Texas LLC Laws – Business and Startup Law
Texas limited liability companies (LLCs) are subject to regulation under the Texas Business Organizations Code (BOC). The BOC is a comprehensive group of laws that applies to all businesses organized in the state of Texas. Enacted in 2003, the BOC replaced several other statutes that governed Texas LLC laws, including the Texas Limited Liability Company Act, the Texas Revised Partnership Act, and the Texas Revised Limited Partnership Act.
All Texas LLC laws are now included in the Texas BOC. Specifically, Texas LLCs are governed under Title 1, which applies to all business organizations in Texas, and Title 3, which applies specifically to LLCs. Additionally, if an LLC is formed as a Texas professional LLC (PLLC), Title 7 of the BOC will also apply.
Texas LLC Laws – Types of LLCs
In Texas, the BOC recognizes several forms of LLCs. Domestic LLCs, professional LLCs, and foreign LLCs are common types recognized by Texas and most other states. However, Series LLCs and Nonprofit LLCs are recent developments that are not that common, but recognized in Texas.
A majority of LLCs formed in Texas are considered domestic LLCs. Essentially, a domestic LLC means that the LLC was formed under and governed by Texas law. Additionally, an LLC that was not formed under Texas law can be converted to a Texas LLC by filing the appropriate paperwork to “domesticate” the LLC.
A Texas domestic LLC is formed by filing a Certificate of Formation with the Corporations Section of the Texas Secretary of State (SoS). Most Texas LLC attorneys have accounts with the SOS and can file the initial paperwork online quickly. It is important to note that the Certificate of Formation is filed before an Operating Agreement is drafted or a Federal Employer Identification Number is issued.
It is important to note that care should be taken when completing and filing the Certificate of Formation. As the form only has a few fields and looks simple, business owners often believe that simply filing with the SOS is all that is needed to provide the liability protection needed for their business. That is not true. In addition to the Certificate of Formation, a well-drafted Operating Agreement and an understanding of best practices for operating a Texas LLC is needed to ensure that your business is fully protected. Overall, it is best to think of a Certificate of Formation as a starting point.
Texas LLC laws indicate that a professional LLC (PLLC) are to be formed only for those business providing professional services, such as doctors, attorneys, and certified public accountants. It is important to note that that a Texas PPLC must include either “PLLC” or “professional limited liability company” in its name. Additionally, a foreign PLLC may not register to do business in Texas, unless the state where it is formed allows Texas PLLCs to register in that state.
Under Texas LLC laws, any LLC that was formed in a state other than Texas is considered a foreign LLC. It is important to note that a foreign LLC must register with the Corporations Section of the Texas Secretary of State before conducting business in Texas.
Often, out-of-state businesses are unclear as to whether they are “conducting business in Texas.” Under Section 9.251 of the Texas Business Organizations Code, a list is provided as to the activities that are not considered “transaction of business” in Texas. Overall, whether a foreign LLC is required to register with the Texas Secretary of State under Section 9.001 of the Texas Business Organizations Code is generally a fact question that depends on the specific circumstances surrounding the foreign LLC’s business dealings in Texas.
Although it may be unclear as to the circumstances in which a foreign LLC must register in Texas, it is very clear that the consequences of failure to register has significant consequences. Under Section 9.051 of the Texas Business Organizations Code, an unregistered foreign LLC may not maintain an action, suit, or proceeding in a Texas court. Furthermore, Section 9.052 of the Texas Business Organizations Code provides that an unregistered foreign LLC is liable for a civil penalty equal to the amount that the LLC would have paid if it had registered, in addition to penalties and interest for the LLC’s failure to register with the Secretary of State.
Similar to professional LLCs, non-profit LLCs are distinguished in the BOC by virtue of their purpose. Under Texas LLC laws, a Texas non-profit LLC may be formed for any of the following purposes:
- Operating or managing a professional, commercial or trade association, or a labor union;
- Serving charitable, benevolent, eleemosynary, patriotic, civic, missionary, educational, scientific, social, fraternal, athletic, aesthetic, agricultural, and horticultural purposes;
- Operating on a non-profit cooperative basis for the benefit of its members; or
- Providing animal husbandry
If a domestic Texas LLC is formed for any of the aforementioned purposes, it is considered a non-profit for purposes of Texas LLC law. However, it must be noted that simply forming a domestic non-profit Texas LLC does not provide any tax benefits by virtue of filing alone. For a Texas non-profit LLC to qualify as tax-exempt organization, the LLC must file for tax-exempt recognition with the Internal Revenue Service (IRS).
Texas is one of a few states in the country that recognizes Series LLCs. In short, a Series LLC allows a company the flexibility to segregate assets into separate series. Each individual series is shielded from liability arising from any assets held in other company series. In general, Series LLCs are popular among real estate investors.