Registered Series and the Texas Series LLC

The New Law Going into Effect June 1, 2022
by David J. Willis J.D., LL.M.

Changes to the Texas Series LLC Statute Going into Effect June 1, 2022

By way of background, the series LLC has been widely used in Texas since 2009. It is a useful tool for owning multiple assets since it allows an investor to keep properties or enterprises in separate, insulated compartments known as series. 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 series) so long as the assets are prudently similar in type and function. 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.

Changes to the Texas Business Organizations Code (the “BOC”) effective June 1, 2022 will affect all series limited liability companies, both those already formed and those contemplated, so it is important to begin considering the scope and impact of these changes now.

The lengthy delay in the statute’s effective date is intended to provide time for officials to develop appropriate rules, practices, and forms, so one should be observant as these are promulgated between now and June 1st. All topics discussed in this article relating to registered and protected series are subject to whatever the Secretary of State may come up with in its rule-making and forms design.

Grant of Authority to Series

The traditional concept of series and their powers is found in BOC Sec.101.601. The amended text 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.

The change in this general grant of authority is that it now includes the phrase “or a protected series or registered series” in addition to the original generic series that we have become accustomed to working with in Texas. These are new categories.

Categories of Series Beginning June 1, 2022

The BOC as it relates to series LLCs was significantly amended by the last legislature. The amendments, which go into effect June 1, 2022, break series down series into categories: registered series, protected series, and those that are neither (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.

As for ordinary series (not protected or registered), these will continue to exist. BOC Sec.101.601(c) expressly 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 after the 2022 amendments? It’s less than clear, but would presumably include series in which records and accounting are NOT adequately maintained (as is required by BOC Sec. 101.602) AND no certificate of registered series has been filed. Caution will be in order when it comes to the use of ordinary series after June 1st. Without question these will be at the bottom of the series pecking order.

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 statute 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

Amended 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

(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.

Establishing registered and protected series does not affect the statutory powers that have been traditionally granted to previously existing ordinary series. An example would be the established legal capability of an individual series to hold title to real property. No change there.

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. The amended language contained in Section 101.602 is unchanged except to add mention of registered and protected series:

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.

The utility of this notice extends beyond the Certificate of Formation. Why not, for instance, include this language in a deed into a series so all involved understand the statutory framework?

Certificate of Registered Series

After June 1, 2022, one will need to file a certificate of registered series with the Secretary of State and pay a filing fee of $300—at least if one wants to take advantage of the new registered series regime. If no such filing is done, then series will, by default, be viewed either as protected series or ordinary 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).

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. This may become the preferred methodology after June 1st.

Advantages of Registered Series

Although registered series are a new concept in Texas, it is anticipated that they will provide more overall commercial functionality and utility than ordinary series. For one thing, registered series will be 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.

This requirement of public filing should 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 (called a “certificate of fact” in Texas) 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 limited liability company.

After June 1, 2022, registered series will therefore probably 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. Lesser series—protected series and ordinary series—will probably have less marketplace utility. It is doubtful that they will ever be able to obtain financing except from private hard-money sources.

In practical transactional terms, especially in real estate, protected series are likely to devolve into a second-class alternative to registered series. For LLC owners and managers (1) who are not concerned with the potential operational advantages of registered series; (2) who do transactions in cash and can thus dispense with the inconvenience of a lender; or (3) who are concerned with maximizing anonymity in the public record, getting by with protected series may nonetheless be an acceptable choice. It is harder to discern much significant use for ordinary series.

Governance of Registered and Protected Series

There are no notable LLC governance changes in the amended law. 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 Series after June 1, 2022

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. Existing practice has been somewhat loose in this area, with series being named “ABC LLC—Series A” or something similar. The new law 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 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.” This is a mouthful but 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 June 1, 2022, a series could be named most anything. Afterward, 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.

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.”

A significant improvement in the amended BOC is the express empowerment of protected and registered series to file assumed name certificates. Prior to June 1, 2021, 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 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.

After June 1, 2022, should existing deeds of record into individual series be amended?

This 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 statute 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.

Contemporary Drafting Considerations for Attorneys

Although changes to the BOC relating to registered series do not apply until June 1st, it is prudent for attorneys to plan ahead when it comes to drafting governing documents, particularly the series LLC company agreement. If the option to file and utilize registered series is not built into series LLCs being formed today, then after June 1, 2022 the company agreement (at the very least) will need to be significantly re-worked in order to accommodate the new registered series regime.

For instance: 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 statute when referencing a series, it would clearly be better draftsmanship to define and distinguish these terms in the company’s governing documents. It is good practice to include appropriate provisions relating to protected and registered series in company agreements being written today, with the obvious caveat that certain of those provisions may not spring into effect until June 1st.

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.”

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 © 2021 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.