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Do I need to Register my Out-of-State Business Entity in Texas?

Author: Braden Wayne

Texas entrepreneurs are often counseled by attorneys to form their entities under another state’s law, such as Nevada or Delaware, based on the premise that such laws offer better business protections and greater freedoms. However, entrepreneurs seeking such benefits should be aware that they may lose certain rights in Texas if they fail to jump through the registration hoops established by the Texas Secretary of State.

This is because the Texas Secretary of States determines whether an entity foreign to Texas or domestic to it not by an entity’s principal place of business, but instead on the state in which the entity was formed.  That’s right, Nevada corporations and Delaware LLCs that have their only office in Texas, and employ only Texas employees, are not Texas entities. Instead, the Texas Secretary of State considers such entities “foreign entities,” and subjects them to additional registration requirements under Texas law.

To the extent such entities transact business in Texas, they must register as a foreign entity with the Texas Secretary of State. Failure to do so can strip the entity of the right to use Texas courts (the right to sue), subject the entity to an injunction prohibiting their continued operation in Texas, and the potential imposition of civil penalties equal to all fees and taxes that would have been imposed if the entity had registered when first required, all of which could have critical consequences for a business.

Unfortunately, the Texas Business Organizations Code does not define what constitutes “transacting business” in Texas. Instead, attorneys are left to analyze Section 9.251 of the TBOC, which identifies a non-exhaustive list of activities that are not considered transacting business in Texas, as well as case law and various opinions issued by the Texas Attorney General.

In general, activities that take place in Texas only tangentially (such as engaging in interstate commerce that passes through Texas), or activities that are brief and isolated (such as one-off transactions or maintaining or defending a lawsuit) will not subject a foreign entity to Texas’ registration requirements.  More intentional or longer-term activities, such as developing property in Texas, authorizing a franchisee, and maintaining a general purpose office and employees in Texas will constitute “transacting business” and subject the entity to registration.

Texas courts and the Secretary of State will judge each business activity or transaction on its specific facts, and as such, business owners questioning their need to register to do business in Texas should always consult a Texas attorney.  For more information about this topic, or any other business law questions, please feel free to contact me at214-237-0657 or bwayne@setttlepou.com