Domestication of Foreign and Out of State Corporations
Alex R. Hernandez Jr. 361-454-1000
We handle domestication of foreign corporation and LLC’s. We can help you out of state corporation form a Texas LLC. Moving the Corporation from a state (such as California where many individuals and business owners are relocating from) can have tax benefits. We can help determine whether it is better for you, forming a new LLC or transferring (domesticating) the LLC into Texas. If the LLC has assets or continuous income, dissolving the old LLC and re-contributing assets to a new LLC may cause tax problem
The Texas Business Organizations Code calls an out-of-state LLC a foreign LLC and provides clear procedures for converting foreign LLCs to Texas. Domestication is the process of changing a foreign LLC to a Texas LLC. After domestication, the LLC is treated the same as any other Texas LLC and is no longer subject to the laws of the state where it was originally formed.
Section 9.001 of the Texas Business Organizations Code (“BOC”) requires the following types of foreign entities to file an application for registration with the Texas secretary of state if the entity is “transacting business” in Texas:
- limited partnership;
- limited liability partnerships;
- limited liability companies;
- business trusts;
- real estate investment trusts;
- public or private limited companies;
- any other foreign entity that, if formed in Texas, would be formed as a corporation, limited partnership, limited liability company, professional association, cooperative, or real estate investment trust;
- and any other foreign entity that affords limited liability under the law of its jurisdiction of formation for any owner or member.
Other laws or circumstances may also be reasons for registration.
Section 201.102 of the Texas Finance Code requires an out-of-state financial institution to register with the secretary of state before opening a branch or other office in Texas.
It has been the practice of the Texas Department of Insurance to refuse a non-resident agency license for a foreign entity unless the entity has registered with the secretary of state. HB 2503, passed in the 2011 Legislative Session, removes this requirement effective 09/01/2011.
Some banks will not do business with an unregistered foreign entity, despite that BOC § 9.251 states that maintaining a bank account in this state is not, in and of itself, transacting business in Texas.
A foreign entity registering to transact business in Texas must register under a name that:
contains a recognized term of the organization for the entity type as listed in sections 5.054 to 5.059 of the BOC;
does not contain any word or phrase that indicates or implies that the entity is engaged in a business that the entity is not authorized to pursue; and
is available in Texas, that is, is distinguishable in the records of the secretary of state from the name of any existing domestic or foreign filing entity, or any name reservation or registration filed with the secretary of state.
You may request a preliminary name availability determination from the Texas Secretary of State by calling (512) 463-5555 or by email.
Registration Under a Fictitious Name
If the entity’s legal name does not meet the above requirements the entity must register in Texas under an assumed name (d/b/a). This special type of assumed name is often referred to as a fictitious name.
A fictitious name is a special type of assumed name because, unlike other assumed names, a fictitious name must meet the above requirements.
A foreign entity that registers to transact business under a fictitious name is stating that the entity will transact business in Texas under that name. BOC § 9.004.
A foreign entity registering under a fictitious name must file assumed name certificates with the secretary of state (Form 503 (Word 125kb, PDF 74kb)) and the appropriate county or counties.
Where to file assumed name certificates.
The name requirements for registration to transact business in Texas do not affect trademark or other intellectual property rights. A certificate of registration or assumed name certificate does not authorize the use of the name in violation of another person’s legal rights and does not, in and of itself, offer any trademark protection. See Trademark FAQs for more information.
Determining Whether to Register
Texas statutes do not define “transacting business.” Helpful resources to determine whether an entity’s activities in Texas require registration include:
BOC § 9.251, which lists activities that are not considered transacting business;
Case law from Texas and other U.S. jurisdictions regarding foreign qualification;
Texas Attorney General Opinions; and
Private attorneys are familiar with corporate law.
Another helpful resource may be the comptroller’s Texas Nexus Questionnaire (PDF), used by the comptroller to determine if a foreign entity is “doing business” in Texas for tax purposes.
The threshold level of activity required for a tax nexus is generally lower than the threshold level of activity that requires registration with the secretary of state.
Therefore, if the Texas Nexus Questionnaire results in a determination of “no nexus,” the entity is probably not transacting business in Texas either.
On the other hand, if the Texas Nexus Questionnaire results in a determination of “nexus,” the entity should consider registration.
Remember that, for registration with the secretary of state, the Texas Nexus Questionnaire can be a useful tool, but does not give a definitive answer.
Don’t forget that even if you determine that your entity is not transacting business in Texas under the BOC, you may need to register under other law, such as the Insurance or Finance Codes.
No member of the secretary of state staff can determine whether an entity is transacting business in Texas or needs to file an application for registration. Determining whether to register is a business decision that may have tax consequences, raise legal issues, or impact licensing from another agency or state board.
Penalties for Not Registering
Failure to register can result in penalties, including:
Inability to maintain an action, suit, or proceeding in a Texas court until registration;
Injunction from transacting business in Texas;
Civil penalty equal to all fees and taxes that would have been imposed if the entity had registered when first required; and
Late filing fees owed to the secretary of state by an entity registering more than 90 days after first transacting business in Texas.
Call our business law firm for help in getting information on domestication or forming a new LLC. Alex R. Hernandez Jr. 361-454-1000