In Texas, a corporation’s failure to timely file its franchise tax report or to pay its franchise taxes can result not only in forfeiture of its corporate charter, but also forfeiture of the corporation’s right to sue or defend itself in court. Perhaps more importantly for corporate officials, those failures will result in the directors and officers being personally liable for all new corporate debt.
The personal liability of corporate directors and officers begins the earliest of the date the franchise tax report, taxes, or penalties were due and extends until the corporate privileges are revived. This personal liability includes the amount of franchise taxes or penalties imposed by the Texas Tax Code that become due after the date of forfeiture. Officers and directors may avoid liability for new corporate debt only if they can show that the debt was created or incurred: (1) over their objection; or (2) without their knowledge and the exercise of reasonable diligence would not have revealed the intention to create the debt.
In order to revive corporate privileges and reinstate the protection against individual liability for directors and officers, the corporation must file all outstanding reports and pay any franchise taxes, penalties and interest due. Unfortunately, individual liability for penalties and debts incurred prior to that time will not be affected by the subsequent revival of the corporation’s privileges.
In sum, the timely filing of franchise tax reports, as well as the payment of franchise taxes and penalties, is essential in order to maintain the legal privileges and protections afforded to Texas corporations and to protect directors and officers from personal liability for corporate debts.