By Andy Tiwari
A simple document known either as the Texas Franchise Tax Public Information Report or Ownership Information Report can cause some businesses to lose the benefits of corporate protection or, in other instances, delay important transactions such as loans. Small business owners – and even some professionals – frequently overlook or incorrectly prepare this simple but important filing.
The Public Information Report (“PIR”) and Ownership Information Report (“OIR”) – which are separate from the various Texas franchise tax return forms – provide basic information about a Texas entity including the entity’s address and governing authority and must be filed with the Texas Comptroller annually, typically in May of each year. The PIR is to be filed by most limited liability companies, corporations, and financial institutions, while the OIR is to be filed by most partnerships, professional associations, and trusts. Since the vast majority of small businesses are established as limited liability companies or corporations, for simplicity, we’ll refer to the PIR in this article (the rules for the PIR and OIR are virtually identical).
The PIR should list the officers and directors of a business and any related companies. Even if your business doesn’t owe any franchise tax (and many small businesses won’t), it’s still necessary to file the PIR. As a practical matter, make sure the PIR is accurate: banks often rely on these filings to determine who governs a business, and an inaccurate filing could delay underwriting for a loan. While most tax professionals will file the necessary form for you, carefully review the PIR to be filed and make sure it matches what your entity’s documents show or changes you’ve made.
If you fail to complete the PIR timely or get an extension, there is a $50 penalty in addition to any unpaid taxes your business owes. But the consequences for failing to timely file this simple document far outweigh the rather nominal late fee associated with a delinquent filing.
A business can have its corporate privileges in Texas forfeited simply by failing to file the PIR, even if the business filed a franchise tax return. If the PIR is more than 120 days overdue, the Texas Comptroller will report this information to the Texas Secretary of State, which will then forfeit your charter or Certificate of Authority.
While the Texas Comptroller often sends notice regarding missing franchise tax returns, this information is usually provided after forfeiture occurs. Since PIRs provide the Comptroller with updated information such as address changes, a friendly reminder from the Comptroller could also be sent to the wrong address and thus be overlooked.
Once forfeiture occurs, business owners lose important corporate rights like the right to sue and defend in Texas courts. More importantly, the failure could result in a loss of key liability protections: the governing authority of the entity – directors, managers, or officers – can be personally liable for any unpaid franchise taxes or debts the company or organization incurs from the time the PIR was due until the time the PIR is filed. Since most small businesses have common ownership (shareholders, members, etc.) and directors, managers or officers, this type of forfeiture defeats the benefits of the liability protection afforded by the corporate shield. While officers or directors can avoid personal responsibility if they show that the liabilities were assumed despite their protest or without their knowledge, the forfeiture could place the company’s governing authority in the position of challenging personal liability for company debt.
In addition, if the company’s charter is involuntarily terminated, it’s technically possible for another business to file a similarly named entity. Since a terminated entity must go through the legal process of being reinstated with the Secretary of State, you could find yourself having to choose a new company name or seeking permission from your new competitor to use your old business name.
We’re proud of the fact that it’s easy to start a business in Texas and limit your liability in the process – and justifiably so since small businesses are the engines of our economy. However, filing the PIR with a lawyer is just the first step, and keeping up with the paperwork that’s related to the business is critical to keeping your business in good standing and its corporate privileges intact.
If you need legal advice, schedule a meeting with Tiwari + Bell PLLC through our website or by calling (210) 417-4167.