Many businesses in the State of Texas form entities. Whether a business is a registered partnership, a limited liability company, or a corporation, an entity may lose its ability to do business in Texas if an entity is involuntarily forfeited or voluntarily terminated. This article will discuss the law surrounding forfeitures and terminations as well as the legal effects of termination or forfeiture.
Tax Forfeiture of an Entity
In Texas, a business that is lawfully formed may do business so long as the entity’s charter remains intact. Under the Texas Tax Code, Section 171.301–.3015, the State Comptroller may cause the involuntary forfeiture of an entity for failure to pay its franchise tax. Under Section 171.309, the Texas Secretary of State may also forfeit an entity’s charter, certificate, or registration for the same purpose.
If the Texas Comptroller forfeits an entity’s ability to do business in the state, the entity will not be able to sue, and the entity’s director and officers can be personally liable for the debts of the entity, including taxes. TBOC 171.252 and .255. Once corporate privileges are reinstated, the “rights relate back to the point of the delinquency.” Manning v. Enbridge Pipelines, 345 S.W.3d 718, 723 (Tex. App.—Beaumont 2011).
Once a forfeiture occurs, according to Section 171.312 of the Tax Code, an entity can seek to reinstate its charter or certificate. To do so, a forfeited entity must file all required reports and pay all outstanding monies owed to the state. After all tax forms are filed and outstanding taxes are paid, the entity may file paperwork with the Secretary of State for reinstatement.
Voluntary Termination or Forfeiture by the Secretary of State
A Texas entity may voluntarily relinquish its charter, certificate, or registration. To do so, a business will wind up its affairs and then file a certificate of termination with the Secretary of State, in compliance with Section 11.101 of the Texas Business and Organizations Code, if it is a filing entity. Also, under Section 11.104, entities that were formed for a specific duration that do not extend the duration by amendment or fail to file a certificate of termination, will file termination documents with the Secretary of State.
The Secretary of State may terminate an entity’s existence if it fails to pay all required fees, or for failure to have a registered agent or registered office, Texas Business and Organizations Code, Section 11.251. Accordingly, the Secretary of State may file for involuntary termination of the entity under Section 11.252 of the Business and Organizations Code, by filing a Certificate of Termination.
When an entity is terminated, Section 11.356 of the Texas Business and Organizations Code allows for an entity to engage in certain actions for a period of three years. These acts include:
“(1) prosecuting or defending in the terminated filing entity's name an action or proceeding brought by or against the terminated entity;
(2) permitting the survival of an existing claim by or against the terminated filing entity;
(3) holding title to and liquidating property that remained with the terminated filing entity at the time of termination or property that is collected by the terminated filing entity after termination;
(4) applying or distributing property, or its proceeds, as provided by Section 11.053; and
(5) settling affairs not completed before termination.”
Generally speaking, any individual or entity may sue the terminated entity during the three-year grace period, unless the claim was extinguished. A claim may be extinguished by failure of the claimant to present the claim or the failure to bring an action on a rejected claim when that claimant was notified by the entity that the claim would be handled under Section 11.358 of the Business and Organizations Code. If notified that an entity rejected a claim, the claimant has 180 days to file suit in regards to the claim, unless the three-year grace period passes during the 180-day period. The claimant must file suit prior to the earlier of the expiration of the 180-day period or three-year period from date of termination. TBOC 11.359(b).
Entities in Texas are voluntarily and involuntarily terminated frequently. It is important to note that forfeiture of corporate privileges and voluntary termination of an entity are two wholly separate classifications. The distinction determines what avenues a potential plaintiff may have in resolving disputes against a terminated or forfeited entity. It is a critical that a competent business attorney is hired to pursue claims against any forfeited or terminated entity.
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