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III. Title 1. Chapter 2: Purposes and Powers of a Domestic Entity Purposes of a Domestic Entity

A. Purposes of a Domestic Entity

Chapter 2 contains provisions relating to the purposes and powers of domestic entities, including the restrictions and limitations on such powers and purposes.

  1. Section 2.001 sets forth the general provisions, namely, that a domestic entity has any lawful purpose or purposes, unless otherwise restricted by the provisions of the BOC.

  2. Many of the restrictions that are found under article 2.01 of the Texas Business Corporation Act were carried forwarded to the BOC.  Consequently, a person cannot form or organize an organization under the provisions of the BOC for the purposes of operating as a: bank, trust company, savings association, insurance company, railroad company, or abstract and title company governed by the Insurance Code.  In addition, a person who seeks to form a domestic entity for the purposes of operating a cemetery organization may only do so in accordance with the applicable provisions of the Health and Safety Code.

B. What’s New for LLCs? .

Chapter 2 contains some substantive changes with respect to the purpose of a domestic limited liability company
  1. Background: It was the Texas Secretary of State’s position that there was no statutory basis or authority under Texas law for the formation of a “nonprofit” limited liability company under the provisions of the Texas Limited Liability Company Act (TLLCA).  A reading of various provisions contained in the TLLCA supported this interpretation.
    1. Article 2.01 of the TLLCA states that an LLC formed under the Act may engage in any lawful business.  The term “business” is defined in the TLLCA under article 1.02(6) to mean “every trade and occupation or profession.”
    2. Article 2.02, which relates to the powers of an LLC, states that each LLC shall have the power provided for a corporation under the Texas Business Corporation Act (TBCA) and a limited partnership under the provisions of the Texas Revised Limited Partnership Act (TRLPA).
    3. The provisions of the TBCA specifically state that the TBCA cannot be used to form a corporation for the purpose of operating a non-profit organization.  In addition, a partnership, under Texas law, is defined as an association of two or more persons to carry on a business for profit as owners.  Also, article 8.12 of the TLLCA makes the provisions of the TBCA applicable to LLCs with respect to certain transactions and issues.The provisions of the TBCA specifically state that the TBCA cannot be used to form a corporation for the purpose of operating a non-profit organization.  In addition, a partnership, under Texas law, is defined as an association of two or more persons to carry on a business for profit as owners.  Also, article 8.12 of the TLLCA makes the provisions of the TBCA applicable to LLCs with respect to certain transactions and issues.
    4. Therefore, the organization and formation of a non-profit LLC would be inconsistent with the various provisions and the intent of the TLLCA, TBCA, and the TRLPA.
  2. Titles 2 and 3 of the BOC do not restrict the purpose of a limited liability company.  As the BOC does not restrict the purpose of an LLC to a business, trade, or rofession, a domestic entity formed as an LLC may be formed for a specific nonprofit purpose.
  3. An LLC may be organized solely for one or more nonprofit purposes specified by section 2.002 of the BOC.  Nonprofit purposes include:
    1. Providing professional, commercial, or trade associations; and
    2. Serving charitable, benevolent, religious, fraternal, social, educational, athletic, patriotic, and civic purposes.
  4. An LLC with a nonprofit purpose is distinct from a nonprofit corporation or other nonprofit association.  A BOC provision that is specifically applicable to a nonprofit corporation does not apply to an LLC formed for a nonprofit purpose.  For example, the power of a nonprofit corporation to act as trustee in section 2.106 of the BOC and the default tax-exempt provisions contained in section 2.107 do not apply to an LLC formed for a nonprofit purpose.
  5. The secretary of state will not distinguish between LLCs formed for a for-profit purpose and LLCs created for a nonprofit purpose.  Filing fees established under sections 4.151 and 4.154 apply to all LLCs regardless of purpose.

C. What’s New for Nonprofit Corporations?

Chapter 2 contains a substantive change with respect to the purpose clause of a nonprofit corporation.
  1. Under prior law, a nonprofit corporation was required to specify the purpose or purposes for which the nonprofit corporation was formed.  However, pursuant to section 22.051 of the BOC, a nonprofit corporation may be formed for any lawful purpose or purposes not expressly prohibited under title 1, chapter 2, or title 2, chapter 22, of the BOC.
  2. The form promulgated by the secretary of state for the formation of a nonprofit corporation, Form 202, contains a preprinted purpose clause that provides for the creation of a corporation with a general purpose.  Please note that while the BOC allows a general purpose other laws, including the Internal Revenue Code, may require that the certificate of formation include more specific purposes as a basis for granting a license or tax-exempt or tax-deductible status.  If utilizing the secretary of state form, please use the additional space provided in the “Supplemental Provisions/Information” section to set forth a more specific purpose or purposes.

D. What’s New for Professional Entities?

Chapter 2 contains some substantive changes with respect to professional entities.
  1. The provisions of the Texas Professional Corporation Act (TPCA), TLLCA, and the Texas Professional Association Act (TPAA) permit a professional entity to render only one type of professional service (and any ancillary services).  This general rule is carried forward in the BOC.
  2. Section 301.012 of the BOC however specifically provides for the joint practice of the following professionals.
    1. Persons licensed as doctors of medicine, and persons licensed as doctors of osteopathy by the Texas State Board of Medical Examiners and persons licensed as podiatrists by the Texas State Board of Podiatric Medical Examiners may jointly form and own a professional association or a PLLC to perform professional services that fall within the scope of the practice of those practitioners.
    2. Professionals, other than physicians, engaged in related mental health fields such as psychology, clinical social work, licensed professional counseling, and licensed marriage and family therapy may form a professional association, PLLC or PC that is jointly owned by those practitioners to perform professional services that fall within the scope of the practice of those practitioners.
    3. Persons licensed as doctors of medicine and persons licensed as doctors of osteopathy by the Texas State Board of Medical Examiners and persons licensed as optometrists or therapeutic optometrists by the Texas Optometry Board may, subject to the provisions regulating those professionals, jointly form and own a partnership, including a limited liability partnership, to perform professional services that fall within the scope of the practice of those practitioners. Professional entities formed under the BOC would be permitted to form a professional association or a professional limited liability company for the joint practice of medicine, osteopathy, and optometry or therapeutic optometry.
  3. Changes in the laws governing the professions may permit the joint practice of certain professionals not reflected in section 301.012, the joint professional practice provision of the BOC.  In recognition of this fact, section 2.004 of the BOC provides that a professional entity may engage in only one type of professional service unless the entity is expressly authorized to provide more than one type of professional service under the state law regulating the professional services.
  4. While section 2.004 provides for an exception to the general rule, please note that if a formation document contains a joint practice provision not specifically provided for in the BOC, the legal practitioner should be prepared to provide reference to the specific law permitting the stated joint practice.