A central purpose for creating a corporation or an LLC is for asset protection. These companies shield owners from liabilities that accrue during the life of the business.
In Texas, failure to file your franchise tax returns or pay your franchise tax liability will cause you to lose your limited liability protection.
The Texas Tax Code provides for personal liability for the management of a company if there is a failure to file a report or pay a tax or penalty.
Generally, this happens where a company has failed to file franchise tax returns. The failure then causes the company to forfeit its corporate privileges.
This is a common occurrence especially where a person or a company owns multiple entities.
If privileges are forfeited in Texas – the management (officers & directors) is liable as if the company were a general partnership with no limited liability protection.
So, for instance, if the company has a slip and fall accident the management is personally liable to the extent the company cannot pay.
What can you do about it?
- Get current. File past due franchise tax reports and pay your taxes to get back in good standing and limit your exposure.
- Be very careful becoming a member of management. For instance, it may seem like a promotion to get the title “president” – but if your company has tax problems you may be writing a personal checks to cover the companies problems. Not a good result.
- Resign from the company. Only management is liable for debts – so if you can leave before the debt is incurred you may be OK.
- Argue the Knowledge Exception. If you can show that the debt was either a) created or incurred over your objection, or b) without your knowledge (having exercised reasonable due diligence) – you may be OK as well.
In short, in Texas don’t mess with the Franchise Tax. The tax is generally a small tax – but failure to pay causes big problems.