Business Law Laws in Texas

Business Law Law in Texas: Overview

Texas is one of the most popular states for business formation, offering no personal income tax, a well-developed legal infrastructure, and a large consumer market. The Texas Business Organizations Code (BOC) provides a unified framework for forming and governing LLCs, corporations, partnerships, and other entities. Texas imposes a franchise tax (margin tax) on businesses with revenue exceeding certain thresholds. The state enforces non-compete agreements under the Texas Business and Commerce Code, requiring that they be ancillary to an otherwise enforceable agreement and contain reasonable limitations. Texas follows the at-will employment doctrine with limited exceptions. The state's workers' compensation system is unique in that it does not require private employers to carry coverage, though non-subscribers face significant exposure to employee injury lawsuits. Texas has a robust court system with no state income tax, a diverse economy spanning energy, technology, healthcare, and finance, and a consistently pro-business legislative environment.

Key Statutes & Deadlines

Franchise Tax (Margin Tax) Structure

Texas imposes a franchise tax, commonly called the margin tax, on taxable entities doing business in the state. The tax rate is 0.75% of taxable margin for most entities, with a reduced rate of 0.375% for businesses primarily engaged in retail or wholesale trade. Taxable margin is calculated as the lesser of total revenue minus cost of goods sold, total revenue minus compensation, 70% of total revenue, or total revenue minus $1 million. Businesses with total revenue at or below $2.47 million owe no franchise tax but must still file a report. The franchise tax applies to corporations, LLCs, partnerships, and other entities, but sole proprietorships and certain passive entities are exempt. The tax is reported annually, and failure to file franchise tax reports can result in forfeiture of the entity's right to transact business in Texas. Businesses should carefully calculate their margin to optimize their tax position under the available computation methods.

Non-Compete Agreement Requirements Under the BOC

Texas enforces non-compete agreements under Tex. Bus. & Com. Code § 15.50, which requires that a covenant not to compete must be ancillary to or part of an otherwise enforceable agreement. This typically means the non-compete must be supported by consideration beyond mere at-will employment, such as the provision of confidential information, specialized training, or stock options. The restrictions must be reasonable in time, geographic area, and scope of activity. Texas courts have the authority to reform overbroad non-competes to make them enforceable, making the state relatively employer-friendly in this regard. Non-competes are most commonly upheld when they protect legitimate business interests such as trade secrets, customer relationships, or goodwill. Physicians face special rules under § 15.50(b), which limits the enforceability of non-competes against licensed physicians and requires buyout provisions and access to patient records.

Optional Workers' Compensation System

Texas is unique among states in that private employers are not required to carry workers' compensation insurance. Employers who opt out of the system are known as non-subscribers. While this provides cost flexibility, non-subscribing employers lose three important common-law defenses in employee injury lawsuits: contributory negligence, assumption of risk, and the fellow-servant doctrine. This means injured employees of non-subscribers can sue their employer in civil court and face a lower burden of proof. Many large Texas employers, particularly in the construction and energy sectors, maintain workers' compensation coverage despite it being optional. Non-subscribers must report their status to the Texas Department of Insurance and must post notices informing employees of their non-coverage status. Some industries, particularly government contractors, may effectively require coverage regardless of the voluntary nature of the system.

Texas Court System

Texas has a complex court system with multiple levels. District Courts serve as general jurisdiction trial courts and handle most business disputes, including contract claims, corporate governance disputes, and partnership dissolution. Texas does not have a statewide dedicated business court, but certain counties have implemented specialized business court dockets. Justice of the Peace courts handle small claims up to $20,000. County Courts at Law handle intermediate civil matters. Appeals go to one of 14 regional Courts of Appeals, with final review by the Texas Supreme Court for civil matters. The Texas Supreme Court has been influential in shaping business law, particularly regarding non-compete enforcement, fiduciary duties, and contractual interpretation.

Damages & Penalties

Texas business law provides a range of remedies including compensatory damages, lost profits, and consequential damages for breach of contract. Punitive (exemplary) damages are available under Tex. Civ. Prac. & Rem. Code § 41.003 for fraud, malice, or gross negligence, capped at the greater of two times economic damages plus non-economic damages up to $750,000, or $200,000. The Texas Deceptive Trade Practices Act (DTPA) provides powerful remedies for certain business disputes, including treble damages for knowing or intentional violations. Courts may issue temporary and permanent injunctions for non-compete violations and trade secret misappropriation. Texas recognizes piercing the corporate veil in cases of actual fraud, and alter ego liability applies when an entity is used as a sham to perpetrate fraud. Statutory penalties apply for failure to file franchise tax reports, including entity forfeiture.

Recent Legislative Changes

Texas has updated its franchise tax provisions, raising the no-tax-due threshold and adjusting computation methods. The state enacted the Texas Data Privacy and Security Act (TDPSA), effective in 2024, establishing consumer data privacy rights and business compliance obligations. Recent legislative sessions have also addressed protections for gig economy workers, updated the Texas Uniform Trade Secrets Act, and expanded remote notarization capabilities for business documents.

Frequently Asked Questions