Michael Powell Office of the Secretary of State 18th Annual Texas Crime Stoppers Conference San...

Michael PowellOffice of the Secretary of State

18th Annual Texas Crime Stoppers ConferenceSan Antonio, Texas

May 19, 2006

Business and Public Filings Division

The New Business Organizations Code

And How it Applies to Nonprofit Corporations

Statutory Revision Program


Section 323.007 of the Texas Government Code directs that the Texas Legislative Council execute a permanent statutory revision program for the revision of the statutes on a topical or code basis. Purpose of the program is to clarify and simplify the statutes and to make the statutes more accessible, understandable and usable.

Statutory Revision Program


TLC may not alter the sense, meaning or effect of the statute. Statutory revision process is nearing completion with enacted codes covering almost all areas of the Texas statutes. The BOC was not a TLC statutory revision. The BOC was a product of a State Bar Ad Hoc Committee and does include changes.

Texas Business Organizations Code codifies the following statutes:


Texas Business Corporation Act Texas Non-Profit Corporation Act Texas Professional Corporation Act Texas Professional Association Act Texas Miscellaneous Corporation Laws Act Texas Revised Partnership Act Texas Revised Limited Partnership Act

Texas Business Organizations Code codifies the following statutes:


Texas Limited Liability Company Act Texas Real Estate Investment Trust Act Texas Cooperative Association Act Texas Uniform Unincorporated

Nonprofit Association Act

Code Structure


Provisions common to most forms of entities are placed in a single title with provisions specific to entity type being placed in separate titles.

Title 1. General Provisions

Title 2. Corporations

Title 3. Limited Liability Companies

Title 4. Partnerships

Title 5. Real Estate Investment Trusts

Title 6. Associations

Title 7. Professional Entities

Title 8. Miscellaneous and Transition Provisions

The Wheel


General Provisions


Provisions applicable to most entities Contains 12 Chapters pulling together

similar or overlapping provisions found in prior law

Intent--to standardize, organize, and

simplify

Title 1

“The Hub”

Hub ChaptersTitle 1


Chapter 1: Definitions (key chapter)

Chapter 2: Purposes and Powers of Texas entities (Prohibited Purposes)

More Hub Provisions


Chapter 3: Formation and Governance

Subchapter A--Requirements for certificates of formation for all entities

Subchapter B--Amendments and restatements

Chapter 4


Filings

Subchapter A--General provisions applicable to signatures, liability for false filing instruments, facsimile copies

Subchapter B--When Filings Take EffectGeneral rule: On FilingDelayed effective dates and conditionsAbandonments before effectiveness

Chapter 4 Continued


Subchapter C: Certificates of correction

Subchapter D: FILING FEES!

All Entities 4.151For-Profit 4.152Nonprofit 4.153 etc.

Filing FeesNonprofit Corporations


Fees for nonprofit corporation filings remain the same.

Chapter 5


Names of Entities; Registered Agents and Registered Offices Subchapter B: Names

May use assumed nameUnauthorized purpose in name prohibitedMay not be same as or deceptively similar

More on Names in Chapter 5


Organizational identifiers for all names Professional entity names must not be contrary to regulatory statute. Cannot use “Lotto” or “Lottery” Unauthorized use of certain words in veterans organizations

Chapter 5


Name reservations in Subchapter C Name registrations in Subchapter D

Registered Agents and OfficesSubchapter E


Designation of agent and office Changes to registered agent/office Change by a registered agent to name or address Resignation of registered agent

Other Chapters


Chapter 6: Meetings and Voting Chapter 7: Liability Chapter 8: Indemnification and Insurance

Chapter 9: Foreign Entities


Foreign entities required to register Permissive registration Registration procedures Name changes Withdrawal of registration

Chapter 9 Again


Failure to register--late filing fee Revocation of registration by SOS Reinstatement after revocation Activities not constituting the transaction of business

Chapter 10: Mergers, Interest Exchanges, Conversions and Sales of

Assets


Subchapter A--Mergers Subchapter B--Exchanges of Interests Subchapter C--Conversions Subchapter D--Certificates filed with the SOS Subchapter E--Abandonment of Merger, Exchange, or Conversion

Chapter 11: Winding up and Termination


The new dissolution provisions Includes voluntary and involuntary terminations Also reinstatement procedures

Chapter 12Administrative Powers of SOS and OAG


Adoption of procedural rules Interrogatories Appeal from SOS decisions

The Spokes


Title 2 through Title 8

Title 2


Corporations

For-ProfitNonprofit

Special-Purpose CorporationsLodges

Title 6


Associations

Cooperative AssociationsUnincorporated Nonprofit Associations

Structure and OrganizationTexas Business Organizations Code

Title 3

Limited Liability Companies

Title 5REITS

Chapters1, 4, & 5

Chap. 21For-profit

Corporation

Chap. 22Nonprofit

Corporation

Chap. 152General

Partnership (LLPs)

Chap. 153Limited

Partnership

Chap. 251CooperativeAssociation

Chap. 252Unincorporated

NonprofitAssociations

Chap. 20General

Provisions

Title 1Common ProvisionsApply to all entities

Chap. 151General

Provisions

Chap. 304ProfessionalLimited Liability Co.

Chap. 302ProfessionalAssociation

Chap. 303ProfessionalCorporation

Chap. 301General Provisions

Definitions

Title 7Professional

Entities

Title 6Associations

Title 4Partnerships

Title 2Corporations

Navigating the BOC


Look to Title 1 for the general provision.

Then look to the specific title governing the entity--The “spoke” E.g., corporations--Title 2.

If the provision of Title 1 conflicts with a provision in the specific title governing the entity, the provision in the specific title supercedes the provision in Title 1.

Short Titles for Spoke Provisions


Texas Corporation LawTitle 2 and Title 1 to the extent applicable tocorporations

Texas Nonprofit Corporation LawChapters 20 and 22 and Title 1 to the extent applicable to nonprofit corporations

The Business Organizations Code Effective Dates and Transition Issues


Effective Dates of Code


Applies to all new Texas entities created on or after January 1, 2006.

Applies to all foreign filing entities registering with the SOS after January 1, 2006.

Effective Date for Existing Entities


On January 1, 2010,the “mandatory” application date, BOC applies to domestic entities existing and foreign filing entities registered with SOS before January 1, 2006.

Existing entities may opt in earlier by filing a statement of early adoption with the SOS.

Non-Code Entities


Source law, such as the Texas Non-Profit Corporation Act will continue to govern entities formed prior to January 1, 2006 until January 1, 2010, UNLESS such entities “opt into” the Code, which they may do at any time on or after January 1, 2006, by making a filing with the SOS.

Transition Issues


Early Adoption of the Code

Does the Secretary of State have “opt in” or “early adoption” forms? YES

Use Form 808 for early election by Texas nonprofits; use form 809 for early election by foreign or out-of-state entities.

Transition Issues


Early Adoption of the Code

What is the filing fee for an early adoption statement?

The filing fee for a nonprofit corporation or cooperative association is $5.

Opt-in and Comply?


•Art. 402.003 of the Code states that a domestic filing entity may adopt the Code by following amendment procedures to opt-in and by causing “its governing documents to comply with this Code”.

•SOS will not require amendments to governing documents as a precondition to filing the opt-in statement.

Transition Issues


Application of BOC

Section 402.006 of the Code states that existing statutes will continue to govern the acts, contracts and transactions of non-Code entities until January 1, 2010 (unless they adopt the Code).

Transition Issues


Expiration of Prior Law

All prior law continues in effect (except fees).

Provisions have been added to all of the Acts being codified to indicate that they will expire on January 1, 2010.

Transition Issues


What does a nonprofit corporation need to do on January 1, 2010?

No action is necessary. The BOC is automatically applicable to the nonprofit corporation on January 1, 2010. If necessary, the corporation shall conform its governing documents to the BOC when it next files an amendment to its certificate of formation.

What Does the Code Change?


New organization of statutes

Standardization of provisions

New terminology

Simplification of filing provisions

Substantive Changes


Numbering and organization of business law statutes was changing.

BOC Committee used opportunity to harmonize the statutes and provide more uniformity among entity types.

Uses common provisions when possible.

Code Does Not


Change the management structure Change the liability of the entity or its principals Change the operation of the entity Change the way external parties do business withthe entity Change state agencies enforcement activities againstthose entities

New Vocabulary &

Synonymous Terms



Organization— a corporation, LP, general partnership, LLC, business trust, REIT, joint venture, joint stock company, cooperative, association, bank, insurance company, credit union, savings and loan association, or any other organization, regardless of whether it is for-profit, nonprofit, domestic, or foreign.

Entity— domestic entity or foreign entity.


Domestic Entity—an organization formed under or the internal affairs of which are governed by the BOC. (Does not include banks, insurance companies, telephone cooperatives, or other corporations formed under a Texas law other than the BOC.)

Nonfiling Entity—a domestic entity that is not a filing entity. (Includes unincorporated nonprofit associations and domestic general partnerships.)


Filing Entity—a domestic entity that is a corporation (including a nonprofit corporation), LP, LLC, PA, cooperative, or REIT. (Does not include LLPs.)

Foreign Entity—an organization formed under, and the internal affairs of which are governed by, the laws of a jurisdiction other than Texas.

Foreign Filing Entity—a foreign entity is required to register as a foreign entity under Chapter 9 of the BOC (Includes out-of-state nonprofit corporations).


Governing Authority—a person or group of persons who are entitled to manage and direct the affairs of an entity under the BOC and the entity’s governing documents. Includes: board of directors or trustees of a nonprofit corporation members of a nonprofit corporation if the certificate of formation vests the management of the affairs solely in its members

Does not include an officer.


Governing Person—a person serving as part of a governing authority.

Officer—an individual elected, appointed, or designated as an officer of an entity by the entity’s governing authority or under the entity’s governing documents.

Managerial Official—officer or governing person.

Individual—a natural person. BOC clarifies that officers and directors must be individuals.


Governing DocumentsFor domestic entities:

its certificate of formation (or any other document or agreement under which it was formed); PLUS other documents (bylaws) or agreements adopted by the entity under the BOC to govern the formation or the internal affairs of the entity.


Filing Instrument —instrument, document, or statement that is required or authorized by the BOC to be filed by or for an entity with the filing officer

Filing Officer —For all entities other than domestic REIT: Secretary of State.

A Note About BOC “Nonprofits” A nonprofit entity includes nonprofit corporations,

nonprofit associations, as well as LLCs or other entities that are organized solely for one or more of the nonprofit purposes specified by Sec. 2.002 BOC.

Nonprofit purposes include:– Providing professional, commercial, or trade

associations; and– Serving charitable, benevolent, religious, fraternal,

social, educational, athletic, patriotic, and civic purposes.


A Note About BOC “Nonprofits”

• If the BOC refers to a nonprofit corporation, it does not include other nonprofit entities.

– For example, fees for nonprofit corporations do not apply to LLCs that have a nonprofit purpose.

– Periodic reports required to be filed by nonprofit corporations are not required of other nonprofit entities.


Synonymous Terms


Section 1.006 of the BOC sets forth terms that have the same meaning or significance.

Articles of Incorporation, Articles of Organization, Articles of Association, &

Certificate of Limited Partnership


Certificate of Formation

Application for Certificate of Authority, App’n for Registration of Foreign LP,

Statement of Qual. of Foreign LLP


Application for Registration

Certificate of Termination

Articles of Dissolution

Certificate of Cancellation


Art. of Amendment =

Art. of Merger =

Art. of Exchange =

Art. of Conversion =

Cert. of Amendment

Cert. of Merger

Cert. of Exchange

Cert. of Conversion



Formation Filings


Certificates of Formation Domestic filing entities are formed by filing a certificate of formation with the filing officer.

Any certificate of formation filed with an effective date on or after January 1, 2006:

creates a BOC entity

must comply with BOC filing requirements

is subject to the new BOC fee schedule


Certificates of formation are governed by § 3.001 et seq. Every certificate of formation must contain:

The name of the filing entity to be formed

The type of filing entity to be formed (e.g., nonprofit corp)

Purpose

Duration, if not perpetual

Registered office street address; registered agent’s name

Name and address of organizers


• Supplemental requirements for certificates of formations are set out for:

– For-profit corporations § 3.007– Close corporations § 3.008– Nonprofit corporations § 3.009– Limited Liability Companies § 3.010– Limited Partnerships § 3.011– Real Estate Investment Trusts § 3.012– Cooperative Associations § 3.013– Professional Entities § 3.014– Professional Associations § 3.015

Supplemental Provisionsfor a Nonprofit Corporation


If the nonprofit is to have no members, a statement to that effect.

If management of the nonprofit corporation’s affairs is to be vested solely in the nonprofit corporation’s members, a statement to that effect.

Supplemental Provisionsfor a Nonprofit Corporation


The number of directors and the names and addresses of those directors. OR, if the management is vested solely in the members, a statement to that effect.

If the corporation is authorized on its winding up todistribute its assets in a manner other than provided inSec. 22.304, a statement describing the distribution.


Name availability standards and rules remain the same. § 5.001 et seq.

Nonprofit corporations are not required to use an organizational designation. § 5.054(b)

Names


• A domestic entity’s duration is assumed to be perpetual unless stated otherwise in its governing documents. § 3.003

• If a domestic entity’s duration is not perpetual, its certificate of formation must state the period of duration. § 3.005(4)

• SOS forms for certificates of formation do not include a duration clause. Limited durations can be set out in the “Supplemental Text” area of the forms.

Duration


• Nonprofit corporations can state a general nonprofit purpose. Specifying the nonprofit purpose is no longer required for formation. § 22.051 May be required for IRS tax exemption!

• BOC provisions specifically applicable to nonprofit corporations do not apply to other nonprofit entities.

– Power to act as trustee in § 2.106

– Default tax provisions of § 2.107

Purpose


Registered Agent may be:

an individual resident of Texas, or

a domestic or foreign entity that is registered to do business in Texas.

Registered agent’s business office address must be the same address as the registered office.

Registered Agent Requirements


Registered Office:

Must be located at a street address where process may be personally served on the registered agent;

Is not required to be the business office address of the represented entity; and

May not be solely a mailbox service or telephone answering service.

Registered Office Requirements


Foreign Entities

Transacting Business in Texas After January 1, 2006


Foreign Entities

Title 1, Chapter 9 of the BOC

New terminology is used, such as “registration” and “foreign filing entity.”


Foreign Entities Required to Register

A foreign entity must register to transact business in Texas if:

The entity affords limited liability under the laws of its jurisdiction of formation for any member or owner, unless the foreign entity is authorized to transact business under other state law.


What is “Transacting Business” ?

Transacting business is not defined.

List of “not-transacting business” activities same as those provided under prior law.

We do not have authority to issue formal binding legal opinions.

Look to judicial opinions for guidance.

A. Anything organized outside of Austin.

B. Anything organized outside of Texas.

C. Anything organized outside of the United States.


What is Considered Foreign in Texas?

D. Both B & C.


What is Considered Transacting Business in Texas?

Entity has an employee who resides in Texas.

Entity is pursuing its purpose in Texas.

Entity owns & receives income from property in Texas.

Entity maintains a business office in Texas.

Activities that are purely interstate commerce-- Business conducted by fax, mail, email &

telephone.

Foreign Corporation Changes


Application for Registration not Certificate of Authority. State date entity began transacting business in Texas. Late filing fee of $25 per year if foreign nonprofit corporation transacts business in Texas for more than 90 days without registering. Statement of existence included in application; no certificate of existence from home state required.


Foreign Entities--Failure to Register

Attorney General may enjoin entity from transacting business. Entity cannot maintain an action or proceeding in court until registered. Civil penalty in an amount equal to all fees and taxes that would have been imposed.


Foreign Entities--Failure to Register

Late filing penalty equal to registration fee for each year of delinquency.

Application for registration must be filed within 90 days of the beginning date of transacting business in the state.

SOS FormsName Reservations

Registrations and Change Filings


Forms


Section 4.006 of the BOC authorizes the SOS to promulgate forms for any filing instrument or report required or permitted to be filed with the SOS.

Forms


Available on the SOS web site at:http://www.sos.state.tx.us/corp/forms_option.shtml

Split into BOC Forms and Pre-BOC

When possible, SOS promulgated forms that complied with BOC as well as prior law

Use of SOS forms permissive not mandatory

Name Reservations


Any person may reserve the use of a name under chapter 5 of the BOC.

The filing fee is $40.

The name is reserved for a period of 120 days.

Renewal of Name Reservations


Under the BOC, all name reservations can be renewed for additional 120-day periods.

File a new application within 30 days prior to expiration ($40). If not using SOS form, please identify the reservation as a renewal.

Renewal must be made by applicant of record. If not, transfer of name reservation required ($15).

Signing False Documents


BOC Chapter 4. Filings

General Provisions

False or Fraudulent Filings


Under prior law, it was a Class A misdemeanor to knowingly sign a document that was materially false with the intent that it be filed with the SOS.

House Bill 1507, effective Sept. 1, 2005, amended the TBCA to increase the offense to a state jail felony if the person signing a document intended to defraud or harm another.



BOC penalties for false or fraudulent filing apply to all entities, including nonprofit corporations.

As of Jan. 1, 2006, it is a Class A misdemeanor to knowingly sign a filing instrument that is materially false with the intent that it be filed with the SOS. §4.008

– Class A misdemeanor is punishable by a sentence of up to 180 days, a fine of up to $4,000, or both.



BOC increases offense to a State jail felony if there is intent to defraud or harm another.

State jail felonies are generally punishable by a sentence of 180 days to 2 years plus a fine of up to $10,000.

Enforcement


The SOS does not have the power to prosecute anyone for criminal violations associated with fraudulent filings.

If there is a basis for criminal action, victims can file a complaint with the District or County Attorney.

Civil Liabilities


A person may recover civil damages if the person incurs a loss caused by:

a forged filing instrument; a filing instrument that constitutes an offense under § 4.008; reasonable reliance upon a false statement of material fact in a filed filing instrument; or the omission of a material fact that is required to be in a filing instrument. § 4.007(a)

Civil Liabilities


An injured person may recover from: each person who forged or knowingly signed a false instrument; any managerial official who directed the signing and filing of the filing instrument who knew or should have known of the false statement or omission; or the entity that authorizes the filing of the filing instrument. § 4.007(b)

Enforcement


The SOS does not have authority to bring suit on behalf of parties harmed by a fraudulent filing.

Injured parties can initiate their own civil lawsuits.

Mergers, Conversions & Exchanges


Chapter 10 of the BOC governs the general requirements for mergers, interest exchanges, and conversions.

Mergers of Nonprofit Corporations


Under existing law, a nonprofit corporation may merge only with other domestic or foreign nonprofit corporations and only one party to the merger can be the survivor.

BOC has more permissive merger provisions for nonprofit corporations with limitations.

What’s New?


A domestic nonprofit corporation may merge with a for-profit entity or non-code organization. The domestic nonprofit may not merge with a for-profit entity if:

The domestic nonprofit corporation does not continue as the surviving entity; or

If the nonprofit corporation will lose or impair its tax-exempt status.

Filing fee for this type of transaction: $300.

Nonprofit Merger Limitations


May not merge into another entity, if the NP corporation would lose charitable status.

May merge with for-profit or non-code entities if the nonprofit continues as the surviving entity.

What’s New for nonprofits?


TNPCA did not authorize the creation of a nonprofit corporation by conversion.

BOC authorizes creation of a nonprofit corporation by conversion. Certificate of formation of converted entity must contain the additional statements relating to the conversion.

Domestic nonprofit corporation may not convert to a for-profit entity.

Involuntary Terminations


Circumstances giving rise to an involuntary termination by the SOS.

Failure to file a report within the period required by law;

Failure to pay a fee or penalty prescribed by law when due and payable;

Failure to pay a filing fee, or payment of the fee was dishonored when presented by the state for payment;

Failure to maintain a registered agent or registered office.

Reinstatements


“Finality is not the language of politics.”

Benjamin Disraeli

“It ain’t over til it’s over.”Yogi Berra

Reinstatements


BOC Sections 11.201 and 11.202 Reinstatements under the BOC have longer time periods during which a reinstatement can be filed. Change in substantive law Time frames similar for all Code entities

Reinstatements


PRIOR LAW:

No change. Same under BOC.

Non-profit corporations have an unlimited amount of time to reinstate following an involuntary dissolution for failure to file a report under Art. 1396-9.01 of the Texas Non-Profit Corporation Act.

BOC:

Reinstatements


PRIOR LAW:

No change. See, BOC §§ 11.201(b) & 11.254.

Corporations and LLC’s have an unlimited amount of time to reinstate following a forfeiture for failure to comply with provisions of the Texas Tax Code.

BOC:

Reinstatements


Tax Code Reinstatements (Revivals of Charter) continue to be governed by the Tax Code. See, §§ 171.312 through 171.315 of the Texas Tax Code.

BOC sets the fee for reinstatements following a tax forfeiture for for-profit corporations and LLCs at $75.

No fee for reinstatement of a nonprofit corporation following a tax forfeiture.

Reinstatement Following a Voluntary Termination


Entity terminated inadvertently or by mistake; Termination occurred without the approval of the entity’s governing persons when approval required by BOC; Entity terminated before winding up completed; or The entity’s legal existence is necessary to convey or assign property, to settle or release a claim or liability, to take an action, or sign an instrument or agreement.

BOC Reinstatement Requirements


•Reinstatement must be approved in manner provided by the BOC;•Entity name must be available;•Tax clearance for reinstatement; and•If involuntarily terminated, entity must correct

circumstances giving rise to involuntary termination.•Reinstatement must provide registered

agent/office information.

Need Help? Contact SOSby Email


[email protected]

[email protected]

first initial last [email protected]

Need Help? Call


Mike Powell 463-9856 Nahdiah Hoang 475-0218 Robert Sumners 463-5590Carmen Flores 463-5588Lorna Wassdorf 463-5591

Michael Powell Office of the Secretary of State 18th Annual Texas Crime Stoppers Conference San...

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