Several factors contribute to Texas’ consistently high rankings for small business friendliness, including a relatively low tax burden, superior bankruptcy protections and recent entrepreneur-friendly regulatory reforms.

Low Tax Burden

Texas is consistently lauded for its business-friendly tax framework, particularly for new and small businesses. Texas does not have a personal income tax, and sole proprietorships, the state’s most common form of new business, are completely exempt from the franchise tax, its main business tax.

Texas is among only five states that do not levy any business tax, personal income tax or fee on sole proprietors, allowing them to invest more of their profits back into their businesses. (The others are Alaska, Florida, South Dakota and Wyoming.)

Texas also exempts many other small businesses from any tax obligation. For 2015, all businesses with total revenues of less than $1.08 million or total tax liabilities of less than $1,000 owed no franchise tax. These provisions saved Texas businesses about $256.6 million in fiscal 2015. Many other states, including California, New York and Florida, have minimum tax requirements.

Furthermore, taxable entities with less than $10 million in total revenue are eligible for a reduced franchise tax rate (the “E-Z” rate). This saved Texas businesses an estimated $27.9 million in fiscal 2015. And most recently, the 2015 Texas Legislature approved a 25 percent reduction in the state franchise tax rate.

Asset Protection

Texas’ asset protections are among the nation’s most generous, protecting certain assets from seizure by creditors regardless of whether an individual files for bankruptcy protection. It’s an important consideration for those facing the financial risks of entrepreneurship.

Texas, moreover, is one of only a few states that allow most individuals filing for bankruptcy under state law to protect the entirety of their homesteads (Exhibit 3).

Texas’ statutes also include significant protection limits for personal property that frequently allow debtors to protect their equity in one motor vehicle per licensed driver in their families. Among the five largest states, only Texas usually allows debtors to protect a considerable amount of their equity in their homes and cars.

And Texas offers the choice of filing for bankruptcy under state or federal exemption laws, an option some other large states such as California, Florida and Illinois do not provide.

Exhibit 3: Homestead Exemptions in the Five Most Populous States

Note: This exhibit reflects state bankruptcy laws. Debtors in some states including Texas may choose to file under the federal bankruptcy system.

* California has two distinct statutory schemes under which its residents can exempt property. Exemption shows maximum available under either scheme.

Source: Texas Comptroller of Public Accounts

Equity Crowdfunding

Recent statutory changes in Texas could further encourage entrepreneurship. For example, Texas was among the first states to approve an “equity crowdfunding” exemption to its securities regulations.

The growing popularity of crowdfunding sites, such as Kickstarter and Indiegogo, has encouraged many new and prospective businesses to make appeals for funding though these services. Until recently, however, those making these appeals could offer various awards in exchange for contributions — but not equity in the company itself, as with a traditional business investment. Only “accredited investors” (those above a certain level of net worth) were permitted to receive equity in a company in exchange for investment.

Since November 2014, however, Texas startups can offer equity in their ventures to any in-state investors, regardless of their resources. While there are some restrictions on the total amount such individuals can invest, equity crowdfunding could become another important tool for small businesses seeking capital.

Asset Formation

Despite its business-friendly reputation, some factors undoubtedly discourage potential entrepreneurs in Texas. Whether or not these have contributed to the slowdown in business entry rates, they certainly influence decisions on whether to start new ventures.

Texas trails many other states in some important measures of financial ability.

Nearly half of all U.S. startup businesses rely on personal or family assets to finance some portion of their initial costs. In a recent Gallup poll, 68 percent of potential entrepreneurs cited a lack of sufficient personal savings as a barrier to starting a business.

Texas, unfortunately, is well below national averages for some measures related to assets. Its rates of “unbanked” or “underbanked” households — those that lack bank accounts entirely, or lack access to the basic financial services, such as personal loans, that banks provide — are among the nation’s highest (Exhibit 4).

Exhibit 4: Unbanked and Underbanked Households, Five Most Populous States and U.S. Average, 2013

Source: Federal Deposit Insurance Corporation

Texans who lack such basic advantages will find it much harder to engage in nearly every type of entrepreneurial activity. Simply participating in the traditional banking system can have tangible benefits. The Brookings Institution has estimated that an average full-time worker who banks at a traditional financial institution can save more than $40,000 during his or her working life.

Texas also has one of the nation’s lowest homeownership rates. According to an analysis of recent Census data (2013), just 61.8 percent of Texas’ housing is owner-occupied, a lower rate than in all but seven other states. Not owning a home, most people’s most important asset, presents another roadblock for prospective entrepreneurs seeking capital.

Texas does, however, provide some tools at the local level to help low- and moderate-income families save and buy homes.

Individual development accounts (IDAs), for example, are matched savings accounts that can be used for starting a small business or for other personal transactions, such as purchasing a home or attending college. In exchange for meeting requirements such as attending financial education classes and committing to saving on a regular basis, participants in IDA programs are granted a match for every dollar they save. Some IDA programs in Texas are federally funded, while others are supported by nonprofit organizations, local governments, community colleges and private businesses.

Taxpayers can search for IDA programs and other asset-building aids in their areas through an online tool offered by Raise Texas, a statewide network of nonprofits, businesses and public institutions that supports asset-building initiatives.

Venture Capital

Access to venture capital represents another problem for entrepreneurial Texans. While Texas’ venture capital activity is strong, it is far less robust than that seen in other large states such as California and New York (Exhibit 5). In fiscal 2014, Texas businesses accounted for only 3 percent of all venture capital investments in the U.S., while California’s received 56 percent. No Texas companies were among 2014’s 25 most active venture capital firms.