How to Start a Sole Proprietorship in Texas
When it comes to starting a new business, one of the most common forms of ownership is a sole proprietorship. In this article, we will explore the concept of a sole proprietorship, its benefits, and drawbacks, and provide a general overview of how to establish one in The Lone Star State.
What is a sole proprietorship?
A sole proprietorship refers to a business that is owned and operated by a single person. The owner of a sole proprietorship is personally responsible for all the business’s financial obligations and liabilities because the two are considered a single legal entity.
In the event that the business fails to meet its obligations, the owner could have their personal assets seized in service of business debts.
This type of business offers flexibility that others do not, but does mean there are fewer legal protections for small business owners.
Examples of a sole proprietorship
Sole proprietorships can be found in various industries and professions, though it is more common among freelancers and independent business operations. Some common examples can be:
- Small retail shop owners
- Local services, like lawn care or a beautician
- Online services such as writing, consulting, or graphic design
- Artistic professionals like a photographer
What qualifies your business as a sole proprietorship?
A business is considered a sole proprietorship as long as it has a single owner who has not formed the business as any other structure. If you have not completed Articles of Organization or Articles of Incorporation, but conduct business activity, that is a sole proprietorship. You are also required to claim all business income as personal income on your tax returns.
Sole proprietorship vs LLC
A sole proprietorship is a business with a single owner and operator, where the two are considered the same legal entity. The owner holds unlimited personal liability for the business’s debts and obligations.
An LLC (Limited Liability Company) is a business formed as a separate legal entity from its owner or owners. They are then provided limited liability protection for their personal assets, while maintaining flexibility and autonomy.
Who is it best for?
A sole proprietorship is well-suited for small, simple businesses owned and operated by a single individual. It is particularly beneficial for those who prioritize simplicity and maintaining full control over their business, and those who work in low-risk areas of business.
How to set up a sole proprietorship in Texas
While sole proprietorships are known for being fast and inexpensive to set up, that does not mean there is no work to do. You want to be sure that your business is in compliance with federal and Texas laws, and you may want to go further than the baseline for your business. We’ve captured some of the requirements and common options here to get you started with the process.
Is there any formal paperwork filed to register this new business?
A Texas sole proprietorship is established just by its own existence – when you conduct business under your own name, you have started this type of business entity. No paperwork needs to be filed for this to happen. However, you may need to complete legal documents for things like business licenses, using a trade name, or obtaining an EIN through the IRS.
Name your business
For many entrepreneurs, choosing a business name can be a stressful decision. With a sole proprietorship, you have the option of using your own name or working under an assumed business name, depending on your needs.
Using your own name
When a sole proprietorship is established, it automatically shares a name with its owner, as they are the same legal entity. The two also have the same Social Security Number. You do not have to do anything if you want to operate under your personal name and can proceed this way with no additional cost or paperwork. The Texas Secretary of State does not need record of this form of naming.
Setting up a DBA
If you do want to use a name other than your legal name, Texas allows this through the process of filing a DBA or “doing business as” name. You will need to choose a name that hasn’t been used by another business in Texas, and follow all other naming guidelines. To formalize the name and ensure it can’t be used by others, you will then file an Assumed Name Certificate with the county clerk’s office where your business operates. Exact requirements and filing fees vary by county but are typically $20 or less.
Despite Texas having no state-level general business license, most sole proprietorships will end up needing licensing of some sort to operate. The most common is the sales tax permit, which any business that sells or leases something taxable will need before collecting sales and use tax and paying it to the Texas Comptroller of Public Accounts. There is no fee for this and it can be obtained online. Other businesses may need professional licenses depending on their exact line of work. Daycares, accounting firms, and tanning salons are all examples of businesses that require additional state licensing.
In addition, city and county governments in Texas may also require licenses and zoning clearances. For example, the City of San Antonio requires any business that sells items in public spaces to have a Peddler’s License. You will want to check with the local county clerk’s office to ensure you have all the required permits.
- Lower operational and regulatory costs than other business structures
- Simple and fast setup process
- No requirement to disclose financial information
- Owner has complete control over operation and decision-making for the business
- Owners take on unlimited personal liability and risk their personal assets
- Banks and lenders may be less likely to offer loans, credit cards, or business bank accounts
- Possible lack of credibility with customers
- No continuity; if the owner dies or leaves, the business ceases to exist
Is a sole proprietorship the same as a partnership?
No, a sole proprietorship has a single owner, while a partnership can have multiple. The two share other similarities, like a lack of formation paperwork and personal liability, but they have different structures due to the number of owners. In a partnership, the liability is shared between all partners.
Can a sole proprietor deduct business expenses?
Yes, any legitimate business expenses incurred while operating your sole proprietorship are considered tax deductible. This can include home offices, supplies, marketing expenses, and travel. These will be reported on your personal income tax returns alongside business income.
Do I have to charge Texas sales tax for my sole proprietorship?
Texas has a 6.25% sales tax on many goods and services. If you lease or sell something considered taxable under state law, you will need to collect and remit those sales taxes.
Can I have multiple sole proprietorships in Texas?
You can operate multiple sole proprietorships in Texas, as long as you are able to manage the responsibilities and obligations of each business separately. You may want to seek legal advice from an experienced law firm if there is any conflict or extra risk to your assets.
Do I have to be a U.S. citizen to start a sole proprietorship?
No, sole proprietorships are open to non-citizens or residents throughout the country and in Texas. You will need to be sure you are complying with all visa and immigration requirements and understand any tax implications for engaging in business activity.
Does my sole proprietorship need an EIN?
Any business with employees will need to obtain an EIN, or Employer Identification Number, through the Internal Revenue Service. This will allow you to withhold things like payroll and unemployment taxes. However, if your sole proprietorship does not have employees, you do not need to do this.
How does a sole proprietorship pay taxes?
As a sole proprietor, the way you pay taxes is different from other business entities. Since there is no legal separation between you and your business, all of your business income and expenses are reported on your personal tax return. This means that you will need to file a Schedule C, also known as “Profit or Loss from Business,” along with your individual Form 1040.
What’s a Schedule C and what information does a sole proprietor need to fill it out?
Schedule C is used to calculate your business’s net profit or loss by deducting your business expenses from your business income. You may be eligible to claim various deductions and credits related to your business, such as home office expenses, self-employment tax, and health insurance premiums.
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