Series LLCs in Texas: An Overview

Introduction

The traditional Texas LLC has long been a favorite of real estate investors and others, especially after limited partnerships were made subject to the Texas franchise tax in 2007. Investors who formerly created investment structures based on limited partnerships (with a corporation as general partner) then shifted their focus to LLCs which are cheaper to file and less complicated to manage and maintain. New filings at the Secretary of State reflect that formation of other types of entities is down significantly, while LLCs compose a solid majority of new filings. The LLC is now the dominant entity for small business.

The series LLC is an excellent way for real estate investors to own similar multiple assets since it allows for sorting individual properties into separate and distinct compartments (series). This contrasts with the old method of forming a separate traditional LLC for each asset or property.

Series LLCs were created in Delaware in 1990 and have been available in Texas since 2009. They were initially designed to cater to the mutual fund and asset securitization industries. Since then, series entities have proven their value in real estate investing and may now be formed in at least thirteen states.

Applicable law is found in Business Organizations Code Chapter 101, Subchapter M.

CHARACTERISTICS OF SERIES

Different Series for Different Assets

A series LLC allows an investor to hold assets and liabilities within separate cells or series which effectively operate as sub-companies (Series A, Series B, and so forth). These cells are, for operational and liability purposes, isolated and insulated from one another but still remain within the boundaries of the same legal entity.

Categories of Series

There are three categories of series: registered series, protected series, and ordinary series (BOC Sec. 1.002 (69-b), (77-a), (78-a), and (79-a)).

The most prominent feature of registered series is that—unlike protected or ordinary series—they are publicly filed and disclosed. Although not a separate legal entity, a registered series achieves a level of publicly-recorded credibility comparable to the series LLC at large.

The filing requirement for registered series does not affect ordinary or protected series, which 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.”

For more detail on registered, protected, and ordinary series, see our companion web article on this subject.

Limitation on Liability of Series

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

Notice of Limitation on Liabilities of Protected Series and Registered Series. In accordance with BOC Sec. 101.602, (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 statutory authority for this statement arises from the BOC:

BOC Sec. 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.

Powers of Series

The powers of series derive from 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.

This is a broad (if unspecific) grant of authority. Powers of series may be further expanded by the company agreement so long as these powers does not violate any other BOC provision.

Thus, when there is a solid company agreement in place, an individual series may 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 (and should) operate under its own assumed name.

Additionally, BOC Section 1.201(b)(27) has been amended to include a series within the definition of a legal person.

Series are Not Legal Entities

Even given their considerable powers, series are not considered to be stand-alone legal entities. BOC Section 101.622 states that 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 [italics added].” Accordingly, neither a protected series nor a registered series has any legal existence or power independent of the company at large—so series are not LLCs (and the name of the series may not be followed by the letters “LLC”).

The Texas Comptroller, on its website, states that a “series LLC is treated as a single legal entity. It pays one filing fee and registers as one entity with the Texas Secretary of State. It files one franchise tax report as a single entity, not as a combined group, under its Texas taxpayer identification number.”

SERIES NAMES AND ASSUMED NAMES

Naming of Individual Series

The existing practice of naming series is somewhat loose, with series typically being named “ABC LLC—Series A” or something similar. A naming regime is not restricted to letters or numbers. Occasionally one sees a series named after the property it holds (e.g., the 123 Oak St. Series) although this is not the best practice since the asset held in a particular series may change.\

The law applicable to the naming of registered series is stricter, 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 include the proper name of the company at large (BOC Sec. 101.626). Example:

Alamo Assets LLC—Series A (RS), a registered series of Alamo Assets LLC, a Texas series limited liability company.

Assumed Names for Individual Series

Assumed names, an important part of the overall asset protection process, are available in the case of a series LLC and its individual series. 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 and Commerce Code.” The prescribed contents of an assumed name certificate are spelled out in Section 71.102.

Business and Commerce Code Section 71.051 states that a “person must file an [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.”

Registered series are specifically empowered to file assumed name certificates under Business & Commerce Code Section 71.101. This does not prevent other series from doing the same—if not at the state level then with any of Texas’ 254 county clerks. Refer to our companion web article dedicated to assumed names.

SERIES RECORD-KEEPING AND GOVERNANCE

Series Record-Keeping Requirement

Protections and characteristics associated with series require a level of ongoing maintenance. Records must be maintained “in a manner so that the assets of the series can be reasonably identified by specific listing, category, type, quantity, or computational or allocational formula or procedure” (BOC Sec. 101.603(b)). Implicit in this rule is the idea that assets and liabilities of a series can and should be separate both from the assets and liabilities of other series and those of the company at large. Commingling among these categories should be avoided.

According to Section 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 series record-keeping requirement? As it turns out, not very. Terms like reasonably identified and objectively determined do not call for sophisticated accounting. A well-kept check register with selected annotations should suffice.

Governance of Series

Governance of series is largely a matter of the terms and conditions of the company agreement. The BOC states only the following with regard to series governance:

BOC Sec. 101.608(b). 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.

Although amended in 2022 to include mention of protected and registered series, this is the same governance formula we have been accustomed to with Texas series LLCs since their authorization in 2009.

LIABILITY PROTECTION
FOR MEMBERS AND MANAGERS

Members and managers of a series LLC are protected from series liabilities (and from liabilities of the company at large) that they have not personally guaranteed:

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.

CLASSES OF MEMBERSHIP INTERESTS

When forming an LLC, including a series LLC, it may be useful to establish class A and class B membership categories, both at the level of the company at large and at the level of individual series. In order to accomplish this, the company agreement may provide that in certain situations a particular class or group of members has limited voting rights or no voting rights at all.

Classes of membership interests may be extended to both registered and protected series:

BOC Sec. 101.607. 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.

Ordinary series, it would appear, are not included within the scope of this feature.

HOLDING ASSETS IN A SERIES LLC

Series LLC Versus a Traditional LLC

A series LLC shares core characteristics with a traditional LLC, including the benefit of informal management, an effective liability shield, and pass-through taxation; but a series LLC also segregates and compartmentalize assets and liabilities within individual series. Accordingly, in a series LLC the effect of a lawsuit or judgment is contained within the specific series. This contrasts with a traditional LLC which holds its assets in a collectively vulnerable pool. In any context in which multiple assets are involved, this is a compelling reason to consider a series LLC rather than a traditional LLC.

As an example, suppose there is a foreclosure on a property contained in Series A, and there is a deficiency at the foreclosure sale which results in a judgment. Assuming that the series company and its transactions were properly structured, the judgment would be enforceable only against Series A and its assets, not against the assets of Series B, Series C, or the assets of the company at large.

Note that it is not necessary to implement the series features of a series company unless and until one is ready to do so; until then the company operates exactly like a traditional LLC. Accordingly, there is generally no downside at the formation stage to choosing to form a series LLC rather than a traditional LLC. One can always defer implementation of series until a later time.

What sort of assets should be placed within the same series LLC?

Notwithstanding the broad statutory grant of powers to series, prudent asset protection practice suggests that one should think carefully before mixing and matching different asset types within the same company—even a series company. Nearly all asset protection advisors consider this to be a bad idea, instead preferring to keep like with like. As a general rule, one should not place an asset or enterprise into a series that:

(1) is significantly different in kind or nature from assets in other series of the company, it being recommended that “like should be kept with like” within the same entity—this core principle remains valid whether the entity is a series LLC or a traditional LLC;

(2) creates a much higher level of liability or potential for lawsuits than assets in other series;

(3) has a significantly different debt structure (involving blanket development loans, personal guarantees, and the like) than assets in other series, which statistically increases the possibility of lawsuits;

(4) receives significantly different tax treatment from assets in other series or is involved in a payment plan with the IRS;

(5) mixes management functions with holding functions within the same entity (it is a core principle of asset protection that these functions should be entirely separated); or

(6) falls into the category of a single-purpose entity (SPE). Examples of SPEs are restaurants, retail outlets, strip centers, apartment complexes, unique financial or technology investments, start-ups, etc. These are better placed in a separate, stand-alone LLC dedicated to a specific purpose.

Merely because the BOC permits entirely different assets or enterprises to be contained within the same LLC does not mean that one actually should do so. Consider someone who wants to put an investment cash account into the same entity (perhaps in a different series) as liability-rich rental properties. While this is legally permissible, it is just not prudent. There is not an asset protection advisor on the planet who would suggest mixing such disparate assets within the same entity, even if that entity is a series LLC.

How many properties may be held in a series LLC?

While the statute permits a series LLC to have an infinite number of series, caution suggests there should be a limit. It is common to use alphabetic nomenclature for series (series A, series B, etc.); so when an investor has filled Series A through Series Z—that’s 26 assets—it is well past time to consider forming another holding entity. Asset protection is a careful enterprise. In our opinion, no more than 10 or 15 properties should be held in a single entity, even a series LLC.

The Two-Company Structure

It is a core principle of asset protection to divide activities (the management function) from assets (the holding function). This is especially true for investors with multiple assets and enterprises. There is no single more important step in maximizing asset protection than forming a two-company structure. It is far more important than (say) choosing any particular state as the primary jurisdiction for LLC formation.

In the classic two-company structure, a series LLC acts as a holding company alongside a traditional LLC management company that handles all public-facing duties. These functions should not overlap. Unlike the management company, the holding company (where hard assets reside in individual series) should remain invisible to potential plaintiffs. Ideally, plaintiffs should not even know that the series LLC holding company exists.

Conclusion

Implementation of series LLCs in Texas has solidified Texas’ already deserved reputation as an excellent place to do business and engage in asset protection.

The series LLC is ideal for real estate investors who wish to avoid a proliferation of entities in their entity structure. A series holding company is especially effective when used alongside a traditional management LLC as part of the classic two-company asset protection structure.