Texas franchise tax delinquency may lead to having your Texas company (corporation, LLC, LP) involuntarily terminated by the Secretary of State and Comptroller (administrative termination, in contrast to judicial termination). A company may become delinquent because it failed to pay or file a report on franchise tax by the due date, a fact which may appear to come as a “surprise” to clients.
It shouldn’t, because it means the company did NOT file a report on time or did NOT pay the tax (including interest and penalties) when due and then ignored repeated delinquency notifications.
Nevertheless, we all overlook things, or the employee charged with compliance left the company and that task wasn’t picked up by another employee, or the paperwork kept getting shuffled to the bottom of the inbox until it disappeared entirely.
But Texas franchise tax delinquency is something that really should not be overlooked.
In the first place — even before charter termination occurs — the Comptroller by statute must “forfeit” the corporate privileges of a company if it fails to file a missed report or pay an unpaid amount within 45 days after the Comptroller has sent the company a notice that it is delinquent. (See my previous blog post about maintaining a registered agent office; the Comptroller only has to mail its notices to the company’s last address known to the Comptroller; if the company moves and neglects to update the Comptroller’s records with a new address, that is the company’s problem, not the Comptroller’s).
What does “forfeiture” of privileges mean?
Bad things: the company is barred from filing suit in a Texas state court, or defending itself in a suit against it in a Texas state court; AND each director and officer (or, in the case of an LLC or limited partnership, the corresponding offices) becomes personally liable for company debts incurred in Texas after the date the report or payment was due and up until the date privileges are revived.
The second bad thing should grab the attention of every company principal — it means that he or she is personally liable, just like a general partner in a partnership (so says the statute), for the unpaid franchise taxes, penalties and interest AND all other debts the company incurs after the original due date. What if the company fails to file the franchise tax report due every May 15, closes a $2 million borrowing on May 16, and fails to cure? Then the lender doesn’t have to produce a personal guaranty by the directors and officers to sue them for the entire $2 million if the company defaults. All the lender has to do to collect a judgment against the individuals is to establish that the debt was incurred while the privileges of the company were forfeited (assuming the company doesn’t timely revive the privileges).
What if the company cures the delinquency? Depends when that happens. If the company files the missing report and makes its delinquent payment BEFORE the date privileges are forfeited, then the personal liability hammer never drops; if AFTER the date privileges are forfeited but BEFORE the date the company’s charter is terminated, then the personal liability hammer is holstered as if it never happened.
But if the company’s privileges have been forfeited AND the company fails within 120 days after the forfeiture date to pay all amounts necessary to revive the privileges (including the $50 fee for a late filing, whether or not any franchise tax was due), then the Comptroller certifies that fact to the Secretary of State, who thereupon sends the company notice (again, at the last address for the company known to the SOS) that its charter has been involuntarily forfeited or terminated.
And this is where the personal liability becomes very sticky, because if the charter has been forfeited, then subsequent revival (the procedure for revival in that situation to be outlined in a future blog post) has NO effect on the personal liability of directors and officers.
Returning to the hypothetical above where the company didn’t file its franchise tax report by May 15 and later closed on a multimillion dollar borrowing: if the company becomes so delinquent that its charter is forfeited later that year, then the directors and officers REMAIN personally liable for that debt.