Texas limited liability companies (LLCs) are governed by the Texas Business Organizations Code (BOC). The BOC is a comprehensive set of laws that applies to all Texas business organizations. When the BOC was enacted in 2003, it replaced a handful of other laws that governed LLCs, including the Texas Limited Liability Company Act, the Texas Revised Limited Partnership Act, and the Texas Revised Partnership Act.
All Texas LLC statutes are now wrapped into the BOC. Texas LLCs are governed by Title 1 (which applies to all business organizations) and Title 3 (which applies specifically to LLCs). If the LLC is a Texas professional LLC, Title 7 will apply as well.
Types of Texas LLCs
Texas law recognizes several types of LLCs. The first three—domestic LLCs, foreign LLCs, and professional LLCs—are common forms of LLCs that are recognized by most state statutes. Nonprofit LLCs are a relatively recent development. Series LLCs are only recognized in a handful of states.
The vast majority of Texas LLCs are domestic LLCs. In this context, the term domestic means that the LLC was formed under and is governed by Texas law. An LLC that was not formed under Texas law can be “domesticated” by filing the appropriate paperwork to convert it to a Texas LLC.
A domestic Texas LLC is formed by filing a certificate of formation with the Corporations Section of the Texas Secretary of State. Most Texas LLC attorneys have user accounts with the Texas Secretary of State and can file the initial paperwork online. Filing the certificate of formation is the first step in setting up the business. The certificate of formation is filed before the operating agreement is drafted or an employer identification number is issued.
LLCs that were formed in other states are known as foreign LLCs. The word foreign does not mean that the LLC was formed in another country. If the LLC was formed or is governed by the law of any state other than Texas, it is a foreign LLC. Before transacting business in Texas, a foreign LLC must register with the Corporations Section of the Texas Secretary of State.
Whether a foreign LLC is “transacting business” in Texas is not always clear. BOC § 9.251 includes a non-exhaustive list of activities that will not be considered to constitute transaction of business in Texas. This list provides some assurance to LLCs that clearly fit within one of its categories. But the list is not exhaustive and does little to define what is considered to be transacting business within the state.
For example, BOC § 9.251(15) provides that “owning, without more, real or personal property” in Texas does not constitute transaction of business in Texas. That means that an LLC is not required to register as a foreign LLC if the LLCs only activity in Texas is holding title to real estate. But what if the LLC leases the real estate? What if the LLC sells it and buys another property? Questions like these are often difficult to answer. As stated by Texas Attorney General Opinion No. GA-0726:
Whether a given foreign entity is transacting business in this state, and is thereby required to register with the Secretary of State’s office under section 9.001 of the Business Organizations Code, is a fact question that will depend on the specific circumstances of that entity’s business in Texas.
Although the circumstances that require registration are not always clear, it is clear that failure to register has bad consequences. An unregistered foreign LLC cannot maintain any action, suit, or proceeding in Texas. If a foreign LLC does business in Texas without registering, the attorney general may bring an action to prevent the LLC from doing business in Texas. The LLC is also liable for a civil penalty equal to the amount that the entity would have paid if it has registered, as well as penalties and interest for failure to register.
A professional LLC (often referred to as a PLLC) is an LLC that has been formed to provide professional services. The name of a Texas PLLC must include the phrase “professional limited liability company” or an abbreviation. The certificate of formation must include information about the LLCs management structure. A foreign PLLC may not register to do business in Texas unless the jurisdiction where it is formed allows Texas PLLCs to register in that jurisdiction.
Like professional LLCs, nonprofit LLCs are distinguished by their purpose. Under Texas law, a domestic nonprofit LLC may be formed for any of following purposes:
- Serving charitable, benevolent, religious, eleemosynary, patriotic, civic, missionary, educational, scientific, social, fraternal, athletic, aesthetic, agricultural and horticultural purposes;
- Operating or managing a professional, commercial or trade association, or a labor union;
- Providing animal husbandry; or
- Operating on a non-profit cooperative basis for the benefit of its members.
An LLC formed for any of these purposes is considered a nonprofit LLC for purpose of Texas law. Organizing a nonprofit as an LLC can provide a flexible management structure and other benefits. But simply forming a Texas nonprofit LLC does not provide any tax benefits. In order to qualify as a tax-exempt organization, a Texas nonprofit LLC must file for recognition with the Internal Revenue Service.
Texas is one of a handful of states that recognize series LLCs. A series LLC allows the company to segregate assets into separate series. Each series is shielded from liability arising from assets held in other series. Series LLCs are popular in the real estate development context. You can find out more about them at Series LLCs and Texas Series LLCs.