There are unique issues when businesses operate across state lines. One of the most important is registering with the state in which the business operates. States differ on what contact is required to trigger the foreign entity registration requirement but every state requires some sort of registration for foreign entities to conduct business in their state.
The reason for the registration requirement is largely based on the state’s interest in protecting its citizens. Domestic entities file certificates of formation that describe the nature of the business and any limitations on the business’s liability. Consumers and other businesses can search the Secretary of State’s database to learn the details of any company they wish to transact with. In the case of foreign entities, there is no information available with the Secretary of State if the business is a foreign entity. Absent a foreign entity registration, there is a risk that one of the state’s citizens might transact with that foreign entity without realizing its true nature.
Texas Foreign Entity Registration Requirement
In Texas, a foreign entity is required to register with the Secretary of State’s Office to “transact business in this state,” if it is one of several types of entities: a foreign corporation, foreign limited partnership, foreign limited liability company, foreign business trust, foreign real estate investment trust, foreign cooperative, foreign public or private limited company, or another foreign entity, the formation of which, if formed in this state, would require the filing of a certificate of formation.
This means there are two questions to determine whether a foreign entity is reqruiement to register in Texas: (1) is it a specified type of entity; and (2) is the entity transacting business in this state. The first requirement is easy enough to determine. Usually it is the determination of whether or not an entity is transacting business in Texas that is more difficult.
Fortunately, the law and the Attorney General’s office provide some guidance on that determination. The Texas Business Organizations Code lists specific activities that do not constitue “transaction of business in this state,” including:
- maintaining or defending an action or suit or administrative or arbitration proceeding;
- holding a meeting of managerial officials, owners, or members or carrying on another activity concerning the entity’s internal affairs;
- maintaining a bank account
- maintaining an office or agency for: transferring or registering securities the entity issues; or appointing or maintaining a trustee related to the entity’s securities;
- voting the interest of an entity the foreign entity has acquired;
- effecting a sale through an independent contractor;
- creating 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;
- transacting business in interstate commerce;
- conducting an isolated transaction that is completed within a period of 30 days and is not a number of repeated similar transactions;
- investing in or acquiring in a transaction outside of this state, a royalty or other nonoperating mineral interest;
- executing a division order, contract of sale, or other instrument incidental to ownership of a nonoperating mineral interest; or
- owning, without more, real or personal property in this state.
Effect of Failing to Register a Foreign Entity in Texas
So what happens if a foreign entity that was required to register under the Texas Business Organizations Code? There are several consequences that could affect a business’s relationship with both the State and any relationships it has with domestic entities.
First, the Attorney General is empowered to enjoin the foreign entity from transacting business in the State if the entity is not registrered or the registration was obtained through false or misleading information.
Second, and perhaps the most important consequence, a foreign entity that fails to register may not maintain an action, suit, or proceeding in a Texas court on a cause of action that arises out of the transaction of business in Texas. While this sounds quite punitive, the failure to register does NOT: affect the validity of any contract; prevent the entity from defending an action, suit , or proceeding; or cause any owner, member, or manager to be come personally liable for the debts, obligations, or liabilities.
Third, there is a civil penalty for failing to register. The penalty is the amount of all fees and taxes that should have been imposed from the time the entity first should have registered plus penalties and interest imposed by law.
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