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.  

New Categories of Series

The amended statute breaks series down into registered series, protected series, and those that are neither. We have chosen to label the third category “nominal series.” The statutory definitions are found in 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.

These categories of series imply the existence of a leftover category that is not fully defined. Clearly such a category will exist (or continue to exist) since 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.”

Our impression is that a series that is NOT established in accordance with BOC Sec. 101.602 (i.e., series records and accounting are NOT adequately maintained, and/or if either/neither the certificate of formation and the company agreement contains the required statement of limitation of liabilities of series, AND for which no certificate of registered series has been filed), are what we will call “nominal series.” This is the category of generic series that we have been using in Texas since 2009. A review of the new law suggests that series isolation and insulation as well as series powers may be questionable or ambiguous for series falling into this nominal category.

BOC Sec. 101.631 et seq. provides that protected series may be converted to registered series (and visa versa) by means a certificate of conversion. However, a company agreement may prohibit the conversion of a registered series or protected series. Protected and registered series may also be merged (BOC Sec. 101.633).

Notice of Limitation on Liabilities of a Protected or Registered Series

A notice of limitations on liabilities of series is required as part of the certificate of formation of a Texas series LLC, and this will not change except to add mention of registered and protected series. Found in BOC Sec. 101.602, this amended notice states:

(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.

Protections and characteristics associated with protected and registered series require a level of ongoing maintenance. According to amended BOC Sec. 101.602(b), the isolation and insulation of series can be maintained only: (1) to the extent the records maintained for that particular protected series or registered series account for the assets associated with that series separately from the other assets of the company or any other series; and (2) if both the certificate of formation and the company agreement contain a notice of limitations on liabilities of series.

How burdensome is the record-keeping requirement? As it turns out, not very. The amended BOC Sec. 101.603 (b) states that “to the extent the records of a protected series or registered series are maintained in a manner so that the assets of the protected series or registered series can be reasonably identified by specific listing, category, type, quantity, or computational or allocational formula or procedure, including a percentage or share of any assets, or by any other method in which the identity of the assets can be objectively determined, the records are considered to satisfy the requirements of Section 101.602(b)(1).” Terms like “reasonably identified” and “objectively determined” do not call for sophisticated accounting. A well-kept check register with selected annotations will likely suffice.

Nonetheless, the new law has the effect of emphasizing the existing statutory requirement. Without compliance with the rule on separate series accounting and record keeping, a series can be neither a registered series nor a protected series. That leaves series in the leftover category (nominal series) which may become largely useless except as an internal placeholding device. In any case and regardless of the terminology used, if a certificate of registered series is not filed, then the series involved cannot – by definition – exceed the status of protected series (BOC Sec. 101.602(f)).  

Certificate of Registered Series  

In order to implement 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. If no such filing is done, then the series of the LLC will, by default, be viewed as protected or nominal 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)).

Powers of Protected and Registered Series

The change here is subtle. The newly amended BOC Sec. 101.605 states:

A protected series or registered series established under this subchapter has the power and capacity, in the name of the protected series or registered series, to: (1) sue and be sued; (2) contract; (3) acquire, sell, and hold title to assets of the protected series or registered series, including real property, personal property, and intangible property; (4) grant liens and security interests in assets of the protected series or registered series; (5)  be a promoter, organizer, partner, owner, member, associate, or manager of an organization; and (6) exercise any power or privilege as necessary or appropriate to the conduct, promotion, or attainment of the business, purposes, or activities of the protected series or registered series.

Accordingly, the new categorization of series does not affect the powers that have been traditionally granted to series under the present regime. An example would be the legal capability of either a protected or registered series to hold title to real property. No change there. But what about the leftover category of nominal series? These are not mentioned above, even though it is doubtless true that many series in existence in Texas today fall into the nominal category. As of June 1st, will nominal series suddenly lack these statutory powers? If so, can they properly be described as series at all? Until this and more is clarified, it would probably be better to steer entirely clear of this bottom rung of series. Those with existing series in this category will need to consider an upgrade.

Note BOC Sec. 101.622: “. . . [A] protected series or registered series has the rights, powers, and duties provided by this subchapter to the protected series or registered series but is not a separate domestic entity or organization.” Accordingly, neither a protected series nor a registered series has any legal existence or power independent of the company at large. “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)).

Liability of Managers and Members of Series

There is no change to the protection of managers and members (i.e., they are still protected from unguaranteed series liabilities) 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.

Classes of Membership Interests  

It is a regular part of this firm’s approach to establish class A and class B membership categories in order to enhance asset protection, both at the level of the company at large and at the level of individual series. One’s ability to accomplish this in the company agreement has not changed except to expressly extend this capability to both protected and registered series (BOC Sec. 101.607).

(a) The company agreement may: (1) establish classes or groups of one or more members or managers associated with a protected series or registered series each of which has certain express relative rights, powers, and duties, including voting rights; and (2)  provide for the manner of establishing additional classes or groups of one or more members or managers associated with the protected series or registered series each of which has certain express rights, powers, and duties, including providing for voting rights and rights, powers, and duties senior to existing classes and groups of members or managers associated with the protected series or registered series. 

 The company agreement may provide that any member or class or group of members associated with a protected series or registered series has limited voting rights or no voting rights at all (BOC Sec. 101.607(c)). Again, no change except to expressly include protected and registered series.  

Governance of Protected and Registered Series under the Amended Law  

There are no notable governance changes. BOC Sec. 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.”

As to 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 nominal 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.

Potential Advantages of Registered Series  

As matters stand today, the formation document used to establish a series LLC does not generally indicate whether or not any series of the LLC have also been formed. The problem has been this: how, in the absence of a public filing, was a third party such as a lender or title company to have certainty as to the valid existence and status of an alleged series? After all, a series LLC that has not yet established and implemented individual series is functionally nothing more than a traditional LLC with the potential to add such series. The transactional solution has typically been to require and rely upon a company resolution expressly 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) has not thus far been obtainable as to individual series. After June 1st, one will presumably be able to obtain a certificate of fact, if only regarding the existence of such series as may have been expressly named in a filed certificate of registered series.

Although it is early in the process, our view is that registered series will provide more overall commercial functionality and utility than protected or nominal series. For one thing, registered series will be publicly filed, eliminating the doubt that previously worried lenders, title companies, and transactional parties as to whether a particular series had been properly formed and implemented – or even whether a particular series existed at all.

Transactions Involving Lenders and Title Companies

Lenders in particular have found the status quo to be unsatisfactory, more often than not declining to make a loan directly to an individual series, instead insisting that the LLC at large execute the note and security agreement. Clearly, this practice undermines a principal purpose of forming a series LLC in the first place: to isolate and contain assets and liabilities within individual series and to avoid undesirable spillover (lawsuits, judgment execution, etc.) into other series or the company at large.

The new requirement of a certificate of registered series may serve to eliminate such ambiguities. 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. It 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. The new lending paradigm may be to allow an individual series to be a debtor, but only with guarantees from the company at large and its individual members.

Lesser series – protected series and nominal series – will probably have less commercial utility and versatility going forward. 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 nominal series.

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 will likely become the preferred methodology.

Naming of 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. 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 after June 1st? 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.” One would especially want to show this full name in any warranty deed or any other instrument where the precisely correct name formulation is necessary in order to establish title or maintain a consistent chain of title. 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.

Also: it will now be the case that 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 would reject a certificate of registered series if the distinguishability standard is not met.

Assumed Names for Series

Assumed names are an important part of asset protection and the newly amended law makes significant progress in this area.

“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.” BOC Sec. 5.051.

Amended Section 71.051 of the Business & Commerce Code (B&CC) 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 Sec. 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 key improvement is the express empowerment of protected and registered series to file assumed name certificates. Presently, the Secretary of State follows the entity theory and declines state-level assumed name filings for individual series, accepting them only for the LLC at large. If one wants a series DBA, then it is presently necessary to obtain one from one of Texas’ 254 county clerks. The Secretary of State will be required to change this practice. Again, it is necessary to wait and see what rules and forms the Secretary of State implements in order to be certain of the exact process and procedure.

The prescribed contents of an assumed name certificate are spelled out in B&CC Sec. 71.102. The item of note here is the requirement that the certificate must state the name of the protected series or registered 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. The practical result may be that assumed names for protected and registered series will be somewhat longer than the average DBA, making them more cumbersome to use in day-to-day business (Think of a tenant writing a check to the full name of series DBA).

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.  

What about existing deeds of record into individual series? Should these be corrected if an investor wishes to move to a comprehensive registered series regime?

Yes, that is probably the safest approach to take if one wants all of one’s properties to fall under the umbrella of registered series.

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. It 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 to instruments of conveyance. 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 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.

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. Accordingly, it is recommended a correction instrument for an existing deed into an individual series should be signed and acknowledged twice whenever that is feasible or possible to do.

There are many such deeds on file that simply recite a transfer of property from an investor’s name into an individual series of a series LLC that is owned by that same investor. In such a case it is easy to prepare a correction instrument that involves the investor signing the instrument twice in his two capacities.

Of course to complete this plan, one would also have to update the company agreement to provide for registered series and other aspects of the new law.

New Federal Law: The Corporate Transparency Act and its Potential Effect on Registered Series

Although passed January 1, 2021, the Corporate Transparency Act will be progressively implemented as the U.S. treasury department issues regulations to enforce it. Core regulations are supposed to be in place no later than January 1, 2022.

The stated purpose of the CTA is to crack down on anonymous shell companies that are used by money launderers, terrorists, and criminals. Regulations implementing the statute are still being rolled out, but it is expected that the Financial Crimes Enforcement Network (“FinCEN”) will require new registered entities to report personal information of the “beneficial owners” of the entity, defined as any individual who directly or indirectly exercises substantial control over an entity or owns at least a 25% interest. New entities will be required to report this information directly to FinCEN within two years of formation.

Now that Texas has a category of series that are publicly filed, will individual registered series be expected to report to FinCEN? This is relevant if for no other reason than penalties for non-compliance with the CTA are substantial. Accordingly, new treasury regulations issued this area will be something to keep an eye on. Texas says registered series are not technically separate entities, but it will the opinion of the treasury department that matters on this subject, and it is under no obligation to honor Texas’s interpretation.

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.