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STARTING AND OPERATING A BUSINESS IN TEXAS Copyright © 2004, Michael D. Jenkins
CONTENTS OF THIS SECTION:
I. INTRODUCTION I. INTRODUCTION Texas, which has the nation's second largest labor force and is the second largest state in terms of population, has some of the lowest taxes of the 15 largest U.S. states, among the lowest energy costs of any state, and a world-class infrastructure of highways and airports, plus low labor costs that average about 15% below the national average. Texas has a fairly unusual tax and legal structure under which most businesses must operate, and a very pro-business government, making it an excellent place to start or operate a business. Like most states, Texas imposes a franchise tax (based on income or capital, whichever yields the higher tax) on corporations and limited liability companies (LLCs), a sales and use tax, various excise and severance taxes, with property taxes imposed at the local level. The state has adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses that operate in Texas in LLC or LLP form may obtain all the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. The most significant feature of the current Texas business tax environment is that Texas is one of the few remaining states that does not impose an income tax on individuals or on unincorporated businesses -- except for LLCs, which are subject to the franchise tax like corporations. Texas is also unique in that it is the only state that does not require a business to have workers' compensation insurance, although few businesses that have employees will dare to take the risk of operating without workers' compensation coverage. The state has seen some very hard years since the "oil bust" that began in the mid-1980s, but has rebounded. At present, the state's economy is reasonably robust, in terms of the level of unemployment and other economic measures. Its unemployment rate in September, 2004, at 5.5%, was slightly higher than the national rate of 5.4%, but has been improving steadily, and is down dramatically from an unemployment rate that was 6.8% a year earlier. One additional benefit of operating a business in the state is that Texas has a relatively low cost of living, compared to national averages. To view the latest federal Bureau of Labor Statistics unemployment rate data for Texas or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Texas can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. S corporation tax status is generally not important for state tax purposes, as there is no income tax in Texas, and since S corporations are fully subject to the Texas franchise tax, although certain S corporations are allowed to compute the tax in a somewhat simplified manner that can sometimes result in a lower effective tax rate than for other corporations. Texas also provides for limited liability partnerships, in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in Texas can be formed with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. No separate state tax form filing is required, generally, for a sole proprietorship, since there is no state income tax in Texas on individuals. (c) Partnerships. As a rule, general partnerships in Texas can be formed with no formalities, other than to register the partnership with the county in which you will be located. Although it is highly advisable to have a written partnership agreement, there is no legal requirement that you do so. However, as discussed in Section IV(b), it will also typically be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for the debts of the partnership), may also be formed under Texas law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the secretary of state, together with a filing fee of $750. Foreign limited partnerships must also register before being allowed to do business in Texas, and must also pay a registration fee of $750. Both domestic and foreign limited partnerships are also required to file a periodic report with the secretary of state not more frequently than every four years, and pay a fee of $50. For information on limited partnership filing requirements, see the contact information for the offices of the Corporations Section, Texas Secretary of State, listed in Section VI(a). Limited liability partnerships (LLPs) are a relatively new form of partnership permitted under the laws of Texas. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal income tax purposes. LLPs are also treated like other partnerships for Texas state tax purposes, and thus are not subject to the franchise tax that applies to LLCs and corporations. Note that the LLP law gives much less protection to partners in an LLP than state law grants to stockholders of a corporation. An LLP shields a partner in an LLP from tort liability from claims brought against another partner in the LLP or employee of the LLP for malpractice or other such wrongdoing, but it does not offer a partner any liability protection from his or her own acts or omissions, or those of an employee or other partner who is acting under his or her direction. Unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization, but must register as a "registered limited liability partnership." To register a Texas partnership as an LLP in Texas, you must file a registration form and pay a filing fee of $200 per partner to the secretary of state. Foreign LLPs, those created under the laws of another state, must also register with the secretary of state and pay a fee of $200 per partner located in Texas, with a minimum of $200 and a maximum of $750. Every LLP doing business in Texas, including both domestic and foreign LLPs, must annually renew its registration and pay the same fee as for initial registration. Every LLP that does business in Texas must carry at least $100,000 of liability insurance to cover errors, omissions, negligence, incompetence or malfeasance, or else must segregate $100,000 or more as security for any such claims, or obtain an equivalent letter of credit or insurance bond. For more information on LLP registration and reporting requirements, see the contact information for the offices of the Texas secretary of state, listed in Section VI(a). Note that one potential drawback of LLPs, if you will do business in other states besides Texas, is that some states, like California and New York, only recognize certain types of professional partnerships as LLPs. If yours is not a professional partnership, such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
There is no personal income tax in Texas, so the income of a partnership is not taxed to the individual partners for state income tax purposes. Therefore, partnerships are not required to file annual tax information returns with the state. (d) Corporations. To form a corporation in Texas, you must file articles of incorporation with the secretary of state and pay a fee of $300. A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in Texas, by filing an application for a certificate of authority and paying a filing fee of $750. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Texas, see the contact information for the offices of the Texas secretary of state, listed in Section VI(a). In addition, once your corporation is formed, it must file an annual public information report with the State Comptroller of Public Accounts, along with the annual franchise tax return. There is no fee required in connection with filing this report. In addition to paying federal income taxes on its income, a corporation that does business in Texas must also file corporate franchise tax returns with the state. The state franchise tax is similar to an income tax, but an alternate tax calculation based on capital may apply, if higher. See Section IV(c) for a discussion of state corporate franchise tax rates and tax return filing requirements. While corporations, other than S corporations, must pay federal income taxes on their taxable income, there is no state corporation income tax, as such, in Texas, although the franchise tax is somewhat similar to an income tax. For tax forms and more information on corporate franchise taxes in Texas, see the contact information for the offices of the Texas Comptroller of Public Accounts, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Since there is no individual or corporate income tax in Texas, the existence of a federal S corporation election is not generally relevant for state income tax purposes in Texas. However, S corporations and certain other closely-held corporations may qualify for use of a simpler accounting method for computing their Texas franchise taxes, and do not need to add back to income their federal tax deductions for officers' compensation, which may in some cases reduce their franchise tax liability, depending on the company's particular circumstances. (f) Limited Liability Companies. Texas, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Texas may also choose to operate in the form of an LLC. LLCs are very attractive entities for many small businesses, in that they offer much the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes, and in most states (but not in Texas). See Section IV(c) for a discussion of the income tax treatment of LLCs under Texas tax laws. To form an LLC under the laws of Texas, one or more persons must file articles of organization with the secretary of state, which must be accompanied by filing fees of $200. On or after January 1, 2006, the fee will be the same as for filing corporate articles of incorporation ($300 at present). Texas state law allows formation of one-owner LLCs, which will now qualify for treatment as sole proprietorships for federal tax purposes. Foreign LLCs, those formed under the laws of another state, must obtain a certificate of authority to do business in Texas, by filing an application for a certificate of authority with the secretary of state and paying a filing fee of $500, if organized before January 1, 2006. On or after January 1, 2006, the fee for a certificate of authority for an LLC will be the same as for a corporation ($750 at present). In addition to initial filing fees, an LLC formed in Texas must subsequently file annual public information reports (no fee is required) with the State Comptroller of Public Accounts, along with the annual franchise tax return. Professionals such as lawyers, accountants, and dentists, are permitted to operate professional LLCs in Texas. While such professionals obtain the same degree of limited liability protection as in the case of a professional corporation, they remain individually liable for their own negligence, malpractice or other misconduct. For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income and franchise tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Texas is one of the states that has repealed its bulk sale laws, so you no longer have to be concerned with this requirement when buying a business in Texas. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Texas, you should obtain a tax release for state sales and use tax, a statement from the Texas Comptroller of Public Accounts that will tell you how much, if any, sales and use tax liability of the seller you should withhold from the purchase price. Also, require the seller to obtain written confirmation from the Texas Workforce Commission that there is no unpaid state unemployment tax that must withheld from the purchase price. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it to be advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. In Texas, if you already have an unemployment tax experience rating, you continue to use your rating until the end of the year. If you do not already have an experience rating, you will succeed to that of the seller. For more information on whether you can or will obtain the seller's experience rating as a successor employer, contact the Texas Workforce Commission, at the address listed in Section VI(a). IV. TEXAS TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General. Texas has consistently been rated as having a very favorable tax structure, ranking 3rd lowest among the states in per capita state taxes in a recent survey. This is in large part due to the fact that there is no state income tax on either corporations or individuals. However, there is a state franchise tax, discussed in Section IV(c), which is much like an income tax, but it applies only to corporations (including S corporations) and LLCs. Thus, if your business is conducted as a partnership (including an LLP) or as a sole proprietorship, your business income will not be taxed by the state. Texas localities impose property taxes on both real property and tangible personal property, but there is no tax on intangible personal property, except in the case of certain regulated industries like savings and loan associations, mutual insurance companies, railroads and other transportation companies. Texas property taxes are considered to be some of the highest in the United States. Also, unlike most other states, Texas does not impose any conveyance fees or taxes on transfers of real estate. As a major oil- and gas-producing state, Texas imposes a wide range of severance taxes on production of hydrocarbons. (b) State and Local Licensing. Nearly any business, operated anywhere in the United States, will have to have at least one government license of some kind. In most cases, this will be a local license, issued by your city or county. Before you open your business, contact your local city or county hall and find out if your particular business needs one or more local licenses. Most kinds of local business licenses are granted upon payment of a fee, with no further requirements, except possibly for annual or other periodic renewal fees. However, if you are engaging in any kind of food business, you will usually need to also obtain a health department permit and show that you are in compliance with health department food-handling requirements. In addition, be sure to check with an attorney or local government zoning or planning department officials to determine if your business will be in compliance with all local zoning and planning restrictions. If you own or rent any type of facility, you will generally need fire department permits, showing that you meet fire safety codes and any construction or improvements to an existing structure will usually require a building permit. If you intend to simply operate your business from your home, you may be in violation of local zoning requirements, but this is less likely to be a concern if you don't have clients, customers, suppliers, or employees coming to your house on business, on a regular basis. State governments have also traditionally required special licenses for many kinds of professionals, such as physicians, dentists, lawyers, and accountants. To further protect consumers, Texas has expanded the list of occupations that must be licensed by the state to include many other occupations. Most state licenses not only require payment of fees, but are only issued for a given profession or occupation upon showing that you have completed certain educational or experience requirements, or passed certain tests, or some combination of the foregoing. For information on state licensing and business registration requirements in Texas, see the contact information for the offices of the Office of Small Business Assistance, Texas Department of Economic Development, listed in Section VI(a). (c) Income and Franchise Taxes. Texas is one of the few states that does not have either a corporate or individual income tax. However, it does have a corporate franchise tax, discussed below, that is similar in many respects to an income tax, and which also applies to LLCs. Because there is no individual state income tax, Texans do not need to be concerned with filing a state income tax return, only a federal return. Sole proprietors report their business income only on their federal income tax return, Schedule C of Form 1040. Note that federal tax legislation enacted in October, 2004 will benefit Texas citizens, as it will allow state sales taxes to be deducted for federal income tax purposes by citizens in states that impose a sales tax but no general income tax, such as Texas and seven other states. Partnerships are not subject to any state tax themselves, as separate taxable entities. Since there is no individual state income tax in Texas, the income earned by a partnership is taxable only to any partners that are corporations or LLCs, under the Texas franchise tax law. Note, however, that a limited liability partnership (LLP) must pay an annual renewal fee of $200 per partner to maintain its status as an LLP (limited to $750 in the case of a foreign LLP, one formed in a state other than Texas). As noted above, there is no corporate income tax in Texas, as such, but there is a state franchise tax that applies to both corporations and LLCs. The state franchise tax on corporations and LLCs has two components:
Once the taxpayer has computed the tax both ways, it must then, in effect, pay the higher of the two amounts. A corporation is not required to pay franchise tax if its gross receipts from its entire business for taxable capital purposes and for taxable earned surplus purposes is less than $150,000 for the tax year. Also, if the amount of tax computed is less than $100, no tax is due. "Earned surplus" is somewhat similar to federal taxable income, but with numerous adjustments, such as adding back (disallowing) any deductions for compensation of officers and directors. However, certain "close corporations" with 35 or fewer shareholders and S corporations are not required to add back such compensation in computing earned surplus. Actual calculation of the tax is inordinately complex, involving an amalgam of various concepts, including calculations of gross receipts according to generally accepted accounting principles (GAAP), or income as shown on the federal income tax return, and under special methods for other items, as determined by accounting rules set forth by the State Comptroller. For companies that also do business outside of Texas, both the taxable capital and taxable earned surplus calculations must be made by computing the fraction of a corporation's gross receipts that are allocable to Texas. "Close corporations" with 35 or fewer shareholders or S corporations may elect to compute their gross receipts, surplus, assets and debts under the federal income tax method rather than according to "generally accepted accounting principles." Corporations with $1 million or less in taxable capital may elect to report their gross receipts under either the GAAP method or the federal income tax accounting method. The state corporation franchise tax return must be filed each year by the 15th day of May, regardless of when the company's fiscal year ends. The State Comptroller will send your corporation a preprinted form for filing each year. However, a corporation's initial report is due one year and 89 days after the corporation's beginning date in Texas. Corporations are not required to make estimated tax payments of their state franchise tax in advance. S corporations are generally treated like any other corporation for purposes of the Texas franchise tax, except that S corporations and certain "close corporations" (those with 35 or fewer shareholders) are granted a few tax breaks in computing the tax, as was noted above with regard to the add-back of officers' or directors' compensation (which is not required for S corporations or close corporations) and the ability to elect to compute gross receipts, surplus, assets and debts under the federal income tax accounting method. In Texas, unlike most other states, limited liability companies (LLCs) are taxed like corporations for state income tax purposes. That is, like corporations, they are fully subject to the franchise tax, which is a tax based in part on income. (d) Sales and Use Tax. Texas imposes a general sales tax on retail sales of tangible personal property and certain types of services at the statewide rate of 6.25%. The Texas sales tax applies not only to sales of tangible personal property, but also to a wide range of services, including amusements, cable TV, various personal services, vehicle parking, repairs services, debt collection, credit reporting, telecommunications, information services, and real property services such as landscaping, lawn care, janitorial and structural pest control services. A number of Texas cities also impose local sales and use taxes, in addition to the special sales taxes that are collected in certain metropolitan transit areas to finance mass transit. The total combined state and local tax rate can be as high as 8.25%. All of the foregoing state and local sales and use taxes are administered by the State Comptroller of Public Accounts, which is the main state taxing agency in Texas. Any person wishing to do business as a seller in Texas must file an application for a sales tax permit with the Comptroller. File on Form AP-157, Texas Application for Sole Owner Sales and Use Tax Permit, if you are a sole owner of the business, or on Form AP-201, Texas Application for Sales and Use Tax Permit, for other forms of business. These permits can be filled out on-line, at the Comptroller's website. A separate permit is required for each place of business. No charge is made for obtaining permits, but you may be required to post a bond or other security to obtain this permit. When submitting your application for a sales and use tax permit, you are required to fill out a Sales and Use Tax Bond-Security Information Worksheet, on which you must estimate the amount of taxable sales you will generate. The Comptroller's office will review the information you provide and inform you if you need to post a bond or other security. In general, although certain occasional or "casual" sales may be exempt from sales tax, anyone who makes more than two sales of taxable items in a 12-month period is considered a "seller" and must collect sales tax. Some of the major categories of goods and services that are subject to sales or use tax in Texas include:
Major categories of goods or services that are exempt from sales tax in Texas include:
A shadow tax, the use tax, is also imposed at the same rate as the sales tax. It is primarily intended to tax property that is acquired from sources outside of the state, in transactions not subject to sales tax, when such property is used or consumed within Texas. Use tax may also apply to items purchased on an exempt basis, such as for resale, if such items end up being used or consumed, instead of being resold. Businesses making sales that are subject to state sales or use tax must file monthly tax returns, generally, with the State Comptroller of Public Accounts, to pay over the taxes. Businesses with small amounts of tax to pay will be allowed to file quarterly, or annually. A discount is allowed if the taxes are paid on time, or are prepaid, as a way of compensating the retailer for collecting the tax. For more information on Texas sales and use tax registration and compliance, see contact information for the offices of the Texas Comptroller of Public Accounts in Section VI(a). (e) Real and Personal Property Taxes. In Texas, as in every other state, any business real estate you own will be subject to real property taxes. In general, there is little that you must do, unless you wish to challenge your assessed valuation, since the assessor will bill you for each year's property taxes as they come due. Texas has some of the highest property taxes in the nation. Texas also imposes personal property taxes on tangible personal property. Business inventories are not exempt from personal property tax in Texas, unlike many other states. A person who owns property on January 1 of the year is personally liable for the property tax for that year, even if the person no longer owns the property after that date. While Texas generally taxes tangible personal property, it does not impose a property tax on intangible personal property, such as stocks, bonds, promissory notes, and other such paper assets, except in the case of certain financial institutions and transportation industries. (f) Other Business Taxes. Texas imposes a number of other taxes on businesses, including:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under an assumed name. For a sole proprietor or a general partnership, an assumed name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In the case of a corporation, limited partnership, LLP, or LLC, it will be considered to be using an assumed business name if it operates under a name other than its legal name. In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. However, a fictitious name filing often provides very little protection for trademarks or the right to use a trade name. Thus, you may also want to register any such trade name, or trademark, as a means of protecting against other companies usurping that particular trade name. Like most states, Texas requires businesses that operate under a fictitious or assumed name to file an assumed name certificate. Unlike most other states, however, the Texas law has real teeth in it, as failing to file such a certificate when required to do so is a Class A misdemeanor. Sole proprietors and general partnerships that do business under an assumed name in Texas must file an assumed name certificate with the county clerk in each county where the business has or will maintain business premises or, if none, in each county where it does business. All corporations, LLCs, LLPs, and limited partnerships that operate in Texas under an assumed business name must file an assumed name certificate (Form 503) with the Statutory Filings Division of the Texas Secretary of State's office, and must also file with the appropriate county clerk. The secretary of state charges a fee of $25 to file an assumed name certificate. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. Once you hire the first employee in your business, you must comply with numerous Federal and state laws. One of the first things you will need to be concerned about as a new employer is the requirement that you withhold personal income taxes from the wages of your employees. As an employer, you are responsible for withholding the taxes and paying them over to the government on behalf of the employee. If you have any employees, you will be withholding federal income tax and FICA taxes from their wages. However, since Texas has no state income tax on wages, you will not need to be concerned with any obligation to withhold state income tax. However, if you pay more than a minimal amount of wages, you will most likely be required to pay state unemployment tax, and will have to register with the state as an employer for unemployment tax purposes, as described in Section V(b). (b) Unemployment and Other State Payroll Taxes. If your business employs one or more individuals in each of 20 weeks during the current or prior calendar year or if your payroll amounts to $1,500 in any calendar quarter, in the current or previous year, you will be required, as an employer, to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Texas unemployment tax are required to register with the Tax Department of the Texas Workforce Commission on Form C-1, Status Report. New employers are required to pay tax at a rate of 2.7% in 2004 on the first $9,000 of wages paid to each employee. After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. Rates may vary, depending on your industry classification. All state unemployment taxes are imposed upon you as the employer, and, under Texas law, cannot be charged to your employees or withheld from their wages. Quarterly returns must be filed by the end of the month after the end of each calendar quarter, on Form C-3. For more information on your Texas unemployment tax obligations as an employer, see the contact information for the offices of Tax Department, Texas Workforce Commission, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. Texas is the one exception to this rule, as it has no such requirement, except for businesses that enter into construction or building contracts with a government entity. But employers who choose not to obtain workers' compensation coverage are required to notify the Workers' Compensation Commission of such decision, and failure to do so constitutes a separate Class D administrative violation for each day the employer operates without filing such notification. However, whether or not you provide workers' compensation insurance coverage for your workers, you must post a notice in the workplace that informs employees whether you have such coverage. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, if you fail to obtain required workers' compensation insurance, and an employee is injured on the job, you will have opened yourself to unlimited liability and severe legal consequences, so it is very important to obtain workers' compensation insurance for your employees. Accordingly, you would be well advised to obtain workers' compensation insurance as soon as you hire employees, even though Texas law does not (generally) require you to do so. The Texas Workers' Compensation Commission estimates that about 70% of Texas employers provide workers' compensation coverage for their workers, and that about 80% of all workers in the state are covered. Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance, and neither provides income replacement for the period in which the injured employee is unable to work. For more detailed information regarding the Texas workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Texas Workers' Compensation Commission, listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, if, for example, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the Texas wage-hour laws, which provide for a state minimum hourly wage that is the same as the federal minimum wage, which is currently $5.15 an hour. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees and outside salespersons are exempted from the Texas wage-hour rules. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Texas Workforce Commission. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in Texas, which prohibit hiring minors when doing so would violate the state's compulsory school attendance laws. The Texas child labor laws generally prohibit hiring children under age 14, except for child actors, and hiring of 14- and 15-year-olds is strictly limited, in terms of total hours that may be worked or the time of day when work is permitted during school session. Texas has adopted as its rules the federal laws that govern the employment of 14- and 15-year-olds, even in cases where the federal law is inapplicable. For 16- and 17-year-old children, Texas also follows the federal child labor law rules, except that under the Texas law, some driving of vehicles by such children is defined as "nonhazardous," while any such operation of a motor vehicle by minors under age 18 is generally prohibited by the federal child labor laws. (e) State Occupational Safety and Health Laws. Employers in Texas must comply with state and federal job safety laws designed to prevent injuries resulting from unsafe or unhealthy conditions in the workplace. The U.S. Department of Labor, Occupational Safety and Health Administration (OSHA) enforces health and safety standards in the state of Texas, as the state relies on the federal OSHA agency, rather than having its own standards and enforcement agency, as is the case in more than half of the states. Note that while you may obtain a free safety consultation from federal OSHA experts, they must and will cite you for any violations they discover at your workplace. This is not the case with state safety inspections. If you request a safety consultation from the Workers' Health and Safety Division/OSHCON, or the Texas Workers' Compensation Commission, and they detect violations, they will not cite you if you promptly correct the unsafe conditions. If you are in compliance with federal standards and employ 150 or fewer workers, you will then be exempt from any further inspections for the next 12 months. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Austin offices of the Workers' Health and Safety Division of the Workers' Compensation Commission, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Texas labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. State law requires that you pay wages at least twice a month to your nonexempt employees, or monthly in the case of certain exempt administrative, executive and other employees. A discharged employee must be paid his or her final wages within 6 days, and other employees who leave employment by the next regular payday. Employers must post notices indicating the paydays in conspicuous places in the workplace. You may obtain the Texas Payday Poster from the Texas Workforce Commission, at the address for that agency listed in Section VI(a), or you may download the form from their website. (See the Internet web link at Section VI(c).) (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Texas has a right-to-work law, which makes it an attractive place to do business, for many employers. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Texas. State law prohibits employers from discriminating on the basis of race, color, national origin, disability, religion, sex or age. An employer is subject to this law if the employer has had 15 or more employees for each working day during 20 weeks of the year, generally. The law also prohibits discriminatory notices or advertisements of any kind in connection with employment, except where disability, religion, sex, national origin, or age is a bona fide occupational qualification. For more information on state civil rights laws in Texas, contact the Austin office of the Texas Workforce Commission, Civil Rights Division (formerly the Commission on Human Rights, before March 1, 2004). (4) Reporting new hires. Under federal welfare reform laws, employers in all states are now required to report newly-hired (or rehired) employees to a designated state agency (the Texas Employer New Hire Reporting program for Texas employers) within 20 days after the date of hire. See the address for reporting new hires in Section VI(a). VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Texas, as many states have done in recent years, has set up a "one-stop" center to help your new or existing business with the process of obtaining all necessary state licenses and permits. The Office of Small Business Assistance, which is part of the Texas Department of Economic Development, acts as a central referral source and can help you jump-start your business, without your having to go from agency to agency to meet all the legal and regulatory licensing requirements. Or, you may prefer to contact the various agencies that are mentioned in this book or listed below on an individual basis, to obtain needed forms, official posters, information, and other assistance from each such agency. A list of addresses and other contact information for such key agencies is set forth below for your convenience. BUSINESS STARTUP INFORMATION. A key agency that can provide helpful information on getting your business up and running in Texas is:
STATE SALES TAX. Obtain your sales and use tax license or permit and information on the Texas sales and use tax law, by requesting the registration form, Form AP-157 (for sole proprietors) or Form AP-201 (for other business entities), from the Comptroller of Public Accounts, at the address listed above for that agency, or to obtain forms for sales and use tax registration, call:
To request a Certificate of No Tax Due when buying an existing business, write to:
EMPLOYER WITHHOLDING. Since there is no state individual income tax law, employers in Texas do not need to be concerned with any state income tax withholding obligations. STATE UNEMPLOYMENT TAX. Contact the Tax Department of the Texas Workforce Commission, at the address listed above for that agency, to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you want to provide workers' compensation coverage (such coverage is not mandatory in Texas), contact the following agency for further information:
Or, to take advantage of free workplace safety consultations that are offered by the state, contact:
(b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Texas to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the following office below for information, or for the location of other SBDCs nearer to you.
(c) Internet Sites. If you have access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Texas. Since new sites are appearing constantly, you might also want to search for other Texas government Web sites by using one of the popular Internet search engines, such as Excite! or Yahoo. To start your Internet search for Texas government information, you may want to begin with the following Internet sites: State of Texas Home Page: List of Texas state government agencies: Comptroller of Public Accounts (Texas state tax agency): Texas Secretary of State, Corporations Section (incorporation, LLC and partnership filings): Texas Department of Economic Development (Office of Small Business Assistance and other assistance for businesses): Texas Employer New Hire Reporting (information and reporting of new hires electronically): Texas Workforce Commission: (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Texas, or contact the Texas Department of Economic Development, listed in Section VI(a), for information on the Capital Access Program and other state financial assistance programs for small businesses. You can contact the U.S. Small Business Administration at the following Texas Regional Office:
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Copyright © 2004 Michael D. Jenkins
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