriate business name (if not using yours), get the relative licenses/permits for your niche, and apply for an EIN (if hiring staff) and to minimize the risk of identity theft.
I hope my guide answered your question on how to start a sole proprietorship in Texas, and I wish you massive success with your business.
This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness. It also does not indicate any affiliation between Tailor Brands and any other brands, services or logos.
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