Texas Business Organizations Code

Monday, November 6, 2006
Contributed by: James Wester

The Texas Business Organizations Code ("TBOC") integrates the various former codes and became effective on January 1, 2006. Entities already in existence on the effective date continue to be governed by the applicable law under which they were created (e.g., the Texas Business Corporation Act or the Texas Limited Liability Company Act) until July 1, 2010. However, entities may elect to adopt and be governed by the TBOC prior to January 1, 2010 by filing an election document with the Texas Secretary of State's Office.

One advantage of the new TBOC is that common provisions applicable to most forms of business organizations are placed in a single title. The TBOC is also organized so that provisions specific to each type of entity are placed in separate titles. The TBOC is divided into eight "titles" as follows:

  • Title 1 contains the general provisions common to most entities;
  • Title 2 relates to corporations;
  • Title 3 relates to limited liability companies (LLC);
  • Title 4 relates to partnerships, both general and limited;
  • Title 5 relates to real estate investment trusts;
  • Title 6 relates to associations;
  • Title 7 relates to professional entities; and
  • Title 8 contains miscellaneous and transition provisions.

Some information worth noting under the TBOC is as follows:

  • For LLCs the term "company agreement" is used in lieu of the old term "regulations" and the company agreement can be oral or written even if you have only one member in the LLC.
  • The TBOC permits an LLC member, upon request and for a proper purpose, to examine and copy any reasonable information regarding the business, affairs and financial condition of an LLC.
  • Except as specifically provided in the TBOC, LLC governing provisions may be waived or modified in the company agreement. The provisions of Title 3 and Title 1 (to the extent applicable to LLCs) will apply as "default" provisions for each LLC, unless modified in the certificate of formation or company agreement.
  • The certificate of formation is required to state whether the LLC will or will not have managers.
  • Entities have a perpetual duration unless stated otherwise in the governing documents.
  • A partnership agreement, whether for a general partnership or a limited partnership, may be oral or written, but certain rights may only be granted to partners pursuant to a written partnership agreement.
  • The partnership duty of loyalty includes a duty to refrain from competing with the partnership in a manner adverse to the partnership.
  • After the TBOC becomes applicable to the domestic entity, the provisions of the TBOC govern any proposed indemnification. This is applicable even if the events upon which the indemnification is based occurred before the TBOC's application to the entity. Unless a limiting provision under the TBOC is intended to limit or restrict permissive indemnification, the governing documents of an entity will not be construed as limiting the permissive indemnification authorized by the TBOC.
  • If your domestic entity plans to wind up or terminate, you should consider adopting the TBOC's provisions. The TBOC has more favorable provisions that permit survival and reinstatement of an entity after termination.
  • Corporations can use the word "limited" or its abbreviation in the company name.
  • Fees have been increased effective as of January 1, 2006.

New Terminology

Because Title 1 of the TBOC applies to most entities, common terms are another advantage:

  • "Organization" - is essentially intended to refer in the broadest sense to any kind of entity or organization regardless of jurisdiction of formation or purpose.
  • "Domestic entity" - an organization formed under, or the internal affairs of which are governed by, the TBOC.
  • "Foreign entity" - an organization formed under, and whose internal affairs are governed by, the laws of a jurisdiction other than Texas.
  • Each entity has either "owners" or "members" which in turn correspond to "ownership interests" or "membership interests," respectively, in the entity. For-profit corporations, real estate investment trusts and partnerships have "owners," while nonprofit corporations and unincorporated nonprofit associations have "members." Limited liability companies, cooperative associations and professional associations have both "members" and "owners," and these terms are used interchangeably for these kinds of entities.
  • A "filing entity" is an entity that is formed by filing a "certificate of formation," which replaces the existing articles of incorporation, articles of organization, certificate of limited partnership or similar document.
  • The certificate of formation and the other documents or agreements adopted by the entity to govern the formation or internal affairs of the entity constitute the "governing documents" of the domestic entity.
  • "Governing authority" is the person or group of persons who are entitled to manage and direct the affairs of an entity under the TBOC. This term refers to the board of directors of a corporation, the general partners of a partnership, the managers of an LLC that is managed by managers or the managing members of an LLC that is managed by its members.
  • "Governing person" is a person who serves on the governing authority of an entity such as a member of the board of directors.
  • "Managerial official" is an officer or a governing person.
  • The TBOC also facilitates electronic filing. The TBOC defines "signature" to mean any symbol executed or adopted by a person with present intention to authenticate a writing and includes a digital signature, electronic signature or a facsimile of such. The terms "writing" or "written" are expanded to encompass textual information stored in an electronic or other medium that is retrievable in a perceivable form, and includes electronic data and transmissions and reproductions of writings. These terms do not include sound or video recordings of speech.
  • "Fundamental business transaction" means a merger, interest exchange, conversion, or sale of all or substantially all of an entity's assets.

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.