I spent seven years as a judge advocate (JAG – yes, like the movie) in the United States Army before moving into tax and accounting work. Veteran-owned businesses make up a significant part of my practice in Colleyville as a result, and the same five mistakes come up again and again.
Texas gives new veteran-owned businesses five years with no state franchise tax and no filing fee on their Certificate of Formation. The benefit is real, and it is also easy to forfeit through a decision made in the first week of setting up the company. Here is where it goes wrong.
Mistake 1: Assuming the exemption expired
Texas created this exemption in 2021 for businesses formed on or after January 1, 2022. More than 13,700 veteran-owned businesses have formed under it.
It was scheduled to expire on January 1, 2026. The Legislature repealed that expiration date in 2025, making the program permanent.
A great deal of the guidance still online was written before that change and describes the exemption as ending. Veterans read it, conclude they missed the window, and never apply. The window is open, and it is not closing.
To qualify, the business must meet four conditions:
100 percent veteran-owned. Every owner must be an honorably discharged veteran.
Texas residency. Each owner must be a Texas resident and cannot already hold a similar exemption for another business.
A new entity. The business must be formed or organized in Texas on or after January 1, 2022. An existing company cannot claim it retroactively.
Documentation filed at formation. More on this in Mistake 3, because it is where most of the damage happens.
Mistake 2: Giving a non-veteran equity without running the numbers
Two programs use two different ownership thresholds, and the gap between them catches people.
The Texas exemption requires 100 percent veteran ownership. Federal veteran contracting certification requires at least 51 percent.
Take a veteran in Keller starting a construction company who gives a civilian partner 15 percent in exchange for startup capital. That business still qualifies comfortably for federal certification. It does not qualify for the Texas exemption at all.
Sometimes the capital or the expertise is worth more than five years of franchise tax relief. That is a reasonable trade. The problem is making it by accident. Before you sign an operating agreement, calculate what five years of franchise tax exposure looks like at your projected revenue, then decide what that equity is actually costing you.
Mistake 3: Forming the entity first and asking about the exemption later
This one costs the most and is the easiest to avoid.
The exemption paperwork is submitted with your formation filing, not afterward. You need three things to arrive together at the Secretary of State:
- A Veteran Verification Letter from the Texas Veterans Commission for each owner
- Comptroller Form 05-904, Certification of New Veteran-Owned Business
- Your Certificate of Formation
The Veteran Verification Letter is the bottleneck. It is not issued instantly, and it is required for every owner, so a two-owner company needs two of them before anything else can move.
What happens instead: a veteran forms an LLC through an online filing service in twenty minutes, pays the filing fee, and hears about the exemption months later from an accountant. The fee is already spent, and claiming the exemption at that point is considerably harder.
If you have not formed yet, start the verification letters now and file everything together. If you formed recently, have someone review the situation before you write it off.
Mistake 4: Treating the exemption as permission not to file
The Texas franchise tax has a no-tax-due threshold, currently around $2.47 million in annualized revenue. Most small businesses in Southlake, Grapevine, and Hurst are nowhere near it. Combine that with the veteran exemption, and it is easy to assume there is nothing to submit.
Owing nothing and filing nothing are separate obligations. Texas still requires reports, and the penalties for failing to file apply whether or not any tax was due. Businesses have lost their right to transact in Texas over unfiled reports that carried no tax at all.
Put the deadline on your calendar the day the entity is formed.
Mistake 5: Self-certifying for federal contract work
If federal contracting is part of your plan, the rules changed and the old approach no longer works.
Veteran contracting certification moved to the SBA, and the National Defense Authorization Act for fiscal year 2024 eliminated most self-certification. The grace period closed in December 2024. Pursuing veteran set-aside or sole-source work now requires formal certification through the SBA’s VetCert program at certifications.sba.gov.
There are two classifications:
VOSB requires at least 51 percent ownership and control by one or more veterans, and allows you to compete for VA sole-source and set-aside contracts.
SDVOSB requires at least 51 percent ownership and control by veterans whom the VA has rated service-disabled. It opens sole-source and set-aside work across the entire federal government, where the target is at least 5 percent of all federal contracting dollars each year.
One point worth verifying rather than assuming: many veterans believe SDVOSB requires a high disability rating. The requirement is that the VA has rated you service-disabled. If you hold a rating, confirm your eligibility before ruling yourself out.
With NAS Fort Worth JRB nearby and the volume of federal and defense contracting across this region, certification is worth evaluating for a lot of Tarrant County businesses.
If you are setting up now, the order matters
- Confirm each owner’s veteran status and Texas residency before settling ownership percentages.
- Request Veteran Verification Letters from the Texas Veterans Commission for every owner. Start early.
- Choose your entity type with the tax consequences modeled, not assumed.
- File Form 05-904 and the verification letters together with your Certificate of Formation.
- Record your franchise tax report deadline, exemption or not.
- If federal contracting is in your plans, begin the VetCert application. It takes longer than people expect.
Every one of these depends on how the business is structured and when it was formed, which makes them legal questions and tax questions at the same time. That is usually why they get answered badly. The attorney drafting the operating agreement is not modeling franchise tax, and the preparer filing the return in March has never read the operating agreement.
Books By Bonnie works with veteran-owned businesses across Colleyville, Southlake, Grapevine, Keller, North Richland Hills, Hurst, Bedford, and Fort Worth. As both a licensed attorney and a Certified Tax Coach, I look at the structure and the tax consequences together. If you are forming a business, or you think something was missed during setup, schedule a consultation.
This article provides general information, not legal or tax advice for your specific circumstances. Program requirements and thresholds change. Confirm current details with the Texas Comptroller, the Texas Veterans Commission, and the SBA, or contact us directly.
