The Hazards of Failing to Register Your Company as a Foreign Company Outside the State of Texas

Texas corporations are creatures of state law, formed under the laws of Texas, referred to as the corporation's state of incorporation. A Texas formed corporation which confines its operations to Texas does not need to worry about the corporate laws of other states. 

But generally shareholders of corporations want them to grow and increase profitability. For this purpose, Texas corporations will oftentimes expand operations outside Texas. Outside of its state of incorporation, a Texas corporation is viewed as a "foreign" corporation.

States not only regulate and tax corporations incorporated in their state, but also foreign corporations that do business in their states. Foreign corporations must register to do business in states in which they are not incorporated. In exchange for agreeing to be subject to jurisdiction in states where they are registered, foreign corporations are granted the rights of a domestic corporation (i.e., a corporation actually incorporated in that state).

There are risks in Texas corporations failing to register as a foreign corporation. The best way to point out an example of such risks is through a case example.  Imagine TEXCO, a Texas corporation, purchases a shopping center in Colorado. Through its purchase of the shopping center, TEXCO engages in commercial leasing activities in Colorado. TEXCO however never registers in Colorado as a foreign corporation.
Years later, CARELESS JOE, while shopping at TEXCO's shopping center slips and falls on a puddle of water is seriously hurt and sues for $500,000. CARELESS JOE's astute attorney obtains a default judgment against TEXCO for $500,000 (for actual damages that were more like $50,000). TEXCO has no knowledge of the suit at the time.

Learning of the suit, TEXCO does what it should have done years later; it registers with the Colorado Secretary of State and moves to set aside the default judgment. TEXCO argued that its failure to respond was due to excusable neglect. TEXCO was also critical of CARELESS JOE's efforts to find TEXCO.

The appeals courts of Colorado are however not sympathetic, pointing out the obvious that TEXCO could have avoided the whole situation by registering as a foreign corporation. By doing so, it would have designated a registered agent within the state of Colorado which would have received notice of the claim and, presumably, given TEXCO an opportunity to defend itself.

As a result, TEXCO faces the consequences of its failure to register as a foreign corporation, including imposition of a $500,000 default judgment against it.

The lesson in all this? A corporation that ventures outside its state of incorporation should take care of other states' laws and registration requirements. Although registering as a foreign corporation will subject the corporation to the state's jurisdiction and taxation, some consequences, as shown in the above case example, could be even more severe.