15 Feb The Pitfalls of the PIR
Texas permits businesses to be structured in many different ways, including corporations, partnerships, and limited liability companies, among others. This article will use the word “entity” to refer to a business, in order to cover all types of business structures. Regardless of the structure, for taxable entities, Texas requires filing of a Public Information Report (a “PIR”) and it is important to understand the PIR and potential risks associated with it.
What is the PIR?
All taxable entities that are organized in Texas are required to file an annual Franchise Tax return with the Texas Comptroller. When a Texas corporation, limited liability company, limited partnership, or professional association (each, a “Filing Entity”) files its Franchise Tax return, it is also required to file a PIR with the Texas Comptroller.
Under Section 171.203 of the Texas Tax Code, a PIR must be submitted on the form set by the Comptroller, and must include (among other things):
- The name, and percentage ownership, of each corporation, limited liability company, limited partnership, or professional association that owns at least 10% of the Filing Entity’s equity;
- The name, and percentage ownership held by the Filing Entity, for each corporation, limited liability company, limited partnership, or professional association in which the Filing Entity owns at least 10% of the equity;
- If the Filing Entity is a limited partnership, the name and mailing address of all general partners; and
- If the Filing Entity is a corporation, limited liability company, or professional association, name, title, and mailing address for all current officers and directors.
A draft PIR is commonly prepared by a Certified Public Accountant or tax preparer as part of preparing the Franchise Tax return for a Filing Entity. An officer, director, or (if applicable) a general partner of the Filing Entity is required to sign the PIR before it is submitted, certifying that “all information contained in the report is true and correct to the best of the person’s knowledge”. It is incredibly important that both the Filing Entity and the individual signing the PIR thoroughly review it and ensure that the PIR is correct before it is filed, as an inaccurate PIR may cause serious problems for the entity.
Missing or Inaccurate Parent/Subsidiary Information
The identity of the owners of a Texas entity, and their respective ownership amounts, are typically kept private. If a limited liability company is member-managed, its Certificate of Formation will publicly disclose the initial members of the entity, but it will not reveal their ownership amounts. The PIR is the only publicly available information that shows both the identity of certain owners of a Texas entity, as well as their ownership percentages.
As the PIR is certified by a representative of the Filing Entity, inaccurate information regarding the parents or subsidiaries of the Filing Entity can be used against the Filing Entity in other contexts where ownership is at issue. For example, if there is a dispute regarding the ownership of a Filing Entity, the historical PIRs may be used to argue for who did (or did not) own a portion of the Filing Entity as of the date of the PIRs, and what percentage of ownership they held. Similarly, historical PIRs could be used by taxing authorities in determining whether the Filing Entity (or one of its affiliates) has properly filed its tax returns.
Mistakenly Listed General Partners
The General Partner of a limited partnership is liable for all of the limited partnership’s debts and obligations. If a limited partnership fails to satisfy any liability – for example, if it fails to repay a loan or defaults on a contract – the affected third party can bring an action against the General Partner directly, even if there is not a guarantee or similar acknowledgment of responsibility by the General Partner.
If a PIR lists an individual or an entity as the General Partner of the Filing Entity, then that identification could be used to argue that the individual or entity is responsible for the debts of the Filing Entity, even if the identification was mistaken. If the individual signing the PIR is a limited partner of the limited partnership, the act of signing the PIR could be used to argue that the limited partner had truly appointed that new individual or entity as a General Partner.
Further, if the individual signing the PIR is the person who was mistakenly listed as a General Partner, or is affiliated with the entity that was mistakenly listed as a General Partner, then the act of signing the PIR may be used as an acknowledgment or ratification of the obligations of being a General Partner.
A PIR’s identification of the Filing Entity’s General Partners is evidence toward identifying someone or some entity as a General Partner, but it can be rebutted through the governing documents of the Filing Entity, or other actions taken by the limited partnership. However, the fact that an individual or entity was mistakenly listed on a PIR as a General Partner could increase their chances of being brought into a lawsuit involving the limited partnership, and would likely result in higher legal fees to have the case against them dismissed.
Missing Officers or Directors
If a PIR fails to list all of the current officers or directors of a Filing Entity, or fails to list all of the current titles held by such officers and directors, this omission may be taken by third parties as an indication that the person no longer holds such office or position. For example, if a Filing Entity is working on a transaction – such as a loan or contractual relationship – that will need to be signed by an officer of the Filing Entity, the existence of a recent PIR that omits such officer undermines their authority to bind the Filing Entity to the transaction. This type of issue can be readily solved by re-appointing the officer to their proper position, but the extra delays caused by identifying the problem, drafting the necessary curative documents, and chasing down signatures from the Filing Entity’s directors or managers could pose significant problems if the transaction is time-sensitive, or if the necessary signatories are unavailable.
Additionally, if the PIR omits any of the current directors of the Filing Entity, that omission could be critical in any disputes as to whether certain actions of the Filing Entity were properly authorized. For example, if there is a contested vote by the directors of a Filing Entity, the fact that a recently-filed PIR omitted some of those directors may be used to argue that those individuals were not entitled to vote on such matter, and may change the ultimate outcome of whether the board of directors approved or disapproved the matter. The absence of directors in a PIR may also be used to assert that the necessary quorum for action by the board of directors was reduced.
The problem is magnified if the individual signing the PIR is the person who was mistakenly omitted as an officer or director. The act of signing the PIR could then be used to argue that they have resigned, or have ratified their withdrawal from the affected position.
Mistakenly Listed Officers or Directors
The flip side of having an officer or director missing from a PIR is where an individual is listed on the PIR as being an officer or director when they in fact do not have such a role. This typically happens when a Filing Entity re-uses the same PIR from the prior year, and does not update it to reflect a resignation or change in authority that happened mid-year.
With respect to directors, having too many directors listed on a PIR can cause the same problems in disputes over the authorization of actions as having too few directors listed. The excess number of directors could be used to assert that an action taken by the Filing Entity was not properly authorized because not enough directors voted in favor of the action, or even that the meeting at which action was approved should not have been held as the necessary quorum for a meeting of the board of directors was not met.
With respect to officers, listing an individual on a PIR as being an officer may be used to support an argument that the person has apparent authority to act on behalf of the Filing Entity. Under Texas law, the “apparent authority” of an agent is created by the actions of a principal that are communicated either to the agent or to a third party. Because PIRs are certified by the Filing Entity as true, when an individual is listed on the PIR as an officer of the Filing Entity, a reasonably prudent person might be able to rely on the PIR when doing business with that individual, and believe them to actually represent the Filing Entity.
A typical context where this problem arises is when an individual signs a contract on behalf of their employer. If the employee was not authorized to sign that contract, then it is not binding on the employer. However, if the employer’s actions have given the employee either actual or apparent authority to bind the employer, then it will be bound by the contract. If a PIR mistakenly identifies that the employee holds an office of authority, that may be used as evidence that the employee did in fact have the power to bind the Filing Entity.
We here at Rapp & Krock, PC are ready to answer any of your questions about preparing your PIR, or to help you address any inaccuracies in historical PIR filings.
ABOUT THE AUTHOR: Kieran B. Wheeler is a shareholder at Rapp & Krock, PC in the Business Transactions group advising clients on corporate governance matters as well as mergers and acquisitions and other business transactions.
Rapp & Krock, PC presents the information in this article for general education purposes only. Although this article discusses legal issues, it is not legal advice. The law and the content of any linked website may have changed since this article was written, and Rapp & Krock, PC makes no warranty or guarantee about the continuing accuracy of the information presented. Use of this article does not create an attorney-client relationship, and Rapp & Krock, PC does not represent you unless and until we are expressly retained in writing.
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