BILL ANALYSIS H.B. 1637 By: Oliveira Business and Industry Committee Report (Unamended) BACKGROUND AND PURPOSE The Secretary of State's office and the Partnership and Limited Liability Company Law Committee of the Business Law Section of the State Bar of Texas have worked together to update and improve Texas statutes governing partnerships and limited liability companies ("LLCs") so that Texas will continue to have modern, flexible laws in these areas. The work focuses on the Texas Limited Liability Company Act ("TLLCA"), the Texas Revised Limited Partnership Act ("TRLPA"), and the Texas Revised Partnership Act ("TRPA"). Currently, there are inconsistencies in these statutes and a need to provide additional flexibility in the structuring and operation of the affected entities. Also, certain filing procedures with the Secretary of State need streamlining. One significant development that has prompted most states to amend their LLC statutes in recent years is the adoption of the "check-the-box" federal tax classification rules effective January 1, 1997. Most LLC statutes were originally drafted with dissolution provisions that were not necessarily best suited to businesses using the LLC form but were viewed as essential to preserve the tax status of the LLC. While most states have amended these outmoded dissolution provisions, the TLLCA still follows the original approach to dissolution by providing that the death, withdrawal or other event terminating the membership of a member dissolves the LLC. Finally, a proposed new provision of the Government Code is necessary to codify the Secretary of State's current record keeping procedures and clarify the status of certain business organizations as "registered organizations" within the meaning of Chapter 9 of the Texas Business and Commerce Code, which was enacted effective July 1, 2001. This bill contains proposed amendments to the TLLCA, TRLPA, and TRPA that fall into three general categories: (1) amendments to eliminate certain inconsistencies and uncertainties in the statutes; (2) amendments updating, clarifying and adding flexibility to the current statutory provisions in view of changes to the federal income tax classification rules and trends in other states, including eliminating the outmoded dissolution provisions and providing a mechanism for continuation of an LLC upon the death of the LLC's sole member by appointment of a successor member; and (3) technical corrections and improvements to provisions dealing with filing procedures as proposed by the Secretary of State. The bill also contains a provision to be added to the Government Code codifying the Secretary of State's current practice of maintaining business organizations filings as permanent records in order to clarify the status of certain organizations under Chapter 9 of the Texas Business and Commerce Code. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any rulemaking authority to a state officer, department, agency, or institution. SECTION BY SECTION ANALYSIS H.B. 1637 78(R)SECTION 1. Amends Article 2.23 of the TLLCA by adding Section C-1 to clarify that the regulations of a limited liability company may authorize decision making in a manner other than by a meeting or written consent and to clarify that an action is effective if taken with consent, however evidenced, of all of the members. Amends Section D of Article 2.23 to eliminate inconsistencies in the TLLCA by deleting Subsections (1), (2) and (5). Amends Sections G and H of Article 2.23 relating to situations in which no capital has been paid into the limited liability company to be consistent with the amendment to Article 4.01. SECTION 2. Amends Article 4.01 of the TLLCA to expressly provide that a person may become a member and receive a membership interest in a limited liability company without making a contribution and that a person may be a member without having a membership interest. SECTION 3. Amends Article 5.02-1 of the TLLCA to provide that the allocation of LLC profit and loss shall be made in accordance with the contributions of each member in the absence of provisions in the regulations. SECTION 4. Amends Article 5.05 of the TLLCA to clarify that a member may not withdraw or be expelled from a limited liability company except as expressly provided in the regulations. SECTION 5. Amends Section A(5) of Article 6.01 of the TLLCA to eliminate certain causes of dissolution of a limited liability company. Amends Section A(4) of Article 6.01 to be consistent with the changes to Articles 2.23G and 4.01. Amends Section B of Article 6.01 to be consistent with the deletion of Section A(5). Adds Section C to Article 6.01 to provide for the continuation of a limited liability company after the death or other termination of membership of the sole remaining member by appointment of a successor member. SECTION 6. Adds Sections B, C and D to Article 6.06 of the TLLCA to provide a mechanism through which a limited liability company may revoke voluntary dissolution proceedings previously instituted. SECTION 7. Amends Article 7.03 of the TLLCA to provide that a foreign entity need not comply with the name requirements of Article 7.03A(1) if it elects to procure a certificate of authority as described in Article 1.02A(9) of the TLLCA but is not characterized as a limited liability company under the laws of its jurisdiction of organization. SECTION 8. Amends Subsections A(1) and (2) of Article 7.05 of the TLLCA to be consistent with the amendment to Article 7.03. Adds Subsection A(8) to Article 7.05 to require that a foreign limited liability company include in its application for a Certificate of Authority a statement that it exists as a valid entity under the laws of its jurisdiction of formation. SECTION 9. Amends Section A of Article 7.06 of the TLLCA to eliminate the need for a foreign limited liability company that is filing an application for a Certificate of Authority to submit to the Secretary of State a certificate evidencing its existence in its jurisdiction of formation. SECTION 10. Amends Article 8.12 of the TLLCA to make clear that the registered name renewal provisions available to corporations may be utilized by a limited liability company that has registered a name. SECTION 11. Amends Section 1.02(12) of the Texas Revised Limited Partnership Act (TRLPA) to conform the definition of "person" to the other business organizations statutes and clarify the scope of the definition. SECTION 12. Amends Section 1.03 of the TRLPA to clarify that the abbreviation "LP" (without the periods) is a permissible designator for a limited partnership. SECTION 13. Amends Section 1.06(a) of the TRLPA to expand the list of entities that may act as a registered agent of a limited partnership. SECTION 14. Amends Section 2.11(i) of the TRLPA to make clear that the definition of "other entity," as used in Sec. 2.11, includes limited liability companies. SECTION 15. Amends Section 2.14(a) of the TRLPA to clarify that the abbreviation "LLP" is a permissible designator for a limited partnership that registers as a limited liability partnership and to specify that the words "limited liability partnership" may be used as a designator. SECTION 16. Adds Subsection (c)(1) to Section 4.01 of the TRLPA to provide that a written partnership agreement may permit a person to be admitted as a general partner and acquire a partnership interest in a limited partnership without making a contribution or assuming an obligation to make a contribution to the limited partnership. Adds Subsection (c)(2) to Section 4.10 to provide that a written partnership agreement may permit a person to be admitted as a general partner in the limited partnership without acquiring a partnership interest in the limited partnership. SECTION 17. Amends Section 5.01 of the TRLPA to make clear that the types of permissible contributions enumerated are permissible for both limited partners and general partners of the limited partnership. SECTION 18. Amends Section 3.08(c) of the Texas Revised Partnership Act (TRPA) to clarify that the abbreviation "LLP" (without the periods) is a permissible designator for a limited liability partnership and to specify that the words "limited liability partnership" may be used as a designator. SECTION 19. Amends Section 6.08(b) of the TRPA to make clear that the date of withdrawal of a partner who is judicially expelled is the date of the judicial decree. SECTION 20. Adds Section 405.020 to the Government Code to codify the Secretary of State's existing procedure with respect to the maintenance of filings for business organizations. SECTION 21. Specifies that new section 405.020 applies to instruments on file or filed after the effective date. SECTION 22. Effective Date September 1, 2003.