If you have a company that is incorporated in a state other than Texas (it is called a “foreign corporation”), it can still transact business in Texas legally if you follow the rules. There is a requirement that it first register to do business in Texas.
If a foreign corporation transacts business in Texas without first obtaining a certificate of authority, the penalties are severe, as discussed later in this article. In addition to other penalties, there can be a forfeiture imposed in the amount of $100 to $5000 for each month or portion of a month that the foreign corporation operated unlawfully in Texas.
What a foreign corporation must do before transacting business in Texas is obtain a certificate of authority from the Texas Secretary of State that authorizes it to transact business in Texas. The law is very clear, and it is found in Article 8.01 of the Texas Business Corporation Act:
“No foreign corporation shall have the right to transact business in this State until it shall have procured a certificate of authority so to do from the Secretary of State.”
Now there are certain activities that are not considered to be transacting business in Texas because the statute specifically excludes them. The statutory list is not necessarily exclusive, so it is sometimes also necessary to look at case law to see how courts have treated other kinds of activities. The statutory list of activities that are allowed to be done in Texas without registering is as follows:
- Maintaining or defending any action or suit or any administrative or arbitration proceedings, or effecting the settlement thereof or the settlement of claims or disputes to which it is a party;
- Holding meetings of its directors or shareholders or carrying on other activities concerning its internal affairs;
- Maintaining bank accounts;
- Maintaining offices or agencies for the transfer, exchange, and registration of securities issued by it, or appointing and maintaining trustees or depositaries with relation to its securities;
- Voting the stock of any corporation which it has lawfully acquired;
- Effecting sales through independent contractors;
- Creating as borrower or lender, or acquiring, indebtedness or mortgages or other security interests in real or personal property;
- Securing or collecting debts due to it or enforcing any rights in property securing the same;
- Transacting any business in interstate commerce;
- Conducting an isolated transaction completed within a period of thirty (30) days and not in the course of a number of repeated transactions of like nature;
- Exercising the powers of executor or administrator of the estate of a non-resident decedent under ancillary letters issued by a court of this state, or exercising the powers of a trustee under the will of a non-resident decedent, or under trust created by one or more non-residents of this state, or by one or more foreign corporations, if the exercise of such powers, in any such case, will not involve activities which would be deemed to constitute the transacting of business in this state in the case of a foreign corporation acting in its own right;
- Acquiring, in transactions outside Texas, or in interstate commerce, of debts secured by mortgages or liens on real or personal property in Texas, collecting or adjusting of principal and interest payments thereon, enforcing or adjusting any rights and property securing said debts, taking any actions necessary to preserve and protect the interest of the mortgagee in said security, or any combination of such transactions;
- Investing in or acquiring, in transactions outside of Texas, royalties and other non-operating mineral interests, and the execution of division orders, contracts of sale and other instruments incidental to the ownership of such non-operating mineral interests.
If a foreign corporation properly registers to do business in Texas, then it will receive a certificate of authority to do business in this State. There are many benefits that are derived from that certificate of authority, yet a foreign corporation that properly registers to do business in Texas is not totally subject the corporate laws in Texas, as is made clear in Article 8.02 of the Texas Business Corporation Act:
“Until that certificate of authority has been revoked or withdrawn, the foreign corporation will enjoy the same, but no greater, rights and privileges as a domestic corporation organized for the purposes set forth in the application pursuant to which such certificate of authority is issued;
and, as to all matters affecting the transaction of intrastate business in this State, it and its officers and directors shall be subject to the same duties, restrictions, penalties, and liabilities now or hereafter imposed upon a domestic corporation of like character and its officers and directors;
provided, however, that only the laws of the jurisdiction of incorporation of a foreign corporation shall govern.
- the internal affairs of the foreign corporation, including but not limited to the rights, powers, and duties of its board of directors and shareholders and matters relating to its shares, and
- the liability, if any, of shareholders of the foreign corporation for the debts, liabilities, and obligations of the foreign corporation for which they are not otherwise liable by statute or agreement.”
But what are the penalties for transacting business in Texas as a foreign corporation without a certificate of authority? They are substantial, as set forth in Article 8.18 of the Texas Business Corporation Act:
- “No foreign corporation which is transacting, or has transacted, business in this State without a certificate of authority shall be permitted to maintain any action, suit, or proceeding in any court of this State (whether brought directly by the corporation or in the form of a derivative action by a shareholder) on any cause of action arising out of the transaction of business in this State, until such corporation shall have obtained a certificate of authority.
Nor shall any action, suit, or proceeding on any such cause of action be maintained in any court of this State by any successor, assignee, or legal representative of such foreign corporation, until a certificate of authority shall have been obtained by such corporation or by a foreign corporation which has acquired all or substantially all of its assets.
It is expressly provided, however, that the provisions of this article shall not affect the rights of any assignee of the foreign corporation as the holder in due course of a negotiable promissory note, check, or bill of exchange, or as the bona fide purchaser for value of a warehouse receipt, stock certificate, or other instrument made negotiable by law.
- The failure of a foreign corporation to obtain a certificate of authority to transact business in this State shall not impair the validity of any contract or act of such corporation, and shall not prevent such corporation from defending any action, suit or proceeding in any court in this State.
- A foreign corporation which transacts business in this State without a certificate of authority shall be liable to this State, for the years or parts thereof during which it transacted business in this State without a certificate of authority, in an amount equal to all fees and franchise taxes which would have been imposed by law upon such corporation had it duly applied for and received a certificate of authority to transact business in this State as required by law and thereafter filed all reports required by law, plus all penalties imposed by law for failure to pay such fees and franchise taxes.
- In addition to the penalties and payments thus prescribed, such corporation shall forfeit to this State an amount not less than One Hundred Dollars ($100) nor more than Five Thousand Dollars ($5,000) for each month or fraction thereof it shall have transacted business in this State without a certificate. The Attorney General shall bring suit to recover all amounts due this State under the provisions of this section.”
So what will it cost me to do it right, you say? That is a good question to ask when you consider the penalties for not obtaining a certificate of authority to transact business in Texas. The current filing fee to obtain a certificate of authority to transact business in Texas is Seven Hundred Fifty Dollars ($750). That is not an insignificant amount of money, but it is nothing when compared to the possible penalties for not complying with the law.
Copyright 2014 By Lee Solomon