Wednesday, May 16, 2012

Little Known Fact: Director and Officer Liability for Failure to pay Franchise Tax

Directors and officers can be a risk averse group.  They write provisions into their corporate charters and bylaws providing for various levels of exculpation and indemnification.  They take out D&O liability insurance.  They enjoy the benefits of the Business Judgment Rule, which generally protects business decisions made by the board of directors from judicial scrutiny.

But one area of potential liability for directors of Texas corporations that might easily be overlooked is Section 171.255(a) of the Texas Tax Code.  That section provides:  "If the corporate privileges of a corporation are forfeited for the failure to file a report or pay a tax or penalty, each director or officer of the corporation is liable for each debt of the corporation that is created or incurred in this state after the date on which the report, tax, or penalty is due and before the corporate privileges are revived. . ."

If a Texas corporation does not file its franchise tax reports and pay its franchise tax, directors and officers of the corporation can be liable as if they were partners and the corporation were a partnership.  See Section 171.255(b) of the Texas Tax Code.

Thus, if you are an officer or director of a corporation chartered or doing business in Texas, it is a very good idea to stay current on your franchise tax reports and payments!

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