Prior to 2006, each type of Texas entity has been governed by a separate statute. Corporations in Texas were formed under and governed by the Texas Business Corporation Act. The Texas Limited Liability Company Act applied to limited liability companies, and the Texas Revised Limited Partnership Act and the Texas Revised Partnership Act applied to Texas limited partnerships and Texas general partnerships, respectively. Other statutes applied to Texas professional corporations, professional associations and non-profit corporations. Applicability of the Texas Business Organizations Code
The Texas legislature simplified and standardized the various entity statutes by enacting the Texas Business Organizations Code ("TBOC"). In effect, the TBOC combines all of the entity statutes into one set of provisions applicable to all new entities. The TBOC applies to entities as follows:
* New Texas Entity. Any Texas entity formed on or after January 1, 2006, must be formed under and governed by the new TBOC.
* Existing Texas Entity. Any existing Texas entity formed prior to January 1, 2006, will not be subject to the TBOC until January 1, 2010, unless it makes an affirmative election to have the TBOC apply.
* Newly Registered Foreign Entity. Any foreign entity, i.e., an entity formed in any state other than Texas or in any other country, that registers to do business in Texas on or after January 1, 2006, will be subject to the TBOC upon registration.
* Presently Registered Foreign Entity. Any foreign entity registered in Texas prior to January 1, 2006, will not be subject to the TBOC until January 1, 2010, unless it makes an affirmative election to have the TBOC apply.
In many respects, a number of the TBOC provisions are of interest only to your business lawyer. However, there are certain provisions of which you might want to be aware:
1. Filing Fees have changed.
Corporation: new fee $300
Limited Liability Company: new fee $300
Association: new feee $750
Limited Partnership: $750
2. All entities will be formed by filing a Certificate of Formation. There are no longer Articles of Incorporation, Articles of Organization, Certificates of Limited Partnership or similar documents.
3. All entities have a perpetual duration unless stated other-wise in the formation documents.
4. Corporations will be allowed to use the word "limited" or an abbreviation thereof in its name. Previously, (except for a recent anticipatory change made in the TBCA effective September 1, 2005) Texas corporations could not use "limited" in the name of the company.
5. The term "regulations" used by limited liability companies as the name for the governing document has been changed. The governing document (some-what akin to the bylaws) will now be called the "Company Agreement" which is in line with other states which call it the "Operating Agreement."
6. Shareholders of corporations do not have preemptive rights unless the Certificate of Formation provides for such rights. Thus, a minority shareholder wishing to protect against future dilution of ownership will want to protect its rights to purchase its pro rata portion of future stock issuances by providing for pre-emptive rights in the Certificate of Formation. This change continues the 2003 TBCA revision enacted in anticipation of the TBOC.
7. Shareholders of corporations do not have cumulative voting rights unless the Certificate of Formation provides for such rights. Again, if cumulative voting rights are important to minority shareholders, there must be cumulative voting provisions in the Certificate of Formation. This change also continues the 2003 TBCA revision enacted in anticipation of the TBOC.
8. A partnership agreement, whether for a general or limited partnership, may be oral or written. It remains unclear why anyone would want to take the risk of doing business in an oral partnership. In any dispute, the terms of the agreement would have to be established by the testimony of the partners.
9. New terminology has been adopted by the TBOC. If you question someone's role in a cor-poration and you are told that such individual is a "governing person" and a "managerial official," please understand that the individual is a Director and an Officer. The TBOC adopted some general terms applicable to all entities, but there is no real substantive change as a result of the new terminology. Two things to do in anticipation of the TBOC's effective date: 1. Since the TBOC will automatically apply to existing entities effective January 1, 2010, go ahead and file an election to have the TBOC apply in early 2006. There are no adverse consequences from making the election. And, the application of the TBOC could prove beneficial in at least two respects: (i) more flexibility is available in the event of a voluntary winding up and termination and (ii) fewer restrictions exist in connection with permissive indemnification. 2. Change references in documents and agreements to refer to the TBOC as a successor law to the current law.