The state of Texas is known as one of the best places to start a business. In late 2015, the state’s unemployment rate sat at about 4 percent, which is about one point below the national average. Unlike the rest of the country, which experienced stagnant payrolls and lower rates of participation in the workforce, Texas has experienced the opposite effect.
Things have definitely improved for small businesses in the Lone Star State. Its tax rate for businesses has gone down. In certain circumstances, the tax rate that the business owner will pay will be zero if they don’t meet a legal threshold. For small businesses in Texas, this can give the business owners more time and a better opportunity to establish themselves and grow.
All businesses in Texas have to pay what’s known as a franchise tax, even if they’re not technically a franchise. Texas taxes most businesses at a rate of 1 percent of their margins. The amount that business owners pay is the lowest of the following three numbers: either 100 percent of revenue subtracted by the cost of goods sold, 70 percent of the company’s total revenue, or 100 percent of your business’ revenue minus compensation.
The only Texas businesses that don’t have to pay the franchise tax are sole proprietorships and some general partnerships. All other types of businesses in the state must pay the franchise tax.
When a business reaches a certain point in their history, they can switch from S corporations and LLCs to a C corporation. The treatment for Texas corporations is extremely straightforward. The state of Texas requires its businesses to pay its standard franchise tax. Because the 1 percent tax rate is extremely low, the state of Texas remains one of the best places in the country to do business.
Many businesses sign up as an S corporation. With this type of business entity, you’ll get many of the legal benefits by becoming an S corporation, and you will not have to pay federal or in some cases even state income tax. Under an S corporation, your shareholders will get taxed on their equity. But based on your company’s revenue, you might still need to pay the franchise tax. The shareholders will not have to pay state taxes on their equity.
Another popular type of business entity in Texas is the limited liability company or LLC. In the majority of US states, LLCs protect you from certain liabilities. However, you will need to pay a personal income tax instead of taxes on your business income. As with S corporations, Texas will charge your LLC the franchise tax. But you will not have to pay state income taxes on your personal income. Because your LLC will never be more than 1 percent, your financial situation as an LLC is a lot better than those of other states.
While most partnerships in Texas pay the franchise tax, sole proprietorships are exempt from this requirement. The test to see whether your business is a partnership will be comprised of determining whether your business is actually owned by real humans. The business income needs to go directly to those people. With these types of situations, the state of Texas will treat your business partnership like a sole proprietorship. As a result, you will not have to pay the franchise tax. If you fall in this category, you will pay federal income tax, but not state taxes.
Most of the business partnerships in the state of Texas, including limited liability corporations and limited partnerships, have to pay the franchise tax. If you’re a Texas business owner that wants to form a partnership, you should get the help of an experienced tax accountant. You and your accountant can figure out how to structure the legal partnership so that you and your business can get the most favorable treatment come tax time. This is especially important given the special circumstances of the business and its owners.
Of course there are other business taxes Texas state entrepreneurs need to be aware of, such as sales tax. Your accountant or the local branch of the Small Business Administration can help you determine your responsibilities in that area, such as applying for a sales tax ID and how to file your sales tax return. And for information about the kind of taxes you’ll be expected to pay as a Texas employer, such as unemployment tax and workers compensation, see the Texas Workforce Commission website’s section for business owners.
It has never been a better time to start a small business in Texas. With its excellent tax climate, low unemployment rate and high workplace participation, business owners have plenty of reasons to relocate to the state. Because you won’t have to pay any personal income taxes, you can keep more of your own money. And without the onerous tax burden you might have had in other states, you can spend more time recruiting top-tier talent for your Sugar Land, Texas business.