Introduction
Texas allows business owners to use fictitious names in advertising and contracts and to organize the company to avoid personal liability. These privileges extend to businesses from other states. In return, Texas requires public registrations that disclose the owner's name and address, giving consumers an opportunity to search for adverse information before making a commitment.
Unfortunately, public records once required a visit to the courthouse or, more accurately, to the Secretary of State's office, the State Comptroller, the County Clerk, the District Clerk, and the federal Bankruptcy Clerk. Private services summarized records for banks and title companies, but for most of us, the public record remained out of sight, and out of mind. (When the toilet leaks, who writes the Secretary of State for the plumber's articles of incorporation? When the car needs repair, who drives to the County Clerk to check the mechanic's assumed name record?).
As a result, both consumers and businesses have ignored the public record and the responsibilities that registrations discharge. That is unfortunate, because in time the public record becomes invaluable in separating the wheat from the chaff.
Every business has a clean record when it is first organized and full of ambition and good intentions, but time takes its toll, and the evidence soon becomes overwhelming that some companies have their act together and others don't. Franchise taxes become delinquent, charters are forfeited, assumed name registrations lapse, out-of-state businesses operate without authority, and judgments accumulate.
In the bad old days, these nasty little details usually remained a secret until disputes arose, attorneys were retained, and everyone girded for litigation. Only then would anyone search the record and discover the truth. Invariably, had the consumer known, they would have chosen a different merchant. Imagine the time and money that could have been saved, if only the records had been more convenient.
Then along came the internet. Now, in the time it once took to park the car, you can sit at home or the office and visit not just one courthouse, but all of them, at once, immediately, and inexpensively, thanks to online databases that painstakingly gather all this information and make it available to anyone with a credit card and a web browser. Dozens of services now compete to transmit the most information for the least cost, and their quality improves daily. For examples, visit http://www.yahoo.com/ and search for Online Information Retrieval Services. Many government offices also publish their records online. Some of this firm's favorite sites are listed below.
Favorites
In order of actual usage
ZIP code lookup (confirm/correct an address/ZIP)
Texas State Comptroller
Harris County Clerk (assumed names and more)
Westlaw (law databases and public records)
Harris County On-Line Appraisal Information
Harris County Voter Registration
AutoTrackXP (economical for business users)
PACER (U.S. District and Bankruptcy records)
WHOIS (identify domain names)
KnowX.com (economical for individual users)
Privacy rights have dominated discussion about this information revolution, but for business, the bigger story is that they are now accountable to every customer and every competitor, any time, and anywhere, not just to the infrequent government auditor. Many businesses are not ready, and find themselves compromised when they least expect it.
The same laws which grant privileges also impose penalties. When a violation occurs, the owner typically loses the privilege of limited liability and the business may not appear in court. When back taxes and penalties are added to the mix, catastrophe can follow. A lost sale is bad enough, but more dramatic consequences await the unwary business. Consider:
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A homeowner solicits bids for foundation repair. Five minutes and $20 later, the homeowner learns the low bidder's assumed name is unregistered and the actual owner has a bankruptcy, unpaid judgments, and delinquent taxes. The low bidder loses the job, and never knows why.
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A local business receives a demand letter from a $600 million international corporation. When the local business researches, it learns the international corporation's U.S. division let its California charter lapse two months ago, and never registered to do business in Texas. The back taxes are prohibitive, and the international corporation, whose legal department is larger than the small business' entire workforce, withdraws in shame. Total research cost: under $20.
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A real estate investor spends $25,000 over ten years setting up and maintaining different partnerships and corporate general partners to own and manage an apartment complex. He won't spend $35 to register the assumed name, and is individually liable when the apartment security guards sue for back wages. His $25,000 was wasted. The guards' research expense: $0, because Harris County Assumed Name online records are free.
What's a business to do? First, pay attention. The privileges of limited liability and assumed names come with responsibilities. Know your obligations and perform them timely. Second, be proactive: your customers are also reading this newsletter. Research your own public record, identify problems or errors, and resolve them before you have to explain yourself to a customer, competitor, or a government auditor. Third, exploit the internet yourself. Research your own vendors and major customers at the beginning of the relationship, not at the end.
What's a consumer to do? (And this includes commercial consumer, i.e., business to business). Discipline yourself to search the public record before you get in trouble. The time to act is before calling the plumber, before signing (or even reading) the contract, before hiring the roofer, and before delivering the check or credit card. Take ten minutes, research the assumed name, determine the true owner, confirm organization and good standing, and look for judgments, liens, and bankruptcies. If the merchant cannot explain adverse or confusing information, move on to the next one. The merchant who cannot take care of his or her own business won't take any better care of you.
Assumed Names
An assumed name is any name used to identify a business that does not include the actual legal names of all the owners. Assumed names may appear in formal contracts or in casual communication, including directories, advertisements, business cards, web sites, letterhead, street signage, or plain old conversation. For example, when Joseph Johnson Thornton, III, advertises his car repair business in the Yellow Pages as "Joe's Garage," he uses an assumed name.
An assumed name is usually the first information known about a business, and often the only legal identification the business can provide. Most employees have no interest in concealing their employer's ownership, but simply do not know how the business is organized, much less who owns it. Even owners forget or lose track when someone else prepared the documents. And the larger the business, the greater the confusion, especially if it was organized in another state.
However, with an assumed name in hand, identification of an owner's name and address should be quick and simple. If not, the business may be using an unregistered assumed name, which is illegal. If it is difficult to identify a business at the beginning of a relationship, when everyone is trying to make their best impression, just wait until disputes arise and no one will cooperate.
The Texas Assumed Business or Professional Name Act requires that assumed names be registered with one or more county clerks. If the business filed organizational documents or a certificate of authority with the Texas Secretary of State, then the assumed name must be registered there too. Visit http://www.capitol.state.tx.us/statutes/bc/bc0003600toc.html for the full text of the Act, including details on determining each county where an assumed name should be registered.
The Secretary of State's assumed name Form 503 costs only $25 to file, and is available at http://www.sos.state.tx.us/corp/business.shtml. The Harris County Clerk's assumed name filing fee is $10. That form is available at http://www.cclerk.hctx.net/dlforms.htm. Assumed name registrations must be renewed every 10 years.
Failure to register an assumed name is a Class A misdemeanor. Individuals may be punished with a $4,000 fine and up to a year in jail. Corporations or associations may be punished with a $10,000 fine. Criminal penalties are rarely imposed, though, because prosecutors usually have higher priorities.
As the scenarios above illustrate, the civil and commercial consequences of assumed name violations can be worse than any criminal sanction:
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A business who fails to file an assumed name cannot maintain a suit under that name;
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A person who signs a contract under an unregistered name is individually liable if the true owner was not identified; and
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A prudent consumer will not do business with anyone using an unregistered name.
Texas does not publish its assumed name records online, but private services do. As of January 2002, http://www.knowx.com/charged $1.50 to search the Secretary of State's records (KnowX calls this database "Corporate Records") and $8.95 to retrieve specific records. For a free online index of the Harris County Clerk's assumed name records, visit http://www.cclerk.hctx.net/coolice/default.asp?Category=AssumeNames&Service=an_inquiry.
Note: assumed name registrations do not protect a trademark. For information about federal trademarks, visit http://www.uspto.gov/main/trademarks.htm.
Business Organizations
Sometimes an assumed name search discloses that the owner of a business is a sole proprietor (an individual) or two or more individuals (a partnership). As often, the owner is some other business organization, typically a limited liability entity like a corporation, limited partnership, or limited liability company.
Texas limited liability entities must file organizational documents with Texas Secretary of State. The Secretary of State does not publish these records online, but the State Comptroller, which collects the franchise tax from corporations and limited liability companies (but not from partnerships, which are exempt), posts information at http://ecpa.cpa.state.tx.us/coa/coaStart.html. Research this free site to confirm a franchise taxpayer is in good standing, determine its registered agent and office, and identify its officers and directors.
When a business' franchise tax is delinquent too long, its charter is forfeited, and it is prohibited from doing business in Texas and from bringing or defending any suit.
Limited partnerships do not pay a franchise tax, and so are not listed by the State Comptroller. However, their registrations and other documents filed with the Secretary of State are available online from the more robust private services.
Note: some online services don't report partnerships, perhaps because they collect records from the Comptroller but not the Secretary of State. For example, Hall & Hong L.L.P. is not reflected in KnowX.com or AutoTrackXP's corporate records. Although Hall & Hong does appear when searching Yellow Page databases, that does not provide the registered agent or other official information. If you do not find a record of a business, it is perfectly acceptable to ask the business for a copy of the organizational document it filed with the Secretary of State. In any event, a partnership that uses an assumed name should record both the partnership name and the assumed name with the county clerk.
Any company that does business in Texas but is organized in another state, e.g., a Delaware corporation or a Nevada limited partnership, must obtain a certificate of authority to preserve the owners' limited liability. Details are explained at www.sos.state.tx.us/corp/businessfaqs.shtml#Qualification. These companies too must register with the Texas Secretary of State, and their records may be found on the State Comptroller's or a private web site.
The penalties for an out of state business that does not register can be severe: like in-state scofflaws, rights and privileges are lost, but back taxes and penalties may also be imposed. When challenged, many out of state businesses will run rather than fight.
Judgments, Liens, and Bankruptcies
Once an owner has been identified and the business organization confirmed, the public record may be searched for judgments, liens, and bankruptcies. Both the owner's name (whether an individual or an organization) and any assumed name should be searched. Here too, private services can be very cost effective. In addition to KnowX.com, AutoTrackXP is a good resource. Although AutoTrackXP charges a monthly maintenance fee, its Faces of the Nation and Corporations of the Nation searches are thorough and convenient, organizing a mass of information into tables that are easy to read. Access to AutoTrackXP is somewhat restricted, and not every individual will qualify. However, any business with commercial or large consumer accounts should consider the investment. Westlaw is more comprehensive than KnowX.com or AutoTrackXP (Hall & Hong L.L.P. appears in Westlaw's databases), but does not organize search results as well.
Liens are often the result of finance agreements and don't necessarily reflect adverse information. On the other hand, a business that has already pledged all its assets to a lender may not have the resources to satisfy other creditors' claim. Judgments and bankruptcies are always red flags.
Conclusion
Online research is always cheaper than litigation, and some basic internet investigation should become second nature to every consumer and every business. Don't sign another contract, extend credit, or hire another vendor before you research the assumed name, identify the owner, confirm the business' organization and good standing, and check for judgments, liens, and bankruptcies.
Owners, research your own businesses, starting with the assumed names your customers find in your advertisements and letterhead. The results should not surprise or confuse anyone. If they do, call us. We can help.
