Sometimes elaborate and expensive asset protection plans are warranted; more often, however, they are not. But even when they are warranted, a lack of attention to basics can defeat the most sophisticated of asset protection plans.
Those who start or run their own businesses are usually at least somewhat familiar with the asset protection (e.g., pre-litigation risk management) strategy of using some type of statutory business entity (e.g., corporation, limited liability company, etc.) to protect their personal assets from their business creditors. As we – and the Texas courts – all know, the ability to avoid personal liability “is an essential reason that entrepreneurs” shoulder the risks of starting and running their businesses. Willis v. Donnelly, 199 S.W.2d 262, 271 (Tex. 2006).
Most asset protection clients have also heard of the tactic of “piercing the corporate veil,” which is used by plaintiff lawyers who would like to be able to satisfy a judgment against a business by going after the personal assets of the business owner(s). Commonly recommended precautions to prevent a “corporate veil piercing” include such common-sense practices of keeping good corporate records, maintaining separate personal and corporate bank accounts, and not co-mingling business and personal funds and expenses.
However, many Texas business owners may not realize that the asset protection qualities provided by their business entity (e.g., corporation, LLC, etc.), can be forfeited – automatically and without any effort whatsoever by a plaintiff’s lawyer – simply by the business owner’s failure to timely file an Annual Franchise Tax Report and pay any tax that may be due. See, Tex. Tax Code § 171.251.
When “the corporate privileges of a corporation are forfeited,” officers and directors are liable for the corporation’s debt. Tex. Tax Code § 171.255. When “corporate privileges of a corporation are forfeited . . . each director or officer of the corporation is liable for each debt of the corporation that is created or incurred in this state after the date on which the report, tax, or penalty is due and before the corporate privileges are revived.” Id. The period of liability thus begins “when the report, tax or penalty is due,” and not when the corporate charter is eventually forfeited.
Furthermore, “liability . . . is not affected by the revival of the charter or . . . corporate privileges.” Id. Thus, revival of the corporate charter will not protect the business owner from personal liability for a corporate debt that arose during the period between the tax or report being due and the revival of the corporate charter.
Although section 171 refers to “corporations,” these forfeiture provisions apply to all “taxable entities” in Texas.
Annual Texas Franchise Tax Reports are due May 16, 2016.
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