- When forming an entity in Texas, its necessary to file a certificate of formation and then annually file public information and tax reports.
- If an entity does not file those reports, it can fall out of good standing. And that can create potentially liability for the principals of that entity.
- At Bukowski Law Firm, we can help you get your entity back into good standing.
A lot of weeks, the ideas on what to write about in the blog come from something we have recently worked on at our firm. That’s where I am getting this week’s article. I will talk about it more below, but one of our attorneys had success in a matter because the opposing party missed something important.
Most of you reading this are probably involved in the real estate business. And you know, therefore, that most investors will set up a single purpose entity to own the real estate that they have invested in. Its what we recommend for all of our clients. And usually your lender requires it.
And while that is great, for a big investor, that can mean he or she has a lot of entities to account for. And to keep in good standing. Because letting your entity fall out of good standing is not great.
What Texas Requires from Entities
As you probably know, when setting up an entity in Texas, the first thing you have to do is file a Certificate of Formation with the Secretary of State. That ensures that you can receive the legal benefits that an entity provides.
Texas also requires some minimal filings every year to keep the entity in good standing. The first is a Public Information Report. This report makes public the address of the entity and its officers, partners, and/or members.
In addition to that, entities must file a franchise tax report. This report explains how much revenue the entity made and whether it owes franchise taxes.
If the entity does not file these two reports, it will fall out of good standing with the State. And as explained below, that is not a good thing.
The Pitfalls of not Being in Good Standing
Once an entity fails to file the above reports and falls out of good standing, it has no official status in Texas anymore. As a result, it does not provide the protection that it was intended to provide.
This means that the entity cannot:
- Sign agreements – If you sign an agreement for an entity that is not in good standing, the opposing party may be able to claim that the agreement was never valid. Or that you committed fraud by signing on behalf of an entity that does not exist.
- Sue anyone in court – The entity has no official standing in Texas anymore. As a result, it cannot avail itself of the courts and sue someone else to right a wrong.
- Take any other action as an entity.
Because its not an entity in the State’s eyes, the principals of the entity have lost the very thing the entity was set up for. They have lost the protection that the entity provides. As a result, if an entity is not in good standing and there is a potential liability event, the principals of the entity can individually be found liable. And that, obviously, is not good at all.
Its Possible to Get an Entity Back into Good standing
So that information above is not very fun to hear. But don’t panic. Just because an entity falls out of good standing does not mean that it cannot get back into good standing. Usually this requires filing the missing forms and paying unpaid taxes or penalties. It is not incredibly difficult – even if it is incredibly important. Its also something we regularly do for our clients.
So if you are facing this issue of entities falling out of good standing, please give us a call. We can usually get them back into good standing without too much difficulty. And that is not only good – its GREAT!