Texas Series LLC
The Series Limited Liability Company (“Series LLC”) was first introduced in Delaware in 1996. Although many states allow for the formation of Series LLC, few still do not. The Series has been valid in Texas since 2009. The Texas Business Organization Code (BOC) controls and regulates the formation and maintenance of a Texas Series LLC under Tex. Bus. Orgs. Code Ann. §§ 1.001 et seq.
WHY CHOOSE A SERIES LLC?
For real estate investing holding purposes, a Series LLC is a means to own multiple real estate assets under one entity. It allows the investor to separate each property into groups that are distinct and insulated from each other from liability.
Generally, it is a limited liability company that has multiple series (from A-Z) where each series can be organized differently and as needed. That is, each series of a Series LLC may have a different characteristic of a separate LLC.
How it works: The investor has assets and liabilities in each series which act for many practical purposes as separate companies. These series are not stand-alone companies but act as if they are because Texas has empowered them to. The Series LLC typically remains a single entity for purposes of formation and taxation.
WHAT ARE THE RIGHTS OF A TEXAS SERIES LLC?
A Texas Series LLC may conduct any lawful business, activity or purpose for profit or not for profit. However, it may not operate as a bank, trust company, savings association, insurance company, cemetery organization, or title company (Tex. Bus. Orgs. Code Ann. §§ 101.601(b) and 2.003 et)
A particular series is a series within a Series LLC that has the power to sue or be sued; contract; buy, sell, and hold title to properties; be an organizer, partner, member, or manager of an association; and exercise any powers appropriate to conduct or promote the achievement of the business or purpose of the series.
HOW DOES A SERIES LLC PROTECT REAL ESTATE INVESTORS?
Texas Series LLC law does not put a cap on the number of series that can be housed in a single Series LLC entity. But a savvy investor will not place all his or her eggs in one basket. A prudent investor will seek guidance from a reputable real estate lawyer to determine exactly what number of series is appropriate. If you only have one investment property, you can delay the other series activation until a future time. Generally, investors plan to acquire other assets or businesses in the future. Until such time where an investor has multiple assets, the Texas Series LLC will merely act as a regular limited liability company (an “LLC’) unless suggested otherwise by your Texas real estate attorney.
HOW IS EACH SERIES PROTECTED FROM LIABILITY?
An individual series is not liable for the obligations and liabilities of other series or the Texas Series LLC as a whole. Each individual series’ records must be maintained and can only account for the assets or businesses associated with that Series separately and apart from other assets of the Series LLC or any other series
How it works: Each individual series can hold assets or businesses separate and apart (it is treated as if separate companies own the assets or businesses). A series avoids liability because each individual series is only responsible for its own obligations and wrongdoing. Each series is also protected from the obligations and liabilities of the series LLC as a whole.
WHY SHOULD INVESTORS CATEGORIZE OR SEPARATE SERIES ASSETS?
Texas Series LLCs have the flexibility to separate assets within one legal entity without the expense and requirements of forming multiple limited liability companies in order to separate the assets. Many real estate investors will be inclined to separate different assets or businesses within the same company where mixing and matching those businesses will: a) cause an increased level of liability; b) generate a greater amount of debt or c) increase taxation treatment.
By grouping your many assets or businesses in different series you will rest assured that each asset is safely protected without any exposure to outside liability. Each asset or business can only be affected by its group’s obligation or liability. Before the 2009 revelation of Texas Series LLC, investors or owner of various businesses was tasked of with forming multiple “single-purpose LLCs to ensure the same protections [main disadvantage was the added cost of formation and time]. Note: Foreign Jurisdictions – consider holding those assets (and liabilities) in a separate and traditional
LLC, especially if the foreign jurisdiction does not recognize series LLCs.
HOW DO I FORM A TEXAS SERIES LLC?
To form a Series LLC in Texas, an organizer must file a certificate of formation with the Texas Secretary of State (SOS). The company agreement may establish, or provide for the establishment of, one or more series of members, managers, membership interests, or assets that have either separate: (a) Rights, powers, or duties for specified property or obligations or profits and losses associated with specified property or obligations or (b) business purposes or investment objectives.
Maintain records for one series clearly and separately. This helped account for assets associated with that series separately from other assets of the series LLC. You must be able to reasonably identify assets of the series specifically. Mixing records of any of the series expose both series to the liability of each other’s obligations.
Filing an assumed name certificate serves to inform any third party doing business with the company that the company is doing business by and through one of its series.
Written by Willie O. Boaz, intern with The Farah Law Firm, PC
Charlotte School of Law, JD
Brenau University, MBA – Real Estate