Terminations
§ 21.1Overview of Terminations under Texas Law
Chapter 11 of the Texas Business Organizations Code (TBOC) governs winding up and terminating a domestic entity.
Winding up of a domestic entity is required on:
(1)the expiration of any period of duration specified in the domestic entity’s governing documents;
(2)a voluntary decision to wind up the domestic entity;
(3)an event specified in the governing documents of the domestic entity requiring the winding up, dissolution, or termination of the domestic entity, other than an event specified in another subdivision of this section;
(4)an event specified in other sections of this code requiring the winding up or termination of the domestic entity, other than an event specified in another subdivision of this section; or
(5)a decree by a court requiring the winding up, dissolution, or termination of the domestic entity, rendered under this code or other law.
Tex. Bus. Orgs. Code § 11.051.
§ 21.2Expiration of Stated Period of Duration
An entity perpetually exists unless otherwise stated in its governing documents. If a period of duration is provided, the entity must wind up by the specified end time or date or within the specified number of months or years. See Tex. Bus. Orgs. Code § 1.002(69–a).
§ 21.3Voluntary Decision to Wind Up Entity
Entity owners, members, or the governing authority can determine to wind up the business voluntarily. See Tex. Bus. Orgs. Code § 11.001(6).
§ 21.3:1Voluntarily Winding Up Limited Liability Company
Unless the operating agreement or certificate of formation provides otherwise, approving a voluntary winding up of a limited liability company requires a majority vote of all of the members or, if it has no members, all of the managers. Tex. Bus. Orgs. Code § 101.552
§ 21.3:2Voluntarily Winding Up General Partnership
Unless the partnership agreement provides otherwise, a voluntary decision to wind up a general partnership “requires the express will of a majority-in-interest of the partners who have not assigned their interests.” Tex. Bus. Orgs. Code § 11.057(a). “Majority-in-interest” means (with respect to either a specified group of partners or to all the partners, depending on the circumstance) partners who own more than 50 percent of the current percentage interests in the partnership, or who own more than 50 percent of other interest in the profits of the partnership. See Tex. Bus. Orgs. Code § 11.057(f). Unless the partnership agreement provides otherwise, if a general partnership has specified a period of duration, is for a particular undertaking, or provides in its partnership agreement for winding up on the occurrence of a specified event, then a voluntary winding up requires the express will of all of the partners. See Tex. Bus. Orgs. Code § 11.057(b).
§ 21.3:3Voluntarily Winding Up Limited Partnership
Unless otherwise stated in the partnership agreement, all partners must provide written consent to voluntarily wind up a limited partnership. See Tex. Bus. Orgs. Code § 11.058(a).
§ 21.3:4Voluntarily Winding Up Corporation
If a corporation has not commenced business and has not issued any shares, a majority of the organizers or board of directors may wind up the business by providing written consent. See Tex. Bus. Orgs. Code § 21.502(2).
Once a corporation has issued shares and commenced business, however, the process of voluntarily winding up becomes more involved. Unless the corporate agreement provides otherwise, voluntarily winding up requires the consent of all shareholders, or, alternatively, the board of directors must adopt a resolution and submit it for approval at an annual or special meeting of the shareholders, and the shareholders must approve the resolution by a two-thirds affirmative vote in accordance with TBOC sections 21.502(2) and 21.364.
PRACTICE TIP: Before convening a meeting to vote on a voluntary decision to wind up an entity, review the TBOC to verify the procedures regarding notice and voting for the specific entity type, and review the governing documents of the entity. If the governing documents diverge from the procedures outlined in the TBOC, ensure that they do so in an unambiguous manner. Create a detailed record that includes the notice, agenda, minutes of the meeting, and any proxies. Ensure that all documents including consents, minutes, and proxies are signed by the required owner, duly authorized corporate officer, or both.
§ 21.4Event Specified in Governing Documents
The governing documents of an entity will control the winding up and termination. If the terms of the governing documents are different than the TBOC, the terms set forth in the governing documents will control. The documents will be viewed under the law of contracts.
PRACTICE TIP: When drafting organizational documents, discuss with your clients the process for terminating the entity. To better prepare the terms for termination, discuss what events may lead to the termination. If there is the potential for a deadlock (for example, due to fifty-fifty ownership interest), provide for terms that specifically address how to settle any impasses.
PRACTICE TIP: Draft the documents in a clear and precise manner to avoid any ambiguities. Take steps to ensure that all entity documents contain the same terms regarding winding up and terminating the entity.
§ 21.5Events Specified in Other Sections of TBOC Requiring Winding Up, Dissolution, or Termination
The provisions in TBOC sections 11.056 through 11.059 set forth entity-specific provisions regarding winding up or termination.
§ 21.5:1Winding Up Limited Liability Company—TBOC Section 11.056
A limited liability company is required to wind up upon the termination of the continued membership of the last remaining member. If, however, within ninety days after the date of termination, a legal representative or successor of the last remaining member agrees to both continue the company and become a member of the company, winding up is not required. Alternatively, the legal representative or successor may designate another person to become a member of the company. If the designee agrees, winding up is similarly not required. See Tex. Bus. Orgs. Code § 11.056.
§ 21.5:2Winding Up General Partnership—TBOC Section 11.057
A general partnership is required to wind up under the following circumstances:
(1)in a general partnership for a particular undertaking, the completion of the undertaking, unless otherwise provided by the partnership agreement;
(2)an event that makes it illegal for all or substantially all of the partnership business to be continued . . . ; and
(3)the sale of all or substantially all of the property of the general partnership outside the ordinary course of business, unless otherwise provided by the partnership agreement.
Tex. Bus. Orgs. Code § 11.057(c).
A partnership agreement may also require the partnership to wind up on the occurrence of a specified event or at the end of a stated period of duration. To begin the process, a partner, other than a partner who has agreed not to withdraw, must provide notice to the partnership requesting a windup. Winding up then occurs on the sixtieth day after the date on which the partnership receives that notice, or a later date as specified by the request, unless a majority-in-interest of the partners denies the request for winding up or agrees to continue the partnership. See Tex. Bus. Orgs. Code § 11.057(d).
§ 21.5:3Winding Up Limited Partnership—TBOC Section 11.058
Unless otherwise provided by the partnership agreement, the withdrawal of a general partner of a domestic limited partnership is an event requiring the entity to wind up. See Tex. Bus. Orgs. Code § 11.058(b). A limited partnership is also required to wind up when no limited partners remain. See Tex. Bus. Orgs. Code § 11.058(c).
§ 21.5:4Winding Up Corporation—TBOC Section 11.059
A corporation’s certificate of formation or corporate bylaws must specify any events that require winding up, dissolution, or termination. See Tex. Bus. Orgs. Code § 11.059.
§ 21.6Court Decree Requiring Winding Up, Dissolution, or Termination of Domestic Entity
A domestic entity, or the owner or member of the entity, may apply for a court to supervise the process of winding up. The court may then either (1) supervise winding up the entity itself; (2) appoint someone to wind up the entity; or (3) make any order, direction, or inquiry necessary to facilitate winding up the entity. See Tex. Bus. Orgs. Code § 11.054.
The court will also intervene in circumstances of involuntarily winding up an entity. These circumstances result when the attorney general determines that issues exist with the entity under TBOC section 11.301 and the entity has not cured these issues within thirty-one days of notice. See Tex. Bus. Orgs. Code § 11.303. The attorney general may instigate an action for termination of an entity, and a court may require winding up if the court finds any of the following problems:
(1)the filing entity or its organizers did not comply with a condition precedent to its formation;
(2)the certificate of formation of the filing entity or any amendment to the certificate of formation was fraudulently filed;
(3)a misrepresentation of a material matter has been made in an application, report, affidavit, or other document submitted by the filing entity under this code;
(4)the filing entity has continued to transact business beyond the scope of the purpose of the filing entity as expressed in its certificate of formation; or
(5)public interest requires winding up and termination of the filing entity because:
(A)the filing entity has been convicted of a felony or a high managerial agent of the filing entity has been convicted of a felony committed in the conduct of the filing entity’s affairs;
(B)the filing entity or high managerial agent has engaged in a persistent course of felonious conduct; and
(C)termination is necessary to prevent future felonious conduct of the same character.
Tex. Bus. Orgs. Code § 11.301(a).
§ 21.7Procedures for Winding Up
The owners, members, managers, or other governing bodies of an entity must begin the process of winding up as soon as reasonably practicable following a triggering event. First, the entity must cease conducting business except as necessary to wind up. See Tex. Bus. Orgs. Code § 11.052(a)(1). If the entity is not a general partnership, it must notify each known claimant of the windup in writing. See Tex. Bus. Orgs. Code § 11.052(a)(2). It is important that an entity comply with this requirement. Under TBOC section 11.356, a terminated entity continues for only three years after termination for the purpose of pursuing a claim. Therefore, any unraised claims will extinguish if not raised. See Tex. Bus. Orgs. Code § 11.356(a)(2). Also see section 21.8 in this chapter below. After providing notice of claims, the entity must collect and sell any entity property that has not been distributed in kind to the entity’s owners or members and perform any other action required to complete and terminate the entity. See Tex. Bus. Orgs. Code § 11.052(a).
The entity continues to exist until winding up is complete, and it may therefore pursue any legal actions. See Tex. Bus. Orgs. Code § 11.052(b). An entity may continue its business for a limited period, including delaying the property distribution, to avoid unreasonable property or business losses. See Tex. Bus. Orgs. Code § 11.053(d).
PRACTICE TIP: Be sure to work with all of the entity’s advisors, including accountants, to determine all claimants.
During the process of winding up, an entity shall distribute and use entity property to discharge all of its liabilities and obligations. If the property is insufficient to release all of the entity’s liabilities and obligations, the entity shall distribute the property as equitably as possible to satisfy its liabilities and obligations, including those owed to owners or members, other than for distributions. See Tex. Bus. Orgs. Code § 11.053(b). Any assets that are distributable to creditors or owners who are unknown or cannot be found after the exercise of reasonable diligence must be reduced to cash and deposited with the Texas comptroller in a special account to be maintained by the comptroller. The money must be accompanied by a statement to the comptroller with the name of the creditor or owner, the last known address, the amount of each creditor’s or owner’s portion of the money, and any other information that the comptroller may reasonably require. See Tex. Bus. Orgs. Code § 11.352.
After discharging the liabilities and obligations, “the domestic entity shall distribute the remainder of its property, in cash or in kind, to the domestic entity’s owners according to their respective rights and interests.” Tex. Bus. Orgs. Code § 11.053(c). When distributing the remainder of its property, it is important that the entity follows all liquidation procedures set forth in the operating agreement.
In addition to the above requirements for winding up, the entity will need to close any bank accounts; cancel (or sell or transfer, if applicable) any business licenses, permits, and assumed names; file final tax returns with the IRS and Texas comptroller; and withdraw/cancel registration from states in which it is registered.
PRACTICE TIP: It is a good idea to maintain a cash reserve and prepay business insurance for three years after the entity has terminated to cover any contingent liabilities.
§ 21.8Limited Continued Existence and Claims Extinguishment
An entity continues to exist for three years after termination only for the following purposes:
1.to prosecute an action or proceeding brought by the entity, or to defend an action or proceeding brought against the entity;
2.to allow the survival of any existing claims;
3.to hold title to any property remaining after termination, or that is collected by the entity after termination, and to liquidate that property;
4.to distribute property or its proceeds; and
5.to settle any final affairs.
See Tex. Bus. Orgs. Code § 11.356(a).
If a terminated entity brings legal action on an existing claim before the end of the three-year period, or if a third party brings such an action against the entity during that time, and the claim was not otherwise extinguished, the entity will survive for the duration of the action until all judgments, orders, and decrees have been fully executed and all property has been distributed. See Tex. Bus. Orgs. Code § 11.356(c).
Once an entity has terminated its existence, it may not continue conducting business beyond these limited purposes unless it files for reinstatement (SOS Form 811, form 4-4 in this manual). See Tex. Bus. Orgs. Code § 11.356(b). Also see section 21.11 in this chapter below.
§ 21.9Procedures to Revoke or Cancel Dissolution
An entity that is winding up voluntarily may revoke its decision to terminate. Revocation is completed in the manner specified in the TBOC for the type of entity and must be done before the termination of an entity is effective. See Tex. Bus. Orgs. Code § 11.151(a). If winding up is triggered by a specified event, the entity has a year from the first anniversary of the date of the event to cancel the termination. See Tex. Bus. Orgs. Code § 11.152(a). A windup triggered by the expiration of a specified period of duration may be canceled within three years after the expiration of the period of duration by an amendment to the entity’s governing documents. See Tex. Bus. Orgs. Code § 11.152(b). In the case of a limited liability company, a voluntary decision to wind up may be revoked by a majority vote of all members unless otherwise provided in the entity’s governing documents. See Tex. Bus. Orgs. Code § 101.552(a). In the case of a manager-managed limited liability company that has not yet admitted members, a majority of the managers may revoke their decision to wind up the limited liability company. See Tex. Bus. Orgs. Code § 101.552(a).
Upon the completion of the winding up procedure, the entity will need to obtain a certificate of account status for dissolution or termination issued by the Texas comptroller indicating that the entity has paid all taxes under title 2 of the Texas Tax Code (see Texas comptroller form 05-359, available via https://comptroller.texas.gov/forms). To obtain this form, the entity must have paid all delinquent taxes and have filed a final tax return. Upon receipt of the certificate of account status, the entity will submit two signed copies of the certificate of termination (SOS Form 651, form 21-1 in this manual) and the certificate of account status to the secretary of state. Upon receipt, the secretary of state will formally terminate the entity.
§ 21.11Reinstatement of Terminated Entity
A terminated entity may be reinstated if—
1.the entity terminated by mistake;
2.the entity’s governing body did not approve the termination as required by the TBOC;
3.the entity did not fully complete the process of winding up; or
4.the entity must legally exist to—
a.assign or convey entity property,
b.release or settle any claims or liabilities,
c.take legal action, or
d.sign an agreement or legal instrument.
See Tex. Bus. Orgs. Code § 11.201(a).
Reinstatement must be done before the third anniversary of the termination date. See Tex. Bus. Orgs. Code § 11.202(a). To be reinstated, an entity must obtain approval from the entity’s owners, members, or other governing body in the manner provided by the TBOC provisions for that specific entity type. See Tex. Bus. Orgs. Code § 11.202(b). The entity shall then file a certificate of reinstatement (SOS Form 811, form 4-4 in this manual). TBOC section 11.202(d) requires the certificate of reinstatement to include—
1.the entity’s name and filing number,
2.the effective date of the entity’s termination,
3.a statement that the entity’s governing body has approved the reinstatement as required under the TBOC, and
4.the registered agent’s name and address.
The entity must also file a tax clearance letter from the comptroller stating all franchise tax liabilities have been satisfied. See Tex. Bus. Orgs. Code § 11.202. Reinstatement is effective upon approval by the entity’s governing body. See Tex. Bus. Orgs. Code § 11.204. The entity then continues as though the termination never occurred. See Tex. Bus. Orgs. Code § 11.206.
§ 21.12Involuntary Termination by Secretary of State
The secretary of state may terminate an entity’s existence if the entity fails to file required reports, pay required fees, or maintain a registered agent or registered office in Texas. If the secretary of state finds one of these deficiencies, it shall notify the entity and give it an opportunity to cure. The entity then has ninety days to correct the failure, or the secretary of state will terminate the entity. See Tex. Bus. Orgs. Code § 11.251.
PRACTICE TIP: Upon the creation of an entity, notify your clients in writing of the obligation to maintain a registered agent and to file the franchise taxes. Texas Tax Code section 171.255 provides that if the privileges of a corporation are forfeited for failure to file franchise tax reports, the corporation shall be denied the right to sue or defend in state court, and each director or officer of the corporation is liable for the debt of the corporation. This statute also applies to limited liability companies.
An involuntarily terminated entity can be reinstated by the secretary of state if the issues that led to the involuntary termination no longer existed when the termination became effective or if the entity corrects the failures that led to the termination, including paying any fees or penalties, and files a certificate of reinstatement. See Tex. Bus. Orgs. Code § 11.253. In addition to a certificate of reinstatement fulfilling the requirements stated in section 21.11 above, the entity must provide a statement that it has corrected the circumstances that led to the involuntary termination (SOS Forms 801 and 811, forms 4-3 and 4-4 in this manual, respectfully). The entity must also file any required amendments to the certificate of formation and a tax clearance letter from the comptroller confirming that all franchise tax liabilities have been satisfied. See Tex. Bus. Orgs. Code § 11.253(c).
If the filing entity is reinstated before the third anniversary of the involuntary termination date, the entity is treated as though the termination never occurred. See Tex. Bus. Orgs. Code § 11.253(d).
§ 21.13Withdrawal by Foreign Entity
A foreign entity may withdraw its registration from the state at any time by filing a certificate of withdrawal (SOS Form 608, form 21-3 in this manual). TBOC section 9.011 states that a certificate of withdrawal must include—
1.the entity’s name as registered in Texas,
2.the entity type,
3.the entity’s formation jurisdiction and the principal office address,
4.that the entity is no longer transacting business in Texas,
5.that the entity—
a.revokes the registered agent’s authority to accept service of process in Texas and
b.consents to the secretary of state accepting service of process on behalf of the foreign entity for any legal action that arose while the foreign entity was authorized to transact business in Texas,
6.the entity’s forwarding address where it may receive any service of process accepted by the Texas secretary of state, and
7.an affirmation that the entity paid any money due to the state.
The certificate of withdrawal must be accompanied by a certificate of account status stating that all taxes have been filed and paid (see Texas comptroller form 05-359, available via https://comptroller.texas.gov/forms). See Tex. Bus. Orgs. Code § 9.001.