The importance of compliance with state regulations and keeping your business in good standing cannot be overstated. Business owners who ignore their responsibilities to comply with Texas state tax obligations could face serious consequences if they fail to file annual Texas Franchise Tax reports. The result of non-compliance means the company could forfeit its right to do business in the State of Texas, and business owners, officers, and directors could forfeit their corporate privileges.
Texas Tax Code 171.251
Texas Tax Code Section 171.251 requires the Texas Comptroller to forfeit the corporate privileges of a corporation on which the franchise tax is imposed if:
1. The entity does not file a Texas franchise report within 45 days after the date notice of forfeiture is mailed.
2. The entity does not pay the associated liabilities within 45 days after the date notice of forfeiture is mailed: or
3. The entity will not allow the Comptroller to gain access to the company’s financial records.
The Texas Franchise Tax
The Texas Comptroller defines the Texas franchise tax as: “A privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas.” The franchise tax report is due by May 15th of every year. If the due date falls on a holiday or a weekend, the report is due on the next business day. Penalties are imposed if the tax report is filed after the due date.
- A $50.00 penalty is assessed for all reports filed after the due date.
- If the tax is paid 1-30 days after the due date, then a 5 percent penalty is assessed.
- If the tax is paid over 30 days after the due date, then a 10 percent penalty is assessed.
Entities Subject to the Texas Franchise Tax
Each taxable entity formed in the State of Texas or doing business in this state must file an annual franchise report. These entities include:
- Corporations.
- Limited liability companies (LLCs), including series LLCs.
- Banks.
- State-limited banking associations.
- Savings and loan associations.
- S corporations.
- Professional corporations.
- Partnerships (general, limited, and limited liability).
- Trusts.
- Professional associations.
- Business associations.
- Joint ventures; and
- Other legal entities.
Failure to Pay the Texas Franchise Tax Could Lead to Forfeiture
A lawfully formed business in Texas may only conduct business in this state if 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 if the company fails to pay the annual Texas franchise tax. The forfeiture of an entity’s corporate privileges can happen whether registered as a corporation, a limited liability company, a limited partnership, or any of the entities listed above. When an entity’s corporate privileges are forfeited in Texas, this means:
- The filing entity did not file the report required by Chapter #171 of the Texas Tax Code.
- The filing entity failed to pay its franchise taxes within 45 days after the notice of forfeiture was mailed to the filing entity: or
- The filing entity did not permit the Texas comptroller to examine the filing entity’s records pursuant to Section 171.211 of the Texas Tax Code.
What Happens If My Company Does Not Pay the Texas Franchise Tax?
When a state government classifies a corporation as “forfeited,” the entity loses its right to operate in that state and forfeits its corporate privileges and limited liability protection. When an entity’s right to transact business in Texas has been forfeited, the entity no longer exists in the state or country of its formation and can no longer conduct business in Texas.
Can I Reinstate My Business Entity Following Forfeiture?
The former business owner has two options when his or her business entity has been forfeited. The business owner can either reinstate the entity or form a new one with a new company name. Choosing the reinstatement option will require the business owner to file all the overdue franchise tax and public information returns with the Comptroller’s office and pay a late fee.
What is the Process of Reinstating an Entity?
The Texas Tax code says, “An entity forfeited under the Tax Code can reinstate at any time by:
- Filing the required franchise tax report,
- Paying all franchise taxes, penalties, and interest, and
- Filing an application for reinstatement (Form 801 Word 178kb, PDF 87kb), accompanied by a tax clearance letter from the Texas Comptroller of Public Accounts stating that the entity has satisfied all its franchise tax obligations and is eligible for reinstatement.
Can Corporate Officers and Directors Be Held Liable for Taxes?
Section 171.255 is used by the Texas Comptroller of Public Accounts to hold corporate officers and directors personally liable for taxes owed to the state by a corporation that has had its corporate privileges forfeited for failure to satisfy its franchise tax obligations.
Forfeiture is a Common Occurrence in Texas
The forfeiture of business entities in the State of Texas is a common occurrence. Most business entities established in this state never file their first franchise tax reports, and their companies are forfeited within twenty months of being founded. With few exceptions, nearly all business owners in Texas must file the Texas Franchise Tax reports every year, even if they do not owe any franchise taxes.
What Causes the Forfeiture of Corporate Privileges in Texas?
- Business Owners Do Not Fully Understand Their Legal Obligations
The primary reason why entities lose their corporate privileges in Texas is that business owners do not fully understand their legal responsibilities and obligations. With few exceptions, nearly all business owners in Texas must file the Texas Franchise Tax every year, even if they do not owe any franchise taxes.
- Choosing to Ignore the Comptroller’s Notice
Another contributing factor the number of businesses who face forfeiture every year is that many business owners choose not to respond to the notices they receive from the State Comptroller. The Texas Comptroller contacts businesses by mail to provide them with advance notice of a pending forfeiture. Although the Comptroller mails a series of warnings to Texas business owners before the Secretary of State initiates the process forfeit the filing entity, many business owners choose to ignore the notifications.
- Filing an Incomplete Return
Another critical factor that comes into play is when business owners file a Texas Franchise Tax Report but fail to include the annual Public Information Report. When businesses fail to include both reports and submit an incomplete return, their oversight prevents the Comptroller from accepting the filing.
If You Receive a Texas Notice of Intent to Forfeit Right to Transact Business
If you receive a Texas Notice of Intent to Forfeit the Right to Transact Business, it is essential to respond because this notice threatens your right to do business in this state.
· The State of Texas issues this notice to all business entities registered with the state.
· The notice is not issued by the IRS and is not associated with income tax.
· Texas law states that each registered company must file a Franchise Tax Report and attach a Public Information Report every year.
· Both reports must be filed annually, even if no tax is due.
· If your company has received notice, this means that you missed the May 15 filing deadline.
How to Respond:
To avoid forfeiture and to remain in good standing, companies must respond to the notice by filing the annual Franchise Tax Report and the Public Information Report as soon as possible.
Will Your Business Have to Pay a Tax?
According to comptroller.texas.gov, for the 2023 year:
The Comptroller of Public Accounts of the U.S. State of Texas has published a letter/memo on the tax rates, thresholds, and deduction limits for Franchise Tax (business margin tax), including updated values for tax years 2022 and 2023. The Franchise Tax is levied on a taxpayer’s taxable margin, which is the lower of: total revenue less cost of goods sold; total revenue less employee compensation and benefits; 70% of total revenue; and total revenue less USD 1 million. The letter/memo includes the following values for 2022 and 2023: No Tax Due Threshold in USD is $1,230,000.
What are the Consequences of Non-Compliance?
It is always wise for business owners to honor their legal obligations to comply with a Texas Notice of Intent to Forfeit the Right to Transact Business. Even if no amount of assessed tax is due, a business owner’s failure to comply with state regulations to file the annual Texas Franchise Tax reports could result in serious repercussions. When business owners ignore the notice, and the company’s management fails to file a report, pay a tax, or pay a penalty, the corporation can lose its corporate privileges, and the Texas Tax Code can hold company officers and directors personally liable.
Consequences for not filing the annual Texas Franchise Reports or paying the required amount due can include the following:
· The Secretary of State may revoke the entity’s right to do business in the state.
· The Secretary of State can forfeit the entity’s charter, certificate, or registration.
· When the officers and directors of a forfeited corporation are no longer protected, they could be found personally liable for the debts and obligations of the forfeited entity.
· The entity may be subject to fees and penalties if they choose to reinstate.
· Forfeiture will prevent the entity from closing any real estate transactions.
· When a business’s corporate privileges are forfeited, the entity is denied the right to file a lawsuit.
Conclusion
The forfeiture of business entities in the State of Texas is a common occurrence. Most business entities established in this state never file their first franchise tax reports, and the companies are forfeited within twenty months of being founded. With few exceptions, nearly all business owners in Texas must file their Texas Franchise Tax report and attach the Public Information Report every year, even if they do not owe any franchise taxes. The primary reason why many entities lose their corporate privileges in Texas is that business owners do not fully understand their legal responsibilities and obligations to the state.
Once a business entity has been forfeited, business owners can initiate the process of reinstating it or form a new entity with a new company name. When business owners choose to reinstate the company, they must file all overdue franchise tax and public information returns with the Comptroller’s office and pay a late fee. Once they accomplish their due diligence, business owners must request a clearance letter from the Comptroller’s office, which will be used to file for reinstatement with the Secretary of State.
Texas Franchise Tax Report Forms for 2023
Texas Franchise Tax Report Forms for 2023
Franchise tax report forms should be mailed to:
Texas Comptroller of Public Accounts
P.O. Box 149348
Austin, TX 78714-9348
If You Are a Business Owner and You Have Questions About Filing Your Annual Texas Franchise Report
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If you are an employer with questions about filing your annual Texas Franchise reports, or are you are seeking to resolve a labor and employment issue, protect yourself, your employees, and your business by contacting Treaty Oak now. Schedule a free consultation with Treaty Oak by emailing us or calling 512 298 2346.
Treaty Oak’s Clients Include:
- Individuals
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- Limited partnerships
- Limited Liability Companies
- Sole proprietorships
- Family businesses
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- Beneficiaries
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- Professionals
- Government Entities
About Natalie Lynch: Founding Attorney
Natalie R. Lynch, a business and employment law attorney in Austin, Texas, has demonstrated expertise in workplace investigations, employment law, and entity formations. Credentialed through the Association of Workplace Investigators (AWI), Natalie is the only consulting and credentialed expert in Central Texas who conducts investigations into allegations of harassment, discrimination, and hostile work environment. Having lived abroad in Ghana and Spain, Natalie brings unique perspectives to help organizations achieve business nationally and internationally. As a credentialed dispute resolution mediator, she routinely collaborates with general counsel, internal and external counsel, employment litigators, employment generalists, and senior human resources professionals.
Natalie is the outgoing Chair of the Austin Bar Association’s Labor and Employment Section. It serves in leadership roles for the Texas State Bar Association, including the International Bar Section and the Animal Law Section. In Colorado, Natalie was a two-term president of the Aurora Bar Association, the first recipient of the Colorado Bar Association’s Future Leaders award, and a member of the Bar Association’s Executive Council. With her extensive business background and solution-focused, purposeful, no-nonsense approach, Natalie’s legal practice includes:
· Business formation
· Transactional matters
· Employment law
· Workplace discrimination matters.
· Contracts
· Employment litigation avoidance
· Harassment Prevention Training Modules
As a credentialed AWI investigator, Natalie has extensive training in interviewing techniques and a unique and beneficial skill set in the legal field. Natalie insists that each investigation represents the standards of quality and litigation avoidance on which she built Treaty Oak. Before becoming a business owner, Natalie prepared by obtaining her undergraduate degree in international studies from Texas A&M University and her J.D. from South Texas College of Law. She also studied at the University of Denver. Natalie is licensed to practice law in Texas, Wyoming, and Colorado, and she holds certifications from Women-Owned Business (WBE), Minority-Owned Business (MBE), and Historically Under-Utilized Business (HUB).
Another one of Natalie’s passions is animal welfare. She vehemently believes that animals of all shapes and sizes should be treated respectfully. To further her resolve, she generously contributes her time and resources to improving the welfare of animals with the Texas Humane Legislative Network. She also enjoys rallying behind her son’s many athletic endeavors, interacting with her two very large ad rambunctious dogs, and tending the garden she keeps behind her home.
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