Veteran-Owned Businesses Formed in Texas Under Senate Bill 1049: a Census

The Number of Veteran-Owned Businesses in Texas are on the Rise

     As we just celebrated Veterans Day, it seems like a good time to reflect on the impact of a piece of Texas legislation that was passed to encourage veterans to launch new business ventures. The legislation I am referring to is Senate Bill 1049 (‘S.B. 1049”), which was passed in 2015 by the 84th Texas Legislature.

     S. B. 1049, which went into effect January 1, 2016, creates financial incentives for veterans to start their own businesses by (1) waiving the filing fees otherwise required when filing a Certificate of Formation to form an entity and any other filing fees that would otherwise be due to the Secretary of State during the first five years of the entity’s existence, and by (2) not subjecting any such veteran-owned businesses to the Texas franchise tax for the first five years of its existence.

     In order to qualify for these benefits, an entity must be 100% owned by one or more individuals, all of whom must have served and been honorably discharged from active duty from any branch of the United States armed services. S.B. 1049 applies to all veteran-owned businesses that meet these criteria and that are formed as domestic Texas entities on or after January 1, 2016, and before January 1, 2020.[1]

Statistics

     Data provided by the Texas Secretary of State, in response to a request I made to that office, shows that so far there have been 1,825 Certificates of Formation issued to qualifying veteran-owned business entities under S.B. 1049.

      Of the 1,825 entities formed, all but nine entities remain in existence. Each of the nine entities that no longer operate was terminated voluntarily. The breakdown of the types of entities formed under S.B. 1049 are as follows:[2][3]

      No other types of entities requiring filings of Certificates of Formation were officially filed by qualifying veterans per the data provided by the Texas Secretary of State.[4]

Analysis

Total Dollars Saved by Veteran-Owned Businesses Under S.B. 1049.

            For several reasons, it is difficult—without considerable additional research—to know the total direct monetary savings that S.B. 1049 has provided to qualifying veteran-owned entities. One reason is the fact that it is unknown how much these entities would owe in state franchise tax if they were not otherwise exempt. This is because the Texas franchise tax rate can vary, and entities have multiple choices for electing deductions that can change the amount that may be due. It is worth noting that the franchise tax is going to begin to be phased out, beginning in 2020, until it no longer applies. This phasing out of the franchise tax, which was achieved by House Bill 28 (passed by the 85th Texas Legislature in 2017), means that qualifying veteran-owned businesses that would otherwise receive some form of savings from the franchise tax may not be gaining as much of a benefit over other business owners once the franchise tax begins to be phased out. However, the phasing out will, nonetheless, be either neutral or positive for the bottom line of all Texas businesses including veteran-owned businesses.

     Second, while we can calculate how much each of these entities has saved in fees that would have otherwise been paid to file their respective Certificates of Formation and, where applicable, their respective Certificates of Termination, S.B. 1049 waives the filing fees for all documents that require filing fees during the first five years of the business, not just the filing fee for the Certificate of Formation.

      Some examples of other filing fees waived under S.B. 1049 during the applicable period include the filing fees for amending the Certificate of Formation, changing the registered agent of a business, or filing an Assumed Name Certificate (only in relation to Assumed Name Certificates filed with the Texas Secretary of State and not any such certificate filed with a county clerk). Therefore, the provided data set, alone, limits the extent to which we can accurately assess the fee savings achieved by qualifying veteran-owned businesses without examining the filing history of each such entity.

     While total savings granted to veteran-owned businesses under S.B. 1049 cannot be precisely calculated without extensive further research, the savings achieved for filing Certificates of Formation and Certificates of Termination can be calculated. With the exception of nonprofit corporations, the filing fee for each of the applicable entity types is $300.00. The fee for filing a Certificate of Formation of a nonprofit corporation is $25.00. Applying these applicable filing-fee rates, the savings on filing fees for Certificates of Formation for veteran-owned businesses under S.B. 1049, other than nonprofit corporations, equals $541,800.00. Nonprofit corporations have saved $475.00 in Certificate of Formation filing fees. Adding these amounts together, the total savings achieved in fees paid for filing Certificates of Formation by veteran-owned businesses under S.B. 1049 equals $542,275.00.

      Additionally, using the data provided, we can calculate the amount that has been saved in filing fees that would otherwise be due for filing Certificates of Termination for the nine entities that have terminated voluntarily. The amount saved by these entities for filing their respective Certificate of Termination equals $325.00.[5]

      Therefore, the total savings in filing fees achieved by veteran-owned businesses under S.B. 1049 that can be calculated from the provided data equals $542,600.00.

      Because this number only includes filing fees for Certificates of Formation and Termination, the total savings in filing fees is certainly higher than this number as some of these entities have filed additional documents with the Texas Secretary of State, such as Assumed Name Certificates, that would ordinarily require filing fees. However, the additional amounts saved in fees that would otherwise be owed requires research that goes beyond the scope of this limited article.

Entity Vehicle Choice for Veteran-Owned Businesses Compared to All Entities Formed in Texas.

     Of the entities that have been formed by veterans since S.B. 1049 went into effect, nearly 92% have been in the form of an LLC, which is about 8% higher than the percentage of all Texas entities formed as LLCs per the most recent press release on this subject from the Texas Secretary of State.[6] The most recent press release was issued in mid-2016, so it has been a while since the public has received an entity census from the Texas Secretary of State.[7] However, that press release states that there had been a 19.5% rise in the proportional utilization of LLCs as the entity vehicle of choice, as compared to other entities, in the first half of 2016 when compared to the first half of 2015.[8] There seems to be no reason why the long-running trend of increasing LLC utilization would change significantly between mid-2016 and now. Therefore, the choice of entity vehicle for veteran-owned businesses does not seem to differ significantly from what one may expect from all entities being formed in Texas.

Entity Types Utilized by Texas Veteran-Owned Businesses

Unsurprisingly, LLCs have dominated.

The Number of Qualifying Veteran-Owned Businesses being Formed has been Steadily Increasing.

     As indicated by the chart below this paragraph, the number of entities that are forming as qualified veteran-owned businesses in Texas has steadily increased on a month to month basis, for the most part, since the S.B. 1049 first went into effect. A likely explanation for this increase is growth in awareness about these available benefits for veteran-owned businesses. It seems reasonable that the number of qualifying veteran-owned businesses will likely continue to increase in number as more and more veterans become aware of the potential savings they may be eligible to receive by utilizing S.B. 1049.

Number of Certificates of Formation Issued to Veteran-Owned Businesses Since January 1, 2016

Current through the End of October, 2017.

Opportunities Remain Under S.B. 1049 for Veterans Seeking to Start a Business.

     The benefits created by S.B. 1049 remain in place for all qualified veteran-owned businesses that form before January 1, 2020, so there is still plenty of time for qualifying veterans to take advantage of this legislation before it expires. Additionally, if a business that would qualify as a veteran-owned business has formed since 2016 but did not take advantage of the benefits provided by S.B. 1049, the veteran owner(s) may be entitled to a refund upon submission of the appropriate paperwork.

      Although the filing fee amounts and the franchise tax fees may not, overall, be gigantic savings to a company or its founders, there is no reason why an otherwise qualifying veteran-owned business should not take advantage of the benefits afforded by S.B. 1049 if the owners are planning on going into business anyways. Any amount of savings helps when starting a new business, and this type of savings was specifically enacted to help encourage veterans to form their own businesses.

 


[1] Interestingly, there were three entities formed in 2015, prior to the bill going into effect or even being passed, that submitted the necessary paperwork after the bill went into effect and received designation as a qualified veteran-owned business.

[2] It appears from the data received from the Texas Secretary of State, that these numbers are current through some time during the day of November 3, 2017.  

[3] Although the data provided by the Texas Secretary of State appears to distinguish professional corporations from standard corporations, it does not appear to distinguish professional limited liability companies from standard limited liability companies, so the listed number of LLCs also includes PLLCs.

[4] In this article, any discussion of entities should be assumed to be limited to only entity forms that require a filing of a Certificate of Formation.

[5] The applicable filing fee is $5.00 for nonprofit corporations and $40.00 for all other entity types utilized so far by veteran-owned businesses.

[6] See Press Release, Texas Secretary of State: Double-digit growth in new Texas business creations for first half of 2016 (July 13, 2016), https://www.sos.state.tx.us/about/newsreleases/2016/071316.shtml. The numbers compiled in this press release did not include nonprofit corporations.

[7] See id.

[8] See id.