Failing to properly terminate or “wind down” an inactive corporation or LLC is a potentially costly mistake many Texas business owners make. While the steps involved in terminating an entity are relatively straight forward, the potential legal ramifications for failing to properly do so can be significant.
While most small business owners are aware that the Texas Business Code requires corporations and LLCs to file a Certificate of Formation to form the legal entity in Texas, many are not aware that the Texas Business Code also provides the steps required to terminate said entity and thereby establishing the “start date” for any applicable statutes of limitation that commence on the termination of the entity. Contrary to what many business owners think, simply closing the business, selling all of the assets, and paying any existing creditors does not, in and of itself, serve to formally terminate the entity in the eyes of the state of Texas.
Continued Obligations Regarding Reporting Requirements
Entities not officially dissolved remain obligated to comply with most state reporting requirements. While the entity may no longer be transacting business and may be forfeited by the Texas Secretary of state, if the entity has not been properly terminated, it is still responsible for filing annual reports.
Federal, state and local tax returns are still technically due even for an entity that is no longer officially doing business but has not been properly dissolved. The consequences of not properly terminating the entity include the accumulation of tax fees and penalties for failing to file. Penalties may be assessed even if the entity is defunct and had no income or expenses to report.
Potential Continued Liability
The most significant consequence of not properly terminating an entity is continued liability for acts, debts, and obligations of the entity until such time as the entity is properly terminated. Property filing a Certificate of Termination triggers the start dates for deadlines for parties bringing claims against the entity. If the entity is not properly dissolved, it remains open to any lawsuit or claim in perpetuity.
Properly terminating a business that is no longer active is as critical as properly forming the entity in the first place. Failing to properly terminate the entity exposes the entity to additional liabilities until such time as the entity is properly dissolved. At the Strong Firm, we have helped hundreds of clients properly dissolved their inactive entities to limit the entities ongoing exposure to potential lawsuits and claims, and we would be glad to do the same for you should the need arise.
Eric R. Thiergood, Sr.
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