If you're looking to start a business in Texas, you should be aware of these opportunities and challenges.
- Texas has the second largest gross domestic product, valued at $1.77 trillion annually.
- Texas has a lower-than-average unemployment rate of 3.4%.
- In Texas, there are 2.7 million small businesses employing 4.7 million people.
They say everything is bigger in Texas, and that includes the state's economy. The Lone Star State boasts a gross domestic product of $1.77 trillion – the second largest in the nation. The state is home to 2.7 million small businesses, which employ 4.7 million people. That's more than 45.1% of Texas' private sector workforce. Last year, the state's economy grew at a rate of 3.2%, outpacing the nation.
Like in most other states, the unemployment rate in Texas has plummeted since late 2011 and today stands at 3.4%, which is even lower than the national unemployment rate (3.6%). While low unemployment is a clear indicator of Texas' economic health, it's a double-edged sword: An employee's market means small businesses can expect to pay more for top talent and face fierce hiring competition from larger companies with deeper pockets. Entrepreneurs remain largely optimistic, though, buoyed by the strong economic recovery after the financial crisis of 2008.
"Texas is very much a can-do state," said Trey Bowles, founder and CEO of the Dallas Entrepreneur Center, who was among the many we spoke to who were enthusiastic about the state's business climate. "It's arguable that it's the No. 1 state to do business in, and we would argue it's the No. 1 state to start a business in right now."
What do entrepreneurs have to say about the state of small business in Texas today? Are small businesses able to take advantage of the healthy economy, and are they optimistic about what tomorrow holds for the Texan business owner? Business News Daily reached out to some of the state's entrepreneurs to find out.
Access to capital
One hurdle for small businesses, particularly startups, is access to capital. Financing the launch or expansion of a business requires a good deal of capital, but Texans said it can be difficult for entrepreneurs to find the money they need.
"It's all tied to the fact that banks are not loaning money like they were 10 years ago," said David Frankel, chief marketing officer at alternative lender Capify. "It's a lot more conservative, and this is a global trend."
Many small businesses have trouble getting a loan from area banks, and those in rural areas have limited options unless they travel into the city, Frankel said. Venture capitalists and angel investors can be difficult to find and, if they are willing to invest, often attach undesirable terms to the capital they offer. For example, Frankel said VCs typically want businesses to uproot and move to wherever the investor is headquartered. There's no dearth of wealthy potential investors based in Texas, but as it stands, that in-state money is generally not flowing to ground-level enterprises.
"There is not enough capital going into the early-stage entrepreneurial world," Bowles told Business News Daily. "There is an enormous amount of money in this area … but the question is, how do we [convince] a billionaire or major corporation to invest in early-stage entrepreneurs?"
Tight labor market
One problem that the small business owners we interviewed mentioned repeatedly was the difficulty of finding the labor they need to continue growing at the pace they would like. It seems that both Texas' immense economic expansion and a labor force decline that persisted through 2015 have contributed to the problem. Still, most entrepreneurs we spoke with view their difficulty in finding additional help as a good problem to have, because it means they are constantly expanding.
"Whether you are looking for help in the Permian Basin fields, tech workers in Austin or experienced petrochemical engineers in Houston, finding talented employees is becoming more and more difficult," said Travis Crabtree, president and general counsel of Swyft Filings. "There is some concern that public education in the state is not getting the attention it needs to assure an ample supply of talented workers in the future. Plus, there are some 'quality of life' issues the cities are trying to address to make the cities more walkable and desirable for young creative workers."
Kellie Sirna and Stacy Elliston, co-founders of Studio 11 Design, said that, while business has been great, it's become harder and more expensive to fill positions.
"We're having to pay 20% more for designers straight out of school, whereas before, we could get the cream of the crop for less because nobody was really moving, and things weren't really growing yet," Sirna said.
No corporate or individual income taxes
With no corporate or individual income taxes and no state property taxes in Texas, business owners keep a larger slice of the pie come Tax Day. The lack of an income tax means Texas' "tax freedom day" – the day by which the average Texan has earned enough to pay all their taxes – is April 5, which ranks as the fifth earliest in the nation.
"There's a low tax burden here; that's kind of the most obvious benefit of being in Texas," Sirna said.
Of course, Texas still has a budget to maintain. The state collects most of its tax revenue through sales and franchise taxes, according to data compiled by the Texas Comptroller's Office. Texas imposes a 6.25% state sales tax, which can be joined by an additional 2% local sales and use tax. According to the Tax Foundation, the average state and local tax burden in Texas is 7.6%, making it the fifth most expensive in terms of these taxes.
Simplified state regulations
Many business owners told us that Texas' regulatory environment is conducive to successful business operations. Even business owners in more stringently regulated industries – like Cody Yarborough, president of Lifecycle Biotechnologies – expressed satisfaction with the state's approach.
"We operate in a highly regulated industry, but from the state level, Texas is so pro-business," Yarborough said. "The state government tries not to get in our way, and that is still the prevalent view in the state congress."
Christopher Corso, who recently expanded his law firm to Texas, said the state's simple-to-navigate laws made the transition easier.
"You always plan for hiccups and problems, but it's been pretty smooth," he said. "It's very easy to comply with state laws. I find that it's a lot easier here than [on] the East Coast, [where I used to work]."
The lack of red tape gives entrepreneurs breathing room to strategize and expand more quickly, said Andy Albertini, owner and president of A2 Consulting Group.
"State laws are straightforward and easy to comply with, which saves me on the need to hire outside experts to help me stay in compliance," he said. "That cost savings can run right back into continued growth."
Growing metropolitan areas
The major metropolitan areas in Texas – Dallas-Fort Worth, Austin, Houston and San Antonio – are experiencing strong growth, which leads to more economic activity. Entrepreneurs reported seeing more startups and heaps of small businesses, as well as new residents who increase the demand for their goods and services.
"Small businesses are thriving here in Texas," said Bernard Ortiz de Montellano, owner of the cleaning service Anago of Austin. "I'm in Austin, and the growth rate here is kind of crazy. Most of our clients are expanding."
Corso said the same growth is happening in Houston, where his defense firm has been practicing for a year. Houston added the most people of any major city in the state. The city grew by an estimated 101,711 people from 2010 to 2014, bringing its total population to 2.2 million. That boom has led to more startups and business opportunities, Corso said.
"You talk about small business, and you can go anywhere, and that's all you see," Corso said. "There are no empty places. The growth is huge. There are people just flooding into here."
Diversity and supportive business environment
Another benefit of doing business in Texas that entrepreneurs mentioned repeatedly was the supportive and diverse business communities throughout the state. Many business owners said they belong to an entrepreneurial organization or have sought help from a development center. Others said their areas are seeing a boom in startups and small business growth spurred by the population growth.
"Texas, from what I can see … hasn't been hit as hard by a lot of the economic struggle," said Rusty Crum, president of C.G. Laboratories.
"You really can't believe how many businesses [there are] to the left and right as you drive down the road," Corso said. "I'm in a great city; it's pro-growth, with a lot of diversity."
Mark del Bosque, owner of e-commerce company Anime Bento, said that, amid the booming growth and healthy entrepreneurial environment, he's found support from community members and other small business owners in the area.
"There's such a tight network of people here, and I've found that support to be a very good thing," he said. "It seems like there is a good beginning of an enterprising revolution, where people are working with small business[es] and growing them."
Sirna and Elliston have taken advantage of the thriving business environment in Dallas, for example. While much of their designing revolves around the hospitality industry, they've been able to branch out and find other clients as well. According to Sirna, this has helped protect them from any future downturns in hospitality.
"Since we're in Dallas, we're able to focus on a variety of industries," she said. "The first thing to go down in a recession is hospitality, because people don't travel, so we've diversified ourselves. We're really able to do that because of the widespread business ownership in Texas."
Frequently asked questions about business in Texas
- Stumped on what type of business you want to run? Check out our list of smart business ideas for 2019.
- Need help writing a business plan? These business plan templates can help you get started.
- Not sure which is the best legal structure for your business? We've broken down the different types, including sole proprietorship, partnership, LLC and various types of corporations.
- Looking for funding for your startup? These reviews and best picks for alternatives to small business loans can help.
- Make sure you're managing your money properly with the right accounting software for your business.
How do you open a business in Texas?
Launching a business in Texas starts with registering your company and choosing a structure. You can choose a sole proprietorship, limited liability corporation (LLC), S corporation or C corporation. You will have to file your business name with the state and/or county in which you intend to operate. Incorporated entities typically have to register with the Texas secretary of state, while most sole proprietorships must register with the county.
Once your business is formed and registration applications have been filed, you must also determine your tax obligations under state and federal law. Filings for Texas taxes must be submitted to the comptroller of public accounts. Some businesses might be required to obtain special permits or pay additional fees.
Is a business license required in Texas?
Most businesses need a license, permit or certification to operate in Texas. You can determine your requirements by checking with the Texas Business Permit Office. Through this office, you can speak with a liaison who will help you determine which permits and licenses you need, as well as facilitate the application of materials for regulatory review.
How much does it cost to get a business license in Texas?
The cost of business licenses and permits varies by city. Not every city maintains business license requirements, and the state does not have a general business license. However, businesses are commonly required to have some type of permit or license, depending on the goods and services they sell. These licenses range in cost from $25 to $500 depending on local ordinances and the type of permit a business seeks.
How do you dissolve a Texas LLC?
To dissolve an LLC in Texas, you must first cease all operations except those related to winding down the business. These include the payment of any and all debts, the settlement of legal disputes, the liquidation of assets, and the collection of outstanding payments owed to the company. You must then request what is known as a Certificate of Account Status from the Texas comptroller of public accounts, which states that the Texas secretary of state acknowledges your LLC is up to date on all taxes due. You must also secure a Certificate of Termination from the secretary of state's office and pay a $40 fee to officially dissolve your LLC.
How long does it take Texas to process business registration filings?
In Texas, it generally takes 1-3 business days to process the formation of an LLC. Same-day electronic filing is also available through the Texas Secretary of State Office.
How do you obtain a DBA in Texas?
To register a "doing business as" name in Texas, you must first ensure that the name you want to use is available. You can do this by contacting the Texas Secretary of State Office. If your chosen DBA name is available, you must file an application for registration with the Secretary of State's Office as well. Some types of businesses are also required to maintain records of their DBA with each county they operate within. You can find more information about Texas DBAs on the secretary of state's website.
When do you need to register as a foreign entity in Texas?
If you are a business registered in another state but operate within the borders of Texas, you are required to obtain a Certificate of Authority from the Texas Secretary of State's Office before conducting any business. The foreign qualification process requires you to file an application for registration with the secretary of state and to appoint a registered agent who resides in Texas. Processing of a Certificate of Authority application can take 3-5 business days.
Resources for small businesses in Texas
Texas Small Business Development Centers
Texas is home to dozens of small business development centers. Each is dedicated to supporting the development and retention of small businesses, and helps entrepreneurs with tasks like crafting business plans and navigating the state's tax code. You can find your region's small business development center via the link below:
SCORE offers volunteer business professionals and expert mentors to give counsel and guidance to entrepreneurs looking to start or expand their business. Its services are free and volunteer-driven. Here are some of the chapters in Texas:
Texas Economic Development Corporation
Established by the state government, the Texas Economic Development Corporation is intended to promote economic development throughout the Lone Star State. The organization offers resources and information for small business owners looking to launch a startup or expand an existing business.
The Dallas Entrepreneur Center
The Dallas Entrepreneur Center (DEC) is a 501(c)(3) nonprofit that serves entrepreneurs in the Dallas area, providing a location where business owners can receive training, education, mentorship, promotion, and access to capital in order to encourage and equip the entrepreneurial community to start, build, and grow their businesses.
Some source interviews were conducted for a previous version of this article.