At the end of summer, a lot of business owners receive notices like this one:
A variation of this notice does not have any estimated tax but simply threatens the forfeiture of your right to do business in Texas.
What does it mean?
- This is not an IRS notice and has nothing to do with income tax.
- This notice is issued by the State of Texas to LLCs and other companies registered with the state.
- By Texas law, each registered company must file an annual Franchise tax report and Public Information report.
- If you received this notice – then you missed the deadline for these reports, normally May 15th.
What should you do?
You need to file those two reports ASAP – or the State of Texas will place your company in bad standing (“forfeiture”). Fortunately, filing these reports is fairly easy, and we offer free do-it-yourself instructions.
Do you have to pay the tax?
Not if your gross income was under $1 mil. The tax on the notice is a completely arbitrary estimate, not based on anything. Frankly, its goal is to get your attention and make you file the missing reports. Once the reports are filed, this tax will disappear automatically.
If your company gross income was over $1 million – then you may actually owe some Franchise tax. In this case, I recommend you do hire us or someone else to help you figure out the correct amount. The rules and calculations are rather confusing.
Since you missed the deadline, the State of Texas will assess you a $50 late filing penalty. Most of the time, these penalties are waived upon request, but you will have to ask.
What happens if you ignore it?
Do not ignore it! The state will turn this arbitrary estimated tax into collections, and your credit will have a major hit.
Even if there is no assessed tax, there is still trouble. When the state forfeits your right to do business in Texas, your LLC will not be able to close any real estate transactions, and your bank may freeze your account. You do not want to learn about this on the day of closing, believe me.
Once your LLC is forfeited, you will still have some time to reinstate it, but it will cost you some fees. After that limited grace period, your LLC will be terminated. Imagine the danger of owning a property in the name of a company that no longer legally exist! Also, at that point, someone else will be able to open a new LLC using your old name – potentially causing a lot of trouble.
Considering how simple this annual reporting formality is – just do it.
It’s not worth the possible trouble down the road.