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“Texas is a great place to do business.” That’s what everyone says, right? But what is missing from the accolades is the inconvenient truth that, “Texas is a horrible place to STOP doing business.”
What Governor Rick Perry and Texas State Comptroller, Susan Combs forgot to tell you is that if you live in the State of Texas, and are an officer of a corporation which is incorporated in any other state, even if you don’t conduct any actual business within the state of Texas – you will be required to file and pay an annual “Franchise” tax. Furthermore, if you sell a product you will be required to obtain and maintain a Sales/Use tax permit; and of course file the necessary forms – even if you specifically exclude residents of Texas from your distribution.
Oh, but it gets even better. According to Texas law, you are not permitted to go out of business without providing “proof” that you are indeed, out of business. Once the State of Texas has forced you into compliance (against your will) you will not be permitted to close your doors unless you can “Prove” that you are out of business.
A friend of mine; whom we will call, Jack once had the idiotic desire to go into the “drop shipping” business and to conduct this business entirely on the internet. Because Jack had the crazy idea that he should conduct the business legally, he decided to form a corporation in the State of Delaware, where many businesses go because of the favorable business & incorporation laws. The State of Delaware has no income tax and no state sales tax. So it seemed like a great way to be legal while cutting down his overhead.
Shortly after forming the corporation, Jack got a nice friendly little letter from Texas Comptroller Susan Combs, thanking him for forming a corporation (a simple LLC) in Delaware and welcoming him to doing business in the great State of Texas.
Jack was advised that since he “lived” in Texas, they will be requiring that he file and pay “Franchise Tax” annually. In addition, since he might be delivering products to Texas residents, he was also advised that he would be required to obtain, maintain and pay a Sales / Use tax as well.
To be fair, Jack would be able to get out of collecting the sales / use tax as long as he specifically excluded sales to Texas residents (which he later did). Of course, Jack first had to pay the $50.00 fine for not filing the sales tax form on time and he would have to complete a long, complicated application to “request” that he not be required to collect sales tax. The fact that he had not made any sales to Texas residents or didn’t plan to make any sales in Texas was irrelevant. He still had to file the forms, he was told.
Well, it didn’t take long for Jack to learn that the drop ship business was a losing endeavor. The completion is simply too great and the profit margin too small to make it work for a small startup business with no funding. After spending several thousand dollars; most of which was spent JUST complying with regulations to be legal; Jack threw in the towel and closed up shop, which (he thought) would be easy to do since the business was entirely internet based.
Three years later.
The State of Texas is still sending Jack demands to complete and submit the Franchise and Sales Tax forms, despite his repeated explanations that the business is dead. Finally, after many emails and letters Jack was able to speak to an actual person at the Comptroller’s office.
“If you want to STOP doing business in Texas, you must provide prove that you are no longer in business.” Since this business was a LLC formed in Delaware that “proof” must come by way of an officially sealed letter from the State of Delaware that the business is actually closed. Only a letter that contains the State of Delaware Seal will do.
Ok fine. How hard could that be? Turns out, it is not hard at all, but it does cost a few dollars. To begin with, only a company in “Good Standing” is allowed to close its doors. Jack would have to first put his corporation back into “Good Standing” status and then file the necessary paperwork along with the fees which accompany the request to NOT be in business any longer.
So his first step would be to hire a new Attorney to represent him with the State of Delaware ($300). Then he would have to re-activate the Delaware Corporation by paying the last two years of licensing fees ($500). Then, he would have to file and pay a “re-activation” fee ($200) after which he would then be eligible to close the business; and of course, there is an application fee for that ($200).
Grand Total = $1200 … to legally NOT do business any longer. Then Jack could get the sealed letter, required by the State of Texas to NOT do business within the State any longer.
Lest we not forget, the reason Jack incorporated in Delaware in the first place was to NOT do business in Texas. It was the State of Texas that imposed this process upon him for no other reason than because he chose to suck oxygen within state boundary lines. Let this be a lesson to all officers of corporations NOT doing business in Texas.
Of course, Jack was given a choice. He could choose to shell out the $1200 to NOT do business any longer or he could chose to file a “no tax due” Texas Franchise form every year for the rest of his natural life, even though the business no longer exists in any rational form. Failure to comply will result in fines which may eventually be seized from his personal assets. The fact that the corporation was a “Limited Liability Corporation” makes no difference to the State of Texas. As an officer of the dead corporation, he is still personally responsible.
Welcome to Texas.