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DAVID J. WILLIS ATTORNEY
http://www.LoneStarLandLaw.com
Copyright 2013. All rights reserved worldwide.

ASSUMED NAMES IN TEXAS


With Comments on the Use of Assumed Names in Asset Protection

By David J. Willis, J.D., LL.M.


Introduction

The use of one or more assumed names or "DBAs" is an important part of an overall asset protection plan. Why? Because asset protection is, at least in part, about layering of incremental obstacles to a potential plaintiff. The more hurdles a plaintiff and his attorney have to get over in order to get to you and your assets, the better. The objective is to deter, discourage, and deplete a potential plaintiff’s resources. Although assumed name records are publicly available for inspection, sometimes online, this is an additional level of research that–believe or not–some plaintiffs will be too lazy to undertake.

Public Interest in Disclosure

What is the intent of the statute requiring the filing of a DBA? Both simple and practical: public disclosure of the identity of the true party in interest and the location at which that party may be served with process if suit is filed. The premise behind that law is that it is in the public interest to be able to ascertain whom to sue and where service of process may be achieved.

From a disclosure perspective, DBA filing requirements operate in favor of potential plaintiffs. There is, however, a sense in which they favor defendants. Suits are filed everyday against assumed-name defendants, particularly at the Justice Court level. Consider a hypothetical auto dealership, "Northside Chevrolet." If a suit is filed against Northside Chevrolet, it is subject to immediate dismissal by Northside’s attorney. Why? Because Northside Chevrolet is not a legal entity. It is merely the assumed name of someone else, almost certainly a corporation or LLC with a liability barrier that is doing business under the name Northside. The result is that the plaintiff must now go home, do research, and refile the case (paying additional fees and costs in the process) against the true principal behind the DBA. The legal entity may not even have its business headquarters in that county, requiring a request for out-of-county service of process, another delay and expense. A certain percentage of plaintiffs will instead give up at this point.

Law Applicable to Assumed Names

There is no statutory limit on the number of DBAs an individual or company may have, either at the state or county level. A filing is good for 10 years. Filing fees are nominal. A DBA may also be terminated or abandoned by the filing of a certain form. Go to the county clerk’s website in the county in which you are headquartered or in which you propose to operate. For state-level filings, go to http://www.sos.state.tx.us/corp/forms/503 and complete Form 503. This form requires one to state the counties in which an assumed name will be used. If the entity will potentially use its assumed name in all counties in Texas, check the box for "All."

Texas Business & Commerce Code chapter 71–the "Assumed Business and Professional Name Act"–requires a notarized DBA filing for individuals, companies, and others under the following circumstances:

§ 71.002. Definitions

(2) "Assumed name" means:


(A) for an individual, [if the enterprise proposes to operate under] a name that does not include the surname of the individual;

(B) for a partnership, [if the enterprise proposes to operate under] a name that does not include the surname or other legal name of each joint venturer or general partner;

(C) for an individual or a partnership, [if the enterprise proposes to operate under] a name, including a surname, that suggests the existence of additional owners by including words such as "Company," "& Company," "& Son," "& Sons," "& Associates," "Brothers," and similar words, but not words that merely describe the business being conducted or the professional service being rendered;

(D) for a limited partnership, [if the enterprise proposes to operate under] a name other than the name stated in its certificate of formation;

(E) for a company, [if the enterprise proposes to operate under] a name used by the company;

(F) for a corporation, [if the enterprise proposes to operate under] a name other than the name stated in its certificate of formation or a comparable document;

(G) for a limited liability partnership, [if the enterprise proposes to operate under] a name other than the name stated in its application filed with the office of the secretary of state or a comparable document; and

(H) for a limited liability company, [if the enterprise proposes to operate under] a name other than the name stated in its certificate of formation or a comparable document including the name of any series of the limited liability company established by its company agreement.

The filer must include the physical address of its place of business. If the proposed county of business is different from the county where the enterprise is headquartered, then a DBA must be filed in both counties.

Suppose you have a Nevada LLC and want to operate under an assumed name in Dallas or Houston, may you file an assumed name certificate in either county and do so? Absolutely. The statute expressly includes both domestic and foreign entities within its scope.

State versus County Filing of DBAs

Obtaining a DBA is a logical next step after forming an LLC. But where should the filing occur–at the county clerk’s office or with the secretary of state? Under Bus. & Com. Code section 71.103, the DBA must be filed as at both levels: "The corporation, limited partnership, limited liability partnership, limited liability company, or foreign filing entity shall file the certificate in the office of the secretary of state and in the office or offices of each county clerk as specified by Subsection (b) or (c)." Notice that the statute says "and" when referring to state and county filings, although filing with the Secretary of State is frequently overlooked by smaller companies who often file only in their local county.

At the county level, the county clerk will want to determine if a proposed DBA is available. The standard is that your proposed name must not be the same as or deceptively similar to another entity's filed assumed name within that county. At the state level, however, the DBA filing is purely a notice filing, meaning that it is not necessary to first ascertain if a certain name is available. Just file Form 503.

Texas has 254 counties. If you are obtaining a county-level assumed name for banking purposes and every-day usage, does it matter in which county you file? Surprisingly, no. Even if you are doing business in Houston, a bank will accept a DBA from El Paso County for purposes of opening an account and ordering checks in the assumed name. Another noteworthy point: there is currently no central data base linking the assumed name records of Texas’ 254 counties. From an asset protection/anonymity perspective, therefore, it may be useful to consider obtaining your company’s DBA far from its true base of operations and in a county whose DBA database is not yet online.

Trusts and DBAs

Interestingly, the statute does not mention trusts, which are a common asset protection device. Are these covered by the law? Must a trust file a DBA if the trust is doing business under anything other than its complete formal name? Our view is in the affirmative, even though trusts are technically not stand-alone legal entities, though they often act as such. A trust likely falls under the term "company," and the statute defines "company" as "a real estate investment trust, a joint-stock company, or any other business, professional, or other association or legal entity that is not incorporated, other than a partnership, limited partnership, limited liability company, limited liability partnership, or foreign filing entity." But this is actually good news. If one has a land trust and is doing business with it then one should acquire an assumed name and use it.

A Series LLC Doing Business through One of Its Series

What about individual series of a series limited liability company? Series are, in many respects, sub-companies and are largely empowered to behave that way. Business Organizations Code section 101.605 provides that an individual series has the power (1) to sue and be sued; (2) to contract; and (3) to hold title to real and personal property. In order to fulfill these functions at the series level (rather than at the level of the company at large), the series must operate or hold title under its own name (for example, as "ABC LLC–Series A") which in turn requires that the series obtain an assumed name certificate. Why is this so? Because the series is not, as a technical matter, an independent legal entity; and since it is operating under a name other than the name stated in the company’s COF, it must have a DBA on file. Moreover, the filing of the DBA must take place both at the county and state levels.

The basic assumed name filing for a series LLC would be in the name of the company doing business as an individual series. For example: "ABC LLC doing business as ABC LLC–Series A." section 71.103 would require such an assumed name filing both in the county where Series A does business and also at the office of the Secretary of State.

An Individual Series Doing Business on its Own

What about filing an assumed name certificate for a specific series–for instance "ABC LLC–Series A DBA Ace Investments?" County clerks have no problem with this formulation. However, the Secretary of State would reject it with the following notation: "Our records do not show an entity by the name shown on the document which was submitted for filing." In other words, the Secretary of State’s office is (for the moment) taking a strict stance here, i.e., that the individual series of a series LLC are not in and of themselves separate legal entities. Therefore, in the State’s view, they cannot have assumed names. Since, for asset protection purposes, we would nonetheless prefer to throw a cloak of anonymity over individual series, we must for now be content with series DBA filing at the county level only. As it turns out, this works sufficiently well for AP purposes.

Banks and DBAs

As to banking, the importance of having a DBA for Series A, Series B, Series C, and so forth is relevant if one chooses to open a bank account solely and specifically for the use of an individual series. A bank will require an assumed name certificate if &ABC LLC–Series A" wants to open an account in the name of "Ace Investments" and have checks printed that way. Having such a DBA also entitles the series to lawfully print business cards and stationery that read "Ace Investments" with no disclosure that the principal behind the scenes is in fact an individual series of a series LLC.

Title Companies and DBA Requirements

Title companies are also sensitive to DBA issues. Expect that if a company (whether traditional or series) has not filed a required assumed name certificate it will be asked to do so before closing on either the purchase or sale of real property.

As a practical matter, neither banks nor title companies appear to care whether one's assumed name certificate is issued by the Secretary of State or by the local county clerk, just so long as a filed certificate exists.

Statutory Penalties

Will one go to the penitentiary for failing to file for an assumed name? No. Penalties for failing to fully comply with the Assumed Business and Professional Name Act are generally mild:

§ 71.201. Civil Action; Sanction

(a) A person’s failure to comply with this chapter does not impair the validity of any contract or act by the person or prevent the person from defending any action or proceeding in any court of this state, but the person may not maintain in a court of this state an action or proceeding arising out of a contract or act in which an assumed name was used until an original, new, or renewed certificate has been filed as required by this chapter.

(b) In an action or proceeding brought against a person who has not complied with this chapter, the court may award the plaintiff or other party bringing the action or proceeding expenses incurred, including attorney’s fees, in locating and effecting service of process on the defendant.

In a civil suit, then, a violator may need to immediately file an assumed name certificate in order to proceed with the prosecution or defense of a suit. It may also be ordered to pay the costs and fees associated with inconveniencing the other party. These are not heavy sanctions. There is, however, a criminal penalty for an intentional violation (whatever that is):

§ 71.202. Criminal Penalty: General Violation

(a) A person commits an offense if the person:

(1) conducts business or renders a professional service in this state under an assumed name; and

(2) intentionally violates this chapter.

(b) An offense under this section is a Class A misdemeanor.

We are unaware of an abundance of prosecutions in this area. Why? As with most criminal offenses, the district attorney must prove criminal intent. It is far more likely that a person or company failing to fully comply inadvertently overlooked the details of the statute. Forged or fraudulent filings, however, are a more serious matter–a third degree felony. See Bus. & Com. Code § 71.203.

Entitlement to Exclusive Use of an Assumed Name

The filing of an assumed name certificate does not assure exclusive use of a DBA and is not the equivalent of obtaining a trademark or copyright:

§ 71.157. Effect of Filing

(a) This chapter does not give a registrant a right to use the assumed name in violation of the common or statutory law of unfair competition or unfair trade practices, common law copyright, or similar law.

(b) The filing of a certificate under this chapter does not in itself constitute actual use of the assumed name stated in the certificate for purposes of determining priority of rights.

Even if one obtains a DBA in the local county, there are still 253 other Texas counties (not to mention the Secretary of State’s office) where someone else may lawfully file to use the same or similar assumed name.

Having said the foregoing, the filing of an assumed name will likely, over time, build and increase one’s entitlement to the assumed name as a matter of common law. The name acquires public acceptance and recognition in the area in which it is used. County clerks, of course, aid in this process by declining to issue identical assumed names to rival enterprises within their borders. A DBA is nonetheless no substitute for obtaining a proper trademark or copyright. This is a highly technical field.

It should also be noted that an assumed name certificate is not a business license, which is not required in Texas except for specific industries.

Bank Accounts and DBAs

It will be necessary to produce your assumed name certificate if you wish to obtain a bank account in the assumed name, which is recommended. For example, forming an LLC and then failing to get a DBA and do business under it reflects an incomplete process from an AP perspective. Get the required DBA and one or more optional DBAs. As many activities as possible should be conducted under a DBA name. There is simply no good reason to make it easy for a potential plaintiff to know the identity or location of the true party in interest.

Use of DBAs with a Two-Company Structure

Our recommended asset protection structure involves two LLCs–a management company and a holding company. Both should obtain and utilize assumed names.

As a practical matter, the choice of name for an LLC is far less important than the DBA. Most clients unnecessarily spend considerable time and energy choosing an LLC name that unwisely includes or reveals their personal names or other sensitive information. It is therefore worth some effort in considering a name for this purpose. It is necessary to first check to determine if a desired DBA is available in the county in which one wishes to file. For anonymity reasons, neither a LLC name nor its DBA should reveal the principal's identity or other personal information.

DISCLAIMER

Information in this article is proved for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is retained and expressly retained in writing to do so.

Copyright 2013 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, http://www.LoneStarLandLaw.com