Registered Series and the Texas Series LLC

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

Background

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.

The unique benefit of a series LLC is that one may need only one entity to safely own multiple assets, with each asset being placed in its own segregated series. In a series LLC, legal action against an asset in one series does not affect or spill over onto assets in other series. The threat or damage is contained within the specific series. This contrasts with a traditional LLC which holds its assets in an undifferentiated and collectively vulnerable pool.

The BOC as it pertains to series LLCs was significantly amended effective June 1, 2022 and the new regime is gradually taking shape.

Changes to the LLC Statute: New Categories of Series

As of 2022, the BOC categorizes series as registered series, protected series, and those that are neither (BOC Sec. 1.002 (69-b), (77-a), (78-a), and (79-a)):

[Ordinary] “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.

As for ordinary series (not protected or registered), BOC Sec.101.601(c) states: “Nothing in BOC Sec. 101.601 shall be construed to limit the freedom to contract to a series that is not a protected series or a registered series.” What constitutes an ordinary series? An ordinary series would include series in which records and accounting are NOT adequately maintained (as is required by BOC Sec. 101.602) and for which a certificate of registered series has NOT been filed.
Caution is in order when it comes to the use of or reliance upon ordinary series after the 2022 changes in the BOC. It is likely that ordinary series will reside at the bottom of the series pecking order.

Most series LLCs that meet the minimum accounting requirements will fall into the category of protected series. Registered series will probably be a rarer variety, used when necessary in order to satisfy the requirements of a lender or title company. See additional comments below.

Grant of Authority to Series

BOC Sec.101.601 reads:

(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.

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

Powers of Protected and Registered Series

Chapter 101 of the BOC specifically defines the powers of protected and registered series as follows:

Section 101.601. Series of Members, Managers, Membership Interests, or Assets

Establishing registered and protected series does not appear to affect the functional powers that have been traditionally granted to ordinary series under prior law. An example would be the established legal capability of an individual series to hold title to real property. No change there. It would appear that the advent of registered series is less about the powers of series and more about the transparency of a specific class of series—registered series—along with confirmation to interested third parties that such series have been duly established and do in fact exist.

Notice of Limitations on Liabilities of Series

A “notice of limitations on liabilities of series” is required as part of the certificate of formation of a Texas series LLC:

Section 101.602. Enforceability of Obligation and Expenses of Protected Series or Registered Series Against Assets

(1) the 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.

As one reads amended section 101.602, the obvious implication is that ordinary series (established pursuant to prior section 101.601) may not have these limitations on liability after June 1, 2022. If so, this adds support to the interpretation that although ordinary series may be undiminished in their powers, they may in fact lack the same protections as protected series or registered series.

Registered Series

Registered series are authorized by the filing of a certificate of registered series with the Secretary of State and pay a filing fee of $300. If no such filing is done, then series will by default be viewed either as protected series or ordinary series. The Secretary of State has interpreted the statute to require a separate filing and a separate $300 fee for each registered series.

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). The Secretary of State’s office has made it clear that when listing the proposed registered series (within the certificate of registered series) the name of the series must include the full name of the LLC.

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

Unless the Secretary of State creates one, there appears to be no obstacle to filing the certificate of formation and the certificate of registered at the same time, perhaps with the former referring to and incorporating the terms of the latter.

Advantages of Registered Series

For one thing, registered series are publicly filed. Although not a separate legal entity unto itself (previous law is not altered in this respect—see BOC Sec. 101.622), a registered series at least approaches the same level of publicly-recorded validity and reliability as does the LLC at large.

Protected series do not require the filing of a certificate of any kind but do require that a minimum amount of accounting be done to keep the activities of each series separate and distinguishable from other series. This is unchanged from prior law since minimal accounting separation has always been required of series.

We will know more in the next couple of years as transactions occur; but for now, protected series should serve most asset protection purposes. There is no obvious reason to rush and file a Certificate of Registered Series, especially since such a filing is for one series at a time—so given the $300 filing fee this approach could become expensive.

As for ordinary series (which do not require separate series accounting), it is more difficult to discern much use for them except perhaps as an internal book keeping device. Ordinary series will definitely be at the bottom of the pecking order when it comes to series, so it is likely better to steer a middle path and utilize protected series as the default setting.

Benefits of Public Filing for Registered Series

The requirement of public filing for a registered series should mitigate 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.

Previously, the transactional solution for lenders and title companies 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 (called a “certificate of fact” in Texas) was not obtainable as to individual series. This changed after June 1, 2022. The secretary of state may now issue a certificate of fact confirming the lawful existence of a registered series. Note, 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 limited liability company.

Which category of series is best?

Registered series will almost certainly be the preferred choice of lenders and title companies when presented with the prospect of doing business with a specific series rather than the company at large. The next step down—protected series—may not be able to obtain stand-alone financing except from private hard-money sources. All of this will need to be approached on a loan-by-loan and deal-by-deal basis.

In practical terms, especially in real estate, registered series are likely to be viewed as flying first class; protected series as business class; and ordinary series as coach (or perhaps even as flying in the baggage hold). For LLC owners and managers (1) who are not concerned with the publicly-registered benefits of registered series; (2) who do transactions in cash and can thus dispense with the inconvenience of a lender for a specific series; or (3) who are primarily concerned with maximizing anonymity in the public record, utilizing protected series will be generally acceptable.

Protected series should therefore be satisfactory for nearly all operational and asset-protection purposes. It is harder to discern much significant use for ordinary series except perhaps as an internal book-keeping device. These should be avoided.

Governance of Registered and Protected Series

The amended BOC makes no notable changes when it comes to series governance. BOC Section 101.608(b) states: “If the company agreement does not provide for the governing authority of the protected series or registered series, the governing authority of the protected series or registered series consists of: (1) the managers associated with the protected series or registered series, if the company’s certificate of formation; (2) the members associated with the protected series or registered series, if the company’s certificate of formation does not provide that the company has managers.” This is the same type of governance we have become accustomed to with Texas series LLCs since their authorization in 2009.

Liability of Managers and Members of Series

There is no change in the amended BOC when it comes to the protections afforded managers and members (i.e., they are still protected from series liabilities they did not personally guarantee) except to add express language for protected and registered series. BOC Sec. 101.606 states:

(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.

It is anticipated that the unfortunate but widespread insistence by lenders on personal guarantees by LLC members will continue to make this statutory protection largely moot.

Naming of Registered Series

Since the certificate of registered series requires that registered series be expressly named, one must now pay more attention to the naming of individual series. Previous practice was somewhat loose in this area, with series being named (for example) “ABC LLC—Series A” or something similar. The amended BOC tightens this up by requiring that “the name of a registered series of a limited liability company must contain: (1) the phrase ‘registered series’; or (2) the abbreviation ‘RS’ or ‘R.S.’ of that phrase.” BOC Sec. 5.0561. In addition, the name of registered series must contain the name of the company at large. BOC Sec. 101.626.

What might this look like? It could be as easy as adding the required RS abbreviation along with the name of the LLC. The full and proper name of a registered series would therefore be along the following lines: “ABC LLC—Series A (RS), a registered series of ABC LLC, a Texas series limited liability company.” Although a mouthful, one would still want to show this full proper name on deeds and contracts. As a point of legal draftsmanship, 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.

Prior to the 2022 amendments to the BOC, a series could be named most anything. Going forward, the name of a registered series must be “distinguishable in the records of the Secretary of State” from other such filed registered series. BOC Sec. 5.053. This is the same standard that is currently applied to the naming of the LLC at large. Presumably, therefore, the Secretary of State could and will reject a certificate of registered series if the distinguishability standard is not met. Protected and ordinary series and not affected by this rule.

Assumed Names for Registered and Protected Series

Assumed names are an important part of asset protection. BOC Section 5.051 states that a “domestic entity, a protected series or registered series of a domestic limited liability company, or a foreign entity having authority to transact business in this state may transact business under an assumed name by filing an assumed name certificate in accordance with Chapter 71, Business & Commerce Code.”

Business & Commerce Code (“B&CC”) Section 71.051 states that a “person must file a[n assumed name] certificate . . . if the person regularly conducts business or renders a professional service in this state under an assumed name other than as a corporation, limited partnership, limited liability partnership, limited liability company, protected series or registered series of a limited liability company, or foreign filing entity.”

B&CC Section 71.101 states that a “corporation, limited partnership, limited liability partnership, limited liability company, registered series of a limited liability company, or foreign filing entity must file a[n 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.”

The express empowerment of protected and registered series to file assumed name certificates is a significant step forward. Previously, the 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 be required to change this practice.

The prescribed contents of an assumed name certificate are spelled out in B&CC Section 71.102. The item of note here is the requirement that the certificate must state the name of the protected series or 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.

Termination and Winding Up of a Series LLC that Contains 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. The interesting new item here is that 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.

Should existing deeds into individual series be amended?

A deed amendment may be the safest approach if a real estate investor wants all properties to fall under the umbrella of a registered series regime—but what a chore that will be. Deed amendments are made pursuant to the statute governing “correction instruments.” Under Property Code Section 5.027 et seq., a correction instrument may be filed in order to a correct a deed that contains some error or mutual mistake. A correction instrument is a supplementary filing that relates back in time to the original deed. It corrects the mistake but leaves other terms of the conveyance intact. A correction instrument is not in itself a deed (so you cannot call it a “correction deed”) but only an instrument correcting a mistake in a recorded deed. No new consideration is required.

The Property Code differentiates between material and non-material corrections. This determines whether both parties must sign or if the signature of only one party is sufficient. A non-material mistake would include the classic scrivener’s error, in other words. Perhaps a distance or an angle in the legal description was misstated, or the name of a party was misspelled. A person with personal knowledge of the facts may execute this type of correction instrument without joinder of others but a copy of the correction instrument must be provided to each party to the original instrument.

Material corrections are a more serious issue and are addressed by Section 5.029. Examples are the conveyance in the original instrument of the wrong property (lot 5 instead of lot 6 for example) or conveyance of property to the wrong entity. A correction instrument effecting a material correction such as these must be executed and acknowledged by each party to the original recorded instrument (in the case of a deed, both grantor and grantee).

It is arguable whether or not adding the RS designation to the grantee clause is actually a change of a party. It is certainly a change in the characteristics of the party. Taking a conservative approach, it is probably best to consider this a material change, so a correction instrument for an existing deed into an individual series should be signed and acknowledged by both grantor and grantee whenever that is feasible or possible to do.

Many existing recorded deeds are transfers from an investor’s personal name into an individual series of a series LLC that is owned by that same investor. In these cases, the process would be relatively easy; a correction instrument would be prepared that involves the investor signing the instrument twice (in each of his two capacities). An essential part of this plan would be to also update the company agreement to provide for registered series and other aspects of the new law.

Texas Secretary of State Filing Fees and Execution of Filings

The filing fee for the new certificate of registered series is found in 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 separate $300 fee must be paid for each registered series.

As to execution of filings, BOC Sec. 101.0515 will require that a “filing instrument of a limited liability company or a registered series must be signed by an authorized officer, manager, or member of the limited liability company or the registered series.” This is a significant change in practice, since presently such filings may be signed an “authorized person” pursuant to BOC Sec. 4.001, which could include the attorney filing the instrument. Apparently, after June 1, 2022, an attorney will need to be an officer, manager, or member of the LLC in order to sign certificates of formation, certificates of registered series, certificates of amendment, and the like.

DISCLAIMER

Information in this article is provided for general informational and 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 expressly retained in writing to do so.

Copyright © 2022 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, www.LoneStarLandLaw.com.