LLC Formation
§ 5.1Overview of LLC Formation in Texas
In Texas, the formation of a limited liability company (LLC) is a relatively simple process. Section 101.051 of the Texas Business Organizations Code (TBOC) allows for the creation of a Texas LLC by the filing of a certificate of formation (SOS Form 205, form 5-1 in this manual) with the Texas secretary of state.
§ 5.2Formation Process Overview
In general, the formation of a Texas LLC requires the following steps:
1.Prepare a certificate of formation, which must comply with the requirements of section 3.005 of the TBOC, including the following:
a.the name of the entity to be formed;
b.the purpose for which the filing entity is formed;
c.the name and address of the registered agent;
d.whether the LLC is to be manager-managed or member-managed, along with the name and address of the initial governing authority;
e.the duration of the LLC; and
f.that address of the organizer for the filing entity.
2.Transmit the certificate of formation to the Texas secretary of state for review and filing.
3.Prepare the LLC’s company agreement and any other documents that are necessary or advisable with the LLC’s formation.
PRACTICE TIP: Formation documents can be filed using the Texas secretary of state’s electronic filing system (SOSDirect). Alternatively, you may mail or fax the formation documents to the Texas secretary of state. You may also request expedited handling for a minimal additional fee.
Section 5.053 of the TBOC sets forth the general standards for name availability, and chapter 79, subchapter C, of the Texas Administrative Code provides additional administrative rules on the availability of names for entities filed with the Texas secretary of state.
PRACTICE TIP: It is best to run name availability searches (either on SOSDirect or by calling the Texas secretary of state) before filing the certificate of formation to avoid unnecessary delays caused by name availability issues.
A proposed name is available for filing if it is distinguishable from the names of existing filing entities in the secretary of state records, or from the names of LLCs already reserved or registered with the secretary of state. Entity names may consist of letters of the Roman alphabet, Arabic numerals, or symbols capable of being reproduced on a standard English-language keyboard.
PRACTICE TIP: On June 1, 2018, the test that an entity name be “distinguishable in the records” replaced the previous test that an entity name not be “deceptively similar” to another entity name. The intention of this revision was to simplify the naming convention of business entities. In practice, this greatly increases the chances that your client’s desired entity name will be available.
Names are distinguishable if a comparison of the names reveals sufficient differences or if one or more of the following conditions exist:
1.a difference of at least one key word (for example, “United” is distinguishable from “United One”);
2.the key words are the same but are in different orders (for example, “Summit Energy” and “Energy Summit”);
3.the key words or contractions of key words are derived from the same root word (for example, “Magic Professionals” and “Magical Professionals”);
4.the key words are the same but are in different languages (for example, “Casa Blanca Productions” and “White House Productions”);
5.the key words sound the same, but at least one word, on its face, has a different meaning or connotation (for example, “Capitol Investments” and “Capital Investments”); or
6.the key words are the same except for the addition, substitution, or omission of prepositions that sufficiently alter the name to make the names distinguishable (for example, “Books for People” and “Books by People”).
§ 5.3:4Indistinguishable Names
The secretary of state will not accept proposed entity names that are indistinguishable. Names are considered indistinguishable if a comparison of the names reveals no differences or if the only difference between the proposed name and the existing name is one or more of the following conditions:
1.the use of uppercase or lowercase letters, distinctive lettering or typeface, or superscript or subscript letters or numerals (for example, “ACE Woodworks” and “Ace Woodworks”);
2.the addition, substitution, or omission of punctuation marks, accent marks, periods, spaces, or symbols that do not alter the name sufficiently to make the names distinguishable (for example, “Cross Roads Productions” and “Crossroads Productions”);
3.except as provided by section 79.43 of the Texas Administrative Code relating to alphabet names, the addition, substitution, or omission of different articles or conjunctions (for example, “The Truck Stop” and “Truck Stop”); or
4.the repetition of, absence of, or difference in letters that does not alter the names sufficiently to make the names distinguishable (for example, “Texxas Strong” and “Texas Strong”).
§ 5.3:5Consent to Use of Similar Name
If the secretary of states determines that a proposed name is not distinguishable from an existing, reserved, or registered entity name, the LLC wanting to use the name must obtain the consent of the entity currently using the name. This consent must be in writing, signed by an officer or authorized agent of the consenting entity in front of a notary public, and accompany the document to which the consent relates at the time of submission. Upon the simultaneous submission of filing instruments for two or more related entities, consent for the use of a name will be implied. For example, consent is not required for the simultaneous formation of a Texas limited partnership named ABC Ventures, Ltd., and its general partner, ABC Ventures, LLC. If a proposed LLC name conflicts with more than one entity name, the secretary of state will request that consent be obtained from the entity or name registrant with the longest continuous use of the name as determined by the records of the secretary of state. SOS Form 509 (form 3-1 in this manual) may be used to document an existing entity’s consent.
Not all LLC name issues involve a conflicting entity name. Other statutory provisions may prohibit or restrict the use of terms within an LLC’s name. Words that might imply a purpose for which the LLC could not be organized should not be included in an LLC name. For example, (1) “insurance” must be accompanied by other words, such as “agency,” that remove the implication that the purpose of the LLC is to be an insurer; (2) “bail bonds” and “surety bonds” imply that the LLC has insurance powers and should be formed under the Texas Insurance Code; (3) “bank” and derivatives of that term may not be used in a context that implies the purpose to exercise the powers of a bank; and (4) “trust” generally implies that the LLC has trust powers.
The use of some words is admissible only with prior approval by a governing board or agency. For example, (1) LLCs desiring to use the terms “college,” “university,” “medical school,” “school of law,” “law school,” and words of similar meaning must obtain prior approval of the Texas Higher Education Coordinating Board; (2) an LLC desiring to use the term “veteran,” “legion,” “foreign,” “Spanish,” “disabled,” “war,” or “world war” in a manner that might imply that the LLC is a veterans organization should obtain written approval from a congressionally recognized veterans organization; and (3) LLCs desiring to include the word “engineer” in their names must comply with the rules and regulations of the Texas Board of Professional Engineers.
PRACTICE TIP: Depending on the purpose for which the LLC is being formed, it is worthwhile to consider whether a professional entity is necessary or desirable.
An LLC may not use the term “lotto” or “lottery” in its name. State and federal law generally preclude the use of the words “olympic,” “olympiad,” “olympian,” and “Olympus” unless authorized by the United States Olympic Committee.
If there will be a delay between the name selection and the submission of the filing instrument, the practitioner should submit an application to reserve the name (SOS Form 501, form 3-2 in this manual). This name reservation may be renewed or terminated in accordance with the TBOC.
PRACTICE TIP: Once an application for name reservation is filed, the name reservation is recorded exclusively in the name of the applicant. An application for name reservation that names any person or entity other than the client as the applicant may result in the unexpected rejection of the certificate of formation if the secretary of state cannot determine the connection between the applicant and the parties named in the certificate of formation. Consequently, consider who should be named as the applicant of the name reservation.
LLCs may be formed for any lawful purposes not expressly prohibited under the TBOC title 1, chapter 2, or title 3. While the TBOC allows a general purpose, other laws, including the Internal Revenue Code, may require that a certificate of formation include more specific purposes or language as a basis for granting a license or tax-exempt or tax-deductible status. Any specific purposes of an LLC should be set forth in the “Supplemental Provisions/Information” section of the certificate of formation.
§ 5.5Designation of Registered Agent
§ 5.5:1Who Can Be Registered Agent
The registered agent of an LLC can be either (1) a domestic entity or a foreign entity that is registered to do business in Texas or (2) an individual resident of the state of Texas. The LLC cannot act as its own registered agent; however, it is common for a manager, managing member, officer, or other governing authority of the LLC to act as its registered agent.
§ 5.5:2Consent to Registered Agent
A person designated as a registered agent must consent to act as registered agent. SOS Form 401-A (form 3-4 in this manual) may be used to document a registered agent’s acceptance of appointment. The appointment of a person as registered agent by an organizer or managerial official of an LLC is an affirmation by the organizer or managerial official that the designated person has consented to serve in the capacity of registered agent. Unless otherwise required by the provisions of the TBOC or other applicable law, the consent of the registered agent is not required to be submitted with or included as part of the certificate of formation.
A Texas LLC may be either manager-managed or member-managed. If the LLC will be manager-managed, the certificate of formation must state the name and address of each initial manager. If the LLC will be member-managed, the certificate of formation must state the name and address of each initial member.
An LLC exists perpetually unless provided otherwise in the certificate of formation. If your client wants to form a Texas LLC with a stated duration, that limited duration should be set forth in the “Supplemental Provisions/Information” section of the certificate of formation.
The certificate of formation must state the name and physical address of each organizer. Unless the entity is formed under a plan of merger or conversion, at least one organizer is required. This must be a natural person at least eighteen years old or a legal entity. It is common to have the practitioner act as the LLC’s organizer.