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By Lori Ann Fox, Government Relations and Regional Attorney for CT Corporation, and Sandra Feldman, Publications Attorney for CT Corporation
On June 1, 2018, Texas changed the way it determines whether a business entity’s name will be available to domestic and registered foreign business entities. Sec. 5.053 of the Business Organizations Code governs name availability for “filing entities” – which are defined as corporations, limited partnerships, limited liability companies, professional associations, cooperatives, and real estate investment trusts - and for “foreign filing entities” – which are defined as foreign entities other than a foreign limited liability partnership, that register or are required to register as a foreign entity.
Name Availability and Texas
Choosing a name for a corporation, limited liability company, or other business entity is one of the most important decisions its owners will make. There are many factors that go into that decision. One of those factors is whether the desired name is available in the formation state. Whether the desired name is available in states where the entity will register as a foreign entity may be a factor as well.
There are generally two standards the states use to determine availability. One is commonly known as the “deceptively similar” standard and the other is commonly known as the “distinguishable upon the records” standard.
Before June 1, 2018, Texas was typically categorized as one of the “deceptively similar” states. The deceptively similar standard in most states is “the same as or deceptively similar to”. The current statute in the Texas Business Organizations Code is Sec. 5.053 and had been called “Identical and Deceptively Similar Name Prohibited”. The statute provided that domestic filing entities cannot have, and foreign filing entities cannot register under a name “that is the same as, or that the secretary of state determines to be deceptively similar or similar to” the name of another domestic or registered foreign entity, or a reserved or registered name. This differs from the standard in most states. The Texas standard had three parts, instead of two, as follows: 1) the name may not be the “same as” another, 2) the name may not be “deceptively similar to” another or 3) the name may not be “similar to” another. The third is an addition to the standard in other states. A proposed name cannot be filed if it is the same as or deceptively similar to an existing entity name. A proposed name that is similar, but is not the same as or deceptively similar, can only be filed if it obtains written notarized consent from the existing entity with the similar name.
Texas Moves to “Distinguishable in the Record”
However, House Bill 2856 (2017) amended Sec. 5.053. As of June 1, 2018, it is now called “Distinguishable Names Required” and provides that the name of a domestic filing entity and the name under which a foreign entity registers “must be distinguishable in the records of the secretary of state” from the name of another domestic or registered foreign filing entity, the fictitious name of a registered foreign entity, or a reserved or registered name. The sections on reserved and registered names, and reinstatements of domestic and foreign entities were also amended to indicate that those names must be “distinguishable in the records of the secretary of state”.
The way the Texas Secretary of State determines if a name is distinguishable in its records is set forth in the department’s administrative rules. Proposed rules were published on April 6, 2018, and remained open for comment until noon CST on May 4, 2018. The Secretary's office has finalized the rules, which were published for adoption in the May 25, 2018 edition of the Texas Register. The rules provide insight and guidance on the approach of the Secretary's office for implementing the new law.
With this change, Texas joins the vast majority of states in applying the distinguishable on the records standard rather than the deceptively similar standard. Among the generally accepted reasons other states have gone away from the deceptively similar standard is the belief that principles of unfair competition, and not the business entity act, should provide the limits on the competitive use of similar names and that it should not be the role of the secretary of state to police the unfair competitive use of names.
As Texas’ new distinguishable in the records standard is less restrictive than the former standard this should result in more names being available for newly forming domestic entities and a better chance that foreign entities will be able to register under their legal names. Beginning June 1, 2018, entities already registered with the Office of the Texas Secretary of State may consider amending their formation or registration filings to obtain a name that was previously unavailable under existing law. This may include a foreign entity being able to use its legal name in its state of domesticity.
It should be remembered, however, that name availability is only one of the factors involved in choosing a name. Other factors, such as trademark issues, need to be considered as well.
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