Should you reinstate your Texas business or create a new entity?

Should you reinstate your business or create a new entity in the state of Texas? I recently read a case study regarding a business owner whose Texas business entity was forfeited by the state. As a CPA in the state of Texas, my obvious opinion on this is they should definitely reinstate their entity. There are several reasons why creating a new entity will eventually catch up to the business owners in the long run.

I will start with what happens if the business owner creates a new entity.

• The business owner can have peace of mind and start from scratch.
• Any taxes or fees due to the Texas Comptroller are not attached to the new entity.
• The business owner can create a new brand identity.

While these look good for the new business, the penalties and forfeiture from the old entity will eventually catch up with the new entity. The most common ways are if the business owner tries to sell/purchase a property. Let’s take a look at what happens when a business owner tries to sell any property acquired under the old forfeited entity.

Title companies perform extensive due diligence before proceeding with a closing. They have to make sure the title is clear or they could be held liable for transferring a title that was not clear. They will check to make sure the seller entity is a legal entity with the Secretary of State and Texas Comptroller. Once they locate the new entity is in good standing, the title company will verify owners through the state records. Then the following steps are performed.

• Search for the names of the registered agent and managing members through the Secretary of State. Every entity registered with the State of Texas must have a registered agent and one managing member.

• The address of the registered agent of the new entity and the old entity. They will flag any entities with the same address and names.
• Type of business. If any of the entities also engage in the same type of business, the title company could flag these are successor entities.
• They will then perform a search on the Texas Comptroller’s taxable entity search. If any of the entities flagged are forfeited, this will put the closing on hold.

Now that the title company has this information, they will take internal actions. Title companies like Stewart Title use strict manuals to tell their agents what to do. Their instructions for Texas corporations and LLCs are very clear:

• Once an entity is forfeited, the corporation effectively ceases to have a separate legal identity. This means it is not able to legally sign the papers to sell the building or land the business think it owns.

• If their search reveals the entity is not in good standing, they are instructed to discuss the situation with an underwriter immediately.
• For a title company, insuring a transfer from a forfeited entity is considered extra hazardous, therefore title companies will usually require proof of reinstatement before they will let a deal close.

Reinstatement with the state of Texas takes two to three days if completed online and expedited. Therefore, the closing process gets delayed and deposits or earnest money could be in jeopardy.

The answer to should you reinstate your entity is clear. You will eventually have to get it back in good standing anyway to proceed with selling property. I did not get into whether a forfeited entity can defend itself in court, owners becoming personally liable for debts, and transacts with lenders/banks. I will save those for another post.

Check out my reinstatement page for more information on how to get your entity reinstated.