Series LLCs in Texas: Registered Series

Series LLCs in Texas

The series LLC is a useful tool for owning multiple assets since it allows a real estate investor to keep properties or enterprises in separate, insulated compartments known as series. Series LLCs have been widely used in Texas since 2009. Applicable law is found in Texas Business Organizations Code (“BOC”) Sec. 101 et. seq. For more information on Texas series LLCs generally, see our companion web article on the subject.

The BOC was significantly amended in 2022 to provide for categories of series. Among these, only one category—registered series—requires a state filing called a Certificate of Registered Series.

CATEGORIES OF SERIES

The three categories of series are registered series, protected series, and those that are neither (which we will call ordinary series). See BOC Sec. 1.002 (69-b), (77-a), (78-a), and (79-a)):

“Series” means a designated series of members, managers, membership interests, or assets that is a protected series or a registered series, or that is neither a protected series nor a registered series.

“Protected series” is a series established in accordance with BOC Sec. 101.602 [i.e., to the extent that series records are maintained and if both the certificate of formation and the company agreement contains a statement of limitation of liability of series], but without filing the certificate of registered series under Subsection (c), is a protected series.

“Registered series” means a series established in accordance with BOC Sec. 101.602 [i.e., to the extent that series records are maintained and if both the certificate of formation and the company agreement contains a statement of limitation of liability of series], and for which a certificate of registered series has been filed, is a registered series.

Even though BOC Sec. 101.602(e) specifies that a company agreement does not need to use the terms protected or registered when referencing a series, it is clearly better legal draftsmanship to define and distinguish these terms in the company’s governing documents.

Naming of Registered Series

The law applicable to the naming of registered series is stricter than that which applies to protected or ordinary series:

(1) BOC Section 5.0561 requires that the name of a registered series of a limited liability company must contain: (a) the phrase ‘registered series’; or (b) the abbreviation ‘RS’ or ‘R.S.’

(2) In addition, the name of registered series must include the proper name of the company at large (BOC Sec. 101.626).

(3) Lastly, the name of a registered series must be distinguishable in the records of the Secretary of State from other filed registered series (BOC Sec. 5.053). This is the same standard that is currently applied to the naming of all LLCs. The Secretary of State can and will reject a certificate of registered series if the distinguishability standard is not met.

The full and proper name of a registered series would therefore be along the following lines: “Ace Asset Holding LLC—Series A (RS), a registered series of Ace Asset Holding LLC, a Texas series limited liability company.” This is a mouthful but a careful document drafter would still want to show this full proper name on all deeds and contracts. It goes without saying that the names of registered series in the certificate of registered series should reflect and be consistent with the naming regime established in the company agreement.

Separate Accounting for Registered and Protected Series

The BOC allows for registered and protected series only “to the extent that series records are maintained” (BOC Sec. 101.602). Unless this rule on separate series accounting and record keeping is followed, a series can be neither a registered series nor a protected series.

As always, company records should be kept with an eye toward potential litigation, particularly litigation that includes piercing allegations since these are common in Texas courts (abusive though they may be in non-fraud situations). Internal documents that reasonably identify the activities of each series are thus also important from the standpoint of preparing for future litigation.

Do ordinary series have value?

Ordinary series would include series in which records and accounting are NOT adequately maintained (as is required by BOC Section 101.602) AND no certificate of registered series has been filed.

Establishing registered and protected series (supposedly) does not affect the powers that have traditionally been granted by statute to previously-existing ordinary series. An individual ordinary series continues to have the power (for example) to hold title to real property. However, caution is in probably in order. Practitioners are probably best advised to use the LLC governing documents to designate all non-registered series as protected series (which do not require a filing with the secretary of state). Ordinary series may become largely useless as a practical matter except perhaps as an internal placeholding device.

PUBLIC FILINGS RELATING TO REGISTERED SERIES

Certificate of Registered Series

In order to establish a registered series, a certificate of registered series must be filed with the secretary of state. In this respect, a registered series at least approaches the same level of publicly-recorded validity and reliability as does the LLC at large.

To designate an ordinary or protected series of a series LLC as a registered series, one needs to file a certificate of registered series with the Secretary of State and pay a filing fee:

BOC Sec. 4.162. For a filing by or for a registered series of a domestic limited liability company, the secretary of state shall impose the following fees: (1) for filing a certificate of registered series, $300; (2) for filing a certificate of amendment, $150; and (3) for filing a certificate of termination, $40.

A certificate of registered series must state: (1) the name of the limited liability company; (2) the name of the registered series being formed, which must conform with the requirements of Section 5.056(c); and (3) if the registered series is formed under a plan of conversion or merger, a statement to that effect (BOC Sec. 101.623(b)). A separate $300 fee must be paid for each registered series.

A certificate of registered series may be amended by filing a certificate of amendment (BOC Sec. 101.624(a)).

Effect of Filing on Protected and Ordinary Series

The filing of a certificate of registered series for one or more series of the company does not affect the remaining protected or ordinary series. These continue to exist. BOC Section 101.601(c) expressly states “Nothing [in the statute] shall be construed to limit the freedom to contract to a series that is not a protected series or a registered series.”

If no certificate of registered series is filed, then all series of the company will (by default) be viewed either as protected or ordinary series. There is no public record of these series or their status.

Not an Amendment to the Certificate of Formation

A certificate of registered series has a specific, limited purpose. It is not a certificate of amendment, so the certificate of registered series is not an appropriate means of altering or amending the company’s certificate of formation. This is true even though a “certificate of registered series may include any other provisions not inconsistent with law relating to the organization, ownership, governance, business, or affairs of the registered series” (BOC Sec. 101.623(c)).

Conversion and Merger

BOC Section 101.631 et seq. provides that protected series may be converted to registered series (and vice versa) by means a certificate of conversion. Protected and registered series may also be merged (BOC Sec. 101.633).

Termination of Registered Series

As to termination and winding up, “a protected series or registered series and its business and affairs may be wound up and terminated without causing the winding up of the limited liability company” (BOC Sec. 101.614 and 101.615). Registered series (unlike protected or ordinary series) must actually go through a formal winding up process that includes filing a certificate of termination with the Secretary of State. This additional bureaucratic step might be considered a disadvantage to having registered series, but given the public filing requirement necessary to form these series the rationale is understandable.

Registered Series and Federal FinCEN Reporting

Since registered series are publicly filed, will they be expected to make individual reports to FinCEN pursuant to the Corporate Transparency Act—even though according to the BOC they are not stand-alone entities? This is relevant if for no other reason than penalties for non-compliance with the CTA (civil and criminal) are substantial, so new treasury regulations issued this area will be something to keep an eye on. Texas says registered series are not separate entities, but it will the opinion of FinCEN that matters on this subject, and it is under no obligation to honor Texas’ interpretation.

POWERS OF REGISTERED SERIES;
LIMITATIONS ON LIABILITY

The advent of registered series in 2022 did not alter or enhance the statutory powers of series generally. These are contained in Chapter 101 of the BOC:

BOC Sec. 101.601. Series of Members, Managers, Membership Interests, or Assets

(a) A company agreement may establish or provide for the establishment of one or more designated series of members, managers, membership interests, or assets that: (1) has separate rights, powers, or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations; or (2) has a separate business purpose or investment objective.

(b) A series established in accordance with Subsection (a) or a protected series or registered series established in accordance with Section 101.602 may carry on any business, purpose, or activity, whether or not for profit, that is not prohibited by Section 2.003.

Series are broadly able to file and defend lawsuits; enter into contracts; buy, sell and hold title to property; grant liens and security interests; and “exercise any power or privilege as necessary or appropriate to the conduct, promotion, or attainment of the business . . . .” (BOC Sec. 101.605(6)). A series can obtain its own EIN if it chooses and be treated separately for federal tax purposes. A series may (but is not required) to have its own bank account. A series can operate under its own assumed name.

Is a series a legal entity?

No. Individual series are not stand-alone legal entities in their own right (BOC Section 101.603) and this includes registered series. This is true even though BOC Section 1.201(b)(27) has been amended to include all series (not just registered series) within the definition of a legal person.

Given the statutory powers of series, declaring that a series is not technically a stand-alone legal entity may be a distinction without a difference much of the time, at least as to ordinary transactions in the real world of commerce and real estate.

Limitation on Liability of Series

The fundamental principle of limitation on the liability of individual series did not change in the 2022 BOC amendments. A notice of limitations on liabilities of series is still part of the certificate of formation of a Texas series LLC: “(1) [T]he debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to a particular protected series or registered series shall be enforceable against the assets of that series only, and shall not be enforceable against the assets of the limited liability company generally or any other series; and (2) none of the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to the limited liability company generally or any other series shall be enforceable against the assets of a particular protected series or registered series” (BOC 101.602).

Liability of Series Managers and Members

The implementation of series categories has not changed the protections afforded series managers and members (i.e., they are still protected from series liabilities that they did not personally guarantee) except to add express language mentioning protected and registered series:

BOC Sec. 101.606. Liability of Member or Manager for Obligations; Duties

(a) Except as and to the extent the company agreement specifically provides otherwise, a member or manager associated with a protected series or registered series or a member or manager of the company is not liable for a debt, obligation, or liability of a protected series or registered series, including a debt, obligation, or liability under a judgment, decree, or court order.

(b) Notwithstanding Subsection (a), a member or manager associated with a protected series or registered series or a member or manager of the company may agree to be obligated personally for any or all of the debts, obligations, and liabilities of one or more protected series or registered series under the company agreement or another agreement.

(c) The company agreement may expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person associated with a protected series or registered series has to: (1) the protected series or registered series or the company; (2) a member or manager associated with the protected series or registered series; or (3) a member or manager of the company.

The prevalence of personal guarantees by LLC members will continue to make this statutory protection largely moot.

ASSUMED NAMES FOR REGISTERED SERIES

Registered series are specifically empowered to file assumed name certificates:

Business and Commerce Code Section 71.101. A corporation, limited partnership, limited liability partnership, limited liability company, registered series of a limited liability company, or foreign filing entity must file an [assumed name] certificate . . . if the registered series or entity: (1) regularly conducts business or renders professional services in this state under an assumed name; or (2) is required by law to use an assumed name in this state to conduct business or render professional services.

Express empowerment of registered series to file assumed name certificates is a significant step forward. Previously, the Texas Secretary of State followed the entity theory and would decline state-level assumed name filings for individual series, accepting them only for the LLC at large. If one wanted an assumed name for a series then it was necessary to obtain one from one of Texas’ 254 county clerks. Based on the text of the amended BOC, the Secretary of State will likely be required to change this practice.

The prescribed contents of an assumed name certificate are spelled out in Business & Commerce Code Section 71.102. As to registered series, the assumed name certificate must state the name of the registered series as stated in the company agreement (and, if applicable, the certificate of registered series) as well as the name of the LLC as stated in the company’s certificate of formation.

REGISTERED SERIES
AND REAL ESTATE TRANSACTIONS

Title Companies and Lenders

With the advent of registered series, one can expect that some title companies may require a certificate of good standing (a certificate of fact as the secretary of state calls it) for individual series that are involved in insured transactions. Title companies may also require that an assumed name certificate be filed indicating that the company is doing business by and through one of its series.

The requirement of public filing for registered series may eliminate the doubt that previously worried lenders, title companies, and transactional parties as to whether or not a particular series had been properly formed, or even whether or not it legally existed at all.

The transactional solution in prior times was to rely upon a company resolution stating that a certain series is duly established and authorized to engage in the subject transaction, since a certificate of good standing (certificate of fact) was not obtainable as to individual series. This has changed. The secretary of state may now issue a certificate of fact confirming the lawful existence of a series.

However, “the secretary of state may not issue a certificate of fact confirming the existence of a registered series if the limited liability company has ceased to be in existence” (BOC Sec. 101.625 (d)). This is true because a series cannot stand alone in the absence of a valid underlying LLC.

The Future of Registered Series

The utility of registered series in real estate transactions is evolving. It may be that registered series will only be filed in the event a title company or lender involved in a transaction requires it. Registered series may turn out to be the preferred choice of lenders and title companies when presented with the prospect of doing business with an individual series rather than the company at large. This remains to be seen. Otherwise, it is anticipated that for most real estate investors the category of protected series will be adequate for operational and asset-protection purposes.