Involuntary Forfeiture of Corporate Privileges

Imagine a small automotive service shop owned by a man named Jason. The shop is run by Jason and his immediate family and has enjoyed moderate success over the past few years. Eventually, the shop develops a reputation for quality work and begins to see higher profile clients with more money at stake. In response, Jason decides to operate the auto shop as a registered limited liability company (LLC) and lists the shop as the primary place of business. Everything runs smoothly and he even decides to open a second location with new equipment and over time, starts to run operations from that location. A year passes and a former client files a lawsuit against the auto shop, seeking not only company assets, but also Jason’s personal assets.

The phrase “piercing the corporate veil” is mysterious, alluring, and like many things in the legal field, relatively meaningless.  It should, however, make business owners pause and take stock of their filings. Many limited liability companies (LLCs) are formed not only to streamline business operations, but also to protect personal assets. Ordinarily, if a company falls on hard times or fails for various other reasons, the owner(s) will be shielded from liability for the company’s outstanding debts or obligations. Unfortunately, there are several ways of losing these protections. If that happens, the owner’s personal assets can be vulnerable to claims again the LLC.

The State of Texas refers to the corporate veil as “corporate privileges,” and the State revokes them when owners neglect to file certain forms or pay franchise tax. Revocation of corporate privileges can be done by the state as a one-step process under Chapter 11 of the Texas Business Organizations Code or as a two-step process under the Tax Code. While both options are available, the Texas Secretary of State typically revokes  corporate privileges under the Tax Code. In that case, the Texas State Comptroller will first provide notice of forfeiture for failure to file a required report or pay franchise tax or penalty. Second, the Secretary of State will then forfeit the entity’s charter or certificate if that entity has not revived its privileges within 120 days after notice of forfeiture.

If a company’s corporate privileges are forfeited, the company will be denied the right to sue or defend in state court and each director or officer will be liable for the debt of the company. While the prospect of forfeiture may sound grim, avoiding it is a fairly easy process. Business owners should diligently file their initial report, annual reports, public information reports, and franchise taxes with the Comptroller and check the Secretary of State’s records to ensure those forms were recorded.

Returning to Jason, luckily for him, he still had time to revive his corporate privileges, ensuring he could protect his personal assets from any collection efforts should he lose the coming lawsuit.

by guest blogger Henry Knight