Is Your Texas Asset at Risk? The High Cost of Forfeited Out of State Entities

Why Out of State Owners are Getting Forfeited and How to Fix It

Forfeited out of state entities are businesses that conduct transactions in the state of Texas but are registered in another state. The entity is considered an out of state business and is legally classified as a foreign entity by the Texas Secretary of State. The fee to register is $750 for all foreign entities except nonprofit corporations and cooperative associations.  The registration fee for these entities is $25. All entities have a 90-day grace period to register with state after initially transacting business with the state.   What is considered transacting business in the state?  The Texas Secretary of State does not specifically define transacting business however, the Texas Business Organization Code does specify sixteen activities that do not constitute transacting business in the state.  Some of these transactions include:

• maintaining or defending an action or suit or an administrative or arbitration
• holding a meeting of the entity’s managerial officials, owners, or members
• maintaining a bank account
• maintaining an office or agency for transferring, exchanging, or registering securities the entity issues
• voting the interest of an entity the foreign entity has acquired
• effecting a sale through an independent contractor
• creating, as borrower or lender, or acquiring indebtedness or a mortgage or other security interest in real or personal property
• securing or collecting a debt due the entity or enforcing a right in property that secures a debt due the entity
• conducting an isolated transaction that is completed within a period of 30 days and  is not in the course of a number of repeated, similar transactions
• owning, without more, real or personal property in this state
• acting as a governing person of a domestic or foreign entity that is registered to transact business in this state

The fees for an unregistered entity or LLC are equal to the registration fee for each calendar year or part of a calendar year of delinquency. Not only are late fees imposed, but the entity cannot maintain an action, suit, or proceeding in a Texas court until it registers and the attorney general can enjoin the entity from transacting business in Texas.

Once an out-of-state owner realizes their Texas entity registration is not active or revoked, they need a clear path forward. The next step would be to reinstate the entity. Reinstatement is a specific multi-agency process.  Below are the steps required to reinstate the out of state entity:

• Request a Tax Clearance Letter from the Texas Comptroller. You cannot talk to the Secretary of State until the Comptroller is happy. You must file all missing Franchise Tax and Public Information Reports (PIR) and pay any outstanding taxes, penalties, and interest. Once current, submit Form 05-391 to request the Tax Clearance Letter (Form 05-377).
• Choose the Correct SOS Form.  Use Form 801 if the entity was forfeited specifically for tax reasons.   Form 811 is filed if the revocation was for other reasons, such as failing to maintain a registered agent.
• Submit and Pay the filing fees. The standard filing fee for reinstatement is $75. For out-of-state owners in a rush to close a deal, expedited 24-hour service is available for an additional fee.

For foreign entities managing millions in Texas assets, a forfeited status is more than a paperwork glitch.  Some of the consequences of having forfeited out of state entities are banks not closing on a loan for the forfeited out of state entity and losing the right to defend property in a Texas court.

If you need more resources to register your out of state entity or reinstate forfeited out of state entities, please visit my reinstatements page or visit the Texas Secretary of State.