Reinstating a Texas LLC

The goal of this article is to provide an overview of why a Texas LLC gets forfeited and involuntarily terminated.  Additionally, this article provides a statutory roadmap for reinstating a Texas LLC.   While this is not an exhaustive guide, it is meant to provide Texas LLC owners a brief explanation of termination and reinstatement process for a Texas LLC.

If you have any questions or would like to speak further about reinstating a Texas LLC, feel free to give us a call at (817) 677-1199 between the hours of 9:00 AM and 9:00 PM, Monday through Saturday.  We’d love to talk with you about your business and your goals with entity formation.

This article was last updated on August 31, 2020.

Reasons for Forfeitures and Terminations by the Texas Secretary of State

In general, the Texas Secretary of State will mail notices before beginning the forfeiture or involuntary termination process against your LLC.  However, if your LLC is considered inactive, you must first determine the reason why.  LLCs are either forfeited via tax forfeiture statutes under the Texas Tax Code or involuntarily terminated under Chapter 11 of the Texas Business Organizations Code (BOC).  Methods for reinstating an LLC vary based on the reason and require an understanding of the specific requirements under the Texas Tax Code and/or BOC.

Forfeiture under the Texas Tax Code

Under Chapter 171 of the Texas Tax Code, the Texas Secretary of State has authority to forfeit the certificate of formation, charter, or registration of a domestic or foreign corporation, limited liability company, limited partnership, professional association, or foreign business trust that the Texas Comptroller of Public Accounts certifies has not revived its privileges to operate in Texas.  Specifically, the Texas Secretary of State will forfeit an LLC or other entity’s ability to conduct business in Texas for failure to file required reports, pay franchise taxes, and/or penalties.

It’s important to note that the Texas Tax Code does not require the Texas Secretary of State to notify an LLC or other taxable entity of the forfeiture.  The Tax Code indicates that the LLC or the taxable entity receives notice regarding the forfeiture of its ability to conduct business in Texas from the Texas Comptroller of Public Accounts under subchapter F of Chapter 171 of the Texas Tax Code.

Essentially, notice is served on the LLC or other taxable entity when the Texas Comptroller of Public Accounts sends out past due notices regarding failure to file required reports, pay franchise taxes, and/or other related penalties.  After the Texas Comptroller assesses the effective date of an LLC or other taxable entity’s forfeiture date and has determined that the LLC or other taxable entity has not revived its privileges to operate in Texas within 120 days after the forfeiture date, the Texas Secretary of State will change the status of the LLC or other taxable entity from “in existence” to “forfeited existence.”

Involuntary Termination under the Texas Business Organizations Code

Section 11.251 of the Texas Business Organizations Code (BOC) authorizes the Texas Secretary of State to involuntarily terminate the existence of an LLC or other domestic entity if the Texas Secretary of State finds that:

  1. the LLC or other domestic entity has failed to, and before the ninety-first (91st) day after the date notice was mailed to the LLC or other domestic entity, has not corrected an entity’s failure to:
    1. Maintain a registered agent or registered office in the State of Texas as required by law; or
    2. File a report within the period required by Texas law or pay a fee or penalty due and prescribed by Texas law when due and payable; or
  2. The LLC or domestic entity has failed to, and before the end of the sixteenth (16th) day after the date notice was mailed to the LLC or domestic entity, not correct the LLC or domestic entity’s failure to pay a fee required in connection with the filing of its Certificate of Formation, or payment of the fee associated with the filing of the Certificate of Formation was dishonored when presented for payment by the State of Texas for payment.

Registered Agent Issues

One of the most frequent reasons for the Texas Secretary of State to involuntarily terminate an LLC or other domestic entity is the LLC’s failure to maintain a registered agent or registered office address in Texas as required by the BOC.  Notice of failure to maintain a registered agent or registered office address generally arrives after the receipt and filing of the resignation of registered agent or rejection of appointment by a registered against the LLC or other domestic entity.  Notice of failure can also be sent after an allegation that the LLC or other domestic entity is not properly maintaining a registered agent or registered office.

If a notice of failure to maintain a registered agent or registered office address is sent after the resignation of a registered agent or rejection of the appointment of registered agent, the Texas Secretary of State will send a notice of the need to designate a new registered agent or registered office address to the LLC or other domestic entity by certified mail.  If a notice of failure to maintain a registered agent or registered office address is sent after an allegation that the LLC or other domestic entities are not properly maintaining a registered agent or registered office address, the Texas Secretary of State will send a notification to the registered agent of record for the LLC or other domestic entity at the registered office address by certified mail, return receipt requested.

Dishonored Payments

If an LLC or other domestic entity failed to pay the statutory fee associated with filing a Certificate of Formation, the Texas Secretary of State will involuntarily terminate the LLC or other domestic entity.  Initially, the Texas Secretary of State will send a notice regarding non-payment or dishonor of the Certificate of Formation filing fee to the submitting party (“payor”)’s name and address.  If good payment is not made within the time frame specified in the initial notice (generally, within sixteen (16) days), a notice of the LLC or other domestic entity’s failure to satisfy the Certificate of Formation fee and intent to involuntarily terminate the LLC or other domestic entity is sent to the registered agent via the registered office address on record by regular USPS mail.

Effects of Forfeitures and Involuntary Terminations

Ability to File and/or Defend Lawsuits in Texas

Under Section 171.252 of the Texas Tax Code, if the privileges of an LLC are forfeited, the LLC “shall be denied the right to sue or defend in a court” in the State of Texas; and “each director or officer” of the LLC shall be liable for the debt of the entity as provided by Section 171.255 of the Texas Tax Code.  Furthermore, if a lawsuit against an LLC or other entity is filed before the LLC or other entity’s privileges are forfeited under the Texas Tax Code, Section 171.253 of the Texas Tax Code indicates that “affirmative relief may not be granted” unless the LLC or other entity revives its privileges to conduct business in Texas under Chapter 171 of the Texas Tax Code.

Case law exists interpreting the language of Section 171.252 of the Texas Tax Code to effectively prohibit an LLC or other entity that has forfeited its privileges to conduct business in Texas from bringing cross-claims, but not specifically from defending itself in court and/or appealing an adverse judgment.  See Zaidi v. Shah, 502 S.W.3d 434 (Tex. App.—Houston [14th Dist.] 2016, pet. denied); Cognata v. Down Hole Injection, Inc., 375 S.W.3d 370 (Tex. App.—Houston [14th Dist.] 2012, pet. denied).  However, the Eastern District of Texas has indicated in Aetna Life Ins. Co. v. Warren Med. Imaging, LLC that a defendant LLC or other entity, which has forfeited its right to transact business in Texas pursuant to Chapter 171 of the Texas Tax Code, has no right to defend itself in court and that a plaintiff was entitled to summary judgment and all of the defendant’s counterclaims were dismissed with prejudice due to the fact that the defendant did not have standing to sue in Texas.  See Aetna Life Ins. Co. v. Warren Med. Imaging, LLC, No. 4:13-CV-102, 2014 WL 12768837 (E.D. Tex. Aug. 22, 2014).  Additionally, it should be noted that courts have interpreted Section 171.252 of the Tax Code to only preclude an LLC or entity who forfeited its privileges to transact business in Texas under the Tax Code from filing a lawsuit after forfeiting its rights to do business in Texas, not to strictly prohibit it from continuing an action filed before its rights to do business in Texas were forfeited.  See Scogin v. Texas Eagle Ford Shale Magazine, Civil No. 2:14-CV-478, 2016 WL 632031 (S.D. Tex. Feb. 17, 2016).

The application of Section 171.252 is less clear regarding the ability to file a lawsuit in federal court after an LLC or other entity forfeited its rights to conduct business in Texas under the Tax Code. In Sequel Group, Inc. v. Wilmington Savings Fund Society FSB, the Northern District of Texas indicated that there is a distinction between a case based on a federal question jurisdiction and a case based on diversity jurisdiction.  In a case based on federal question jurisdiction, the Court indicated that authority exists to indicate a federal court does not need to apply a forum state’s restrictions on a corporation’s ability to sue.  However, the Court indicated that in a case based on diversity jurisdiction, a federal court could apply Section 171.252 to effectively deprive an LLC or other entity that forfeited its rights to conduct business in Texas under the Tax Code from bringing a suit based on diversity jurisdiction.  See Sequel Group, Inc. v. Wilmington Savings Fund Society FSB, No. 3:16-CV-02056-N (BF) 2017 WL 3704833 (N.D. Tex. June 6, 2017).  Later in 2017, the Southern District of Texas indicated that an LLC or other entity’s capacity to sue in federal court is determined by the law of the entity’s state of formation pursuant to Rule 17(b)(2) of the Federal Rules of Civil Procedure and thus, a plaintiff who forfeited its rights to conduct business in Texas under the Tax Code lacked the capacity to bring a lawsuit. See RN’D Productions, Inc. v. Walt Disney Records Direct, No. H-17-142, 2017 WL 4890022 (S.D. Tex. Oct. 30, 2017). It’s important to note that the distinction drawn based on jurisdiction in Sequel Group, Inc. was not discussed in RN’D Productions, Inc.

Personal Liability of Members, Officers, and Directors

Regarding the personal liability of members of an LLC or other entities after an entity’s right to conduct business is forfeited under the Texas Tax Code, the Court in Suntide Sandpit, Inc. v. H & H Sand and Gravel, Inc. confirmed that the penalty under Section 171.255 of the Texas Tax Code is personal liability for an officer or director for corporate debts. See Suntide Sandpit, Inc. v. H & H Sand and Gravel, Inc., No. 13-11-00323-0CV, 2012 WL 2929605 (Tex. App.—Corpus Christi July 19, 2012, pet. denied).  Specifically, an officer or director’s personal liability extends back to debts created or incurred after the report, tax, or penalty was due and/or owing under the Texas Code.  Furthermore, reinstatement of an entity after forfeiture under the Texas Tax Code does not extinguish the personal liability of an officer or director for debts created or incurred before the reinstatement. See Bruce v. Freeman Decorating Servs., Inc., No. 14-10-00611-CV, 2011 WL 3585619 (Tex. App.—Houston [14th Dist.] August 15, 2011, pet. denied).

It’s important to note the Bruce decision also explicitly rejected an argument that Section 171.255 solely applies to corporations and does not apply to LLCs.  Specifically, Section 171.2515(b) of the Texas Tax Code indicates that Section 171.255 applies to other taxable entities, such as limited liability companies and limited partnerships.  Further distinguishing the liability imposed on officers and directors, the Court in Bosch v. Cirro Group, Inc. indicated that Section 171.255 does not limit the scope of debts and imports personal liability for “each debt” incurred, in addition to liabilities for taxes and penalties. See Bosch v. Cirro Group, Inc., No. 03-11-01625-CV, 2012 WL 5949481 (Tex. App.—Dallas Nov. 28, 2012, pet. denied).

Pursuant to Section 171.255(c) of the Texas Tax Code, an officer or director is not liable for the debts of the LLC or other entity if the officer or director can show the debt was created or incurred over the objection of the officer or director without the officer or director’s knowledge and that the exercise of reasonable diligence of the LLC or other entity’s affairs would show that it was not the intention of the officer or director to create the debt in question.  Furthermore, courts have indicated that an officer or direct relying on this exception to personal liability under the Texas Tax Code has the burden of proof, essentially rendering the exception to personal liability affirmative defenses.  See Priddy v. Rawson, 282 S.W.3d 588 (Tex. App.—Houston [14th Dist.] 2009, pet. denied); In re Trammell, 246 S.W.3d 815 (Tex. App.—Dallas 2008, no pet.); PACCAR Fin. Corp. v. Potter, 239 S.W.3d 879 (Tex. App.—Dallas 2007, no pet.).

Regarding bankruptcy proceedings, the Bankruptcy Court of the Southern District of Texas held that claims against officers and directors pursuant to Section 171.255 of the Texas Tax Code are considered direct claims belonging to the claim holders rather than being classified as derivative claims of the debtor.  Accordingly, the Court concluded that these claims against officers and directors did not violate a provision in a Chapter 11 bankruptcy plan that enjoined the assertion of “derivative claims, including claims of third parties asserting alter ego claims, fraudulent transfer claims, guaranty claims, or any type of successor liability based on acts or omissions of the Debtors.  See In re University General Hosp. Sys. Inc., No. 15-31086-H3-11, 2016 WL 1620219 (Bankr. S.D. Tex. Apr. 20, 2016).

Reinstatement Under the Texas Tax Code

The Texas Secretary of State has the authority to reinstate a Certificate of Formation or Registration of a taxable entity in Texas after forfeiture by the Texas Secretary of State.  Instead of the BOC, Sections 171.312 – 171.315 of the Texas Tax Code governs the application for an entity’s reinstatement and request to set aside tax forfeiture.  A taxable entity, such as an LLC, follows the same procedures as a corporation when reinstating an entity under the Texas Tax Code.  It’s important to note that Chapter 171 of the Texas Tax Code does not specify a specific time frame in which a taxable entity must file an application for reinstatement with the Texas Secretary of State.

Regarding specific tax liability requirements, Section 171.313 of the Texas Tax Code requires that the Texas Secretary of State determine whether a taxable entity has complied with filing each delinquent report and paid any applicable delinquent tax before filing an application for reinstatement and setting aside the tax forfeiture.  Accordingly, a tax clearance letter issued by the Texas Comptroller of Public Accounts stating that the taxable entity is in good standing for purposes of reinstatement meets the requirements of Section 171.313, must be valid through the date of filing the application for reinstatement, and is required when submitting an application for reinstatement and setting aside tax forfeiture.

Texas Secretary of State Form 801 is generally used for making an application for reinstatement and setting aside tax forfeiture.  It’s important to note that the application for reinstatement must be submitted on behalf of and executed by a person who was an owner or managerial official of the entity at the time of tax forfeiture.  The filing fee for an application for reinstatement is currently $75.00.  Again, a tax clearance letter from the Texas Comptroller of Public Accounts is required before filing Form 801, which requires filing all delinquent reports and payments of delinquent taxes.

Reinstatement Under Chapter 11 of the BOC

Pursuant to Section 11.253 of the BOC, an LLC that is involuntarily terminated may reinstate its existence by filing a Certificate of Reinstatement and correct the circumstances that led to the involuntary termination and any other circumstances that may exist pursuant to Section 11.251(b) of the BOC.  It’s important to note that additional filings and fees may be required depending on the specific circumstances that led to the involuntary termination of an LLC and any intervening events that may require an amendment to the LLC’s Certificate of Formation.  Thus, it’s important to contact an attorney who is acquainted with the BOC and understands the procedures and requirements for reinstatement if you do not know specifically why your LLC was terminated.

Generally, Form 811 promulgated by the Texas Secretary of State is the form used to file a Certificate of Reinstatement.  If Form 811 is not used, the drafted Certificate of Reinstatement must comply with the requirements of Section 11.253(b) and (c) of the BOC.  Like the reinstatement procedure for an LLC forfeited under the Texas Tax Code, a Certificate of Reinstatement must be accompanied by a tax clearance letter issued by the Texas Comptroller of Public Accounts stating that the LLC is in good standing.

The filing fee associated with a Certificate of Reinstatement is $75.00 unless the entity is a non-profit corporation.  The fee associated with filing a Certificate of Reinstatement for a non-profit corporation is $5.00.

A Certificate of Restatement after an involuntary termination by the Texas Secretary of State can be filed at any time according to Section 11.253(d) of the BOC.  However, it’s important to note that an LLC filing a Certificate of Restatement is only considered to have continued in existence without interruption from the date of its involuntary termination if the LLC is successfully reinstated before the third (3rd) anniversary of the date of its involuntary termination.  For instance, if your LLC was involuntarily terminated on August 1, 2020, you would have until August 1, 2023, to file a Certificate of Restatement.

If an LLC was involuntarily terminated for failure to pay a fee associated with the filing of a Certificate of Formation, the LLC would be required to submit the Certificate of Reinstatement, its associated filing fee, and the fee for the Certificate of Formation.  For instance, if your LLC was involuntarily terminated for failure to pay the Certificate of Formation filing fee, you would pay $75.00 for the Certificate of Reinstatement and $300.00 for the Certificate of Formation, for a total of $375.00.

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