In this article, we’ll talk about one of the most misunderstood business entities in Texas: The Texas Series LLC.
While there’s a lot of information here, we strive to explain how and why the Texas Series LLC became a favored business entity for real estate investors.
If you have any questions or are considering setting up a Texas Series LLC, feel free to give us a call at (817) 677-1199 (Monday – Saturday, 9:00 AM to 9:00 PM). Through our online model, we effectively and efficiently serve clients throughout the State of Texas.
Table of Contents
In Texas, a Series LLC is a variation of the Traditional Texas LLC business formations model. Primarily, the difference between a Traditional Texas LLC and a Texas Series LLC is that the Series LLC includes statutory language from the Texas Business & Organizations Code (TBOC) in the Certificate of Formation and Company Agreement that permits the Series LLC to create a theoretical unlimited number of “series” within the legal framework of a single LLC. In our practice and in this document, we refer to these “series” as a “protected series.” “Protected Series” is a term used by the Uniform Protected Series Act (UPSA), which we will go into further detail in the section pertaining to the naming of a protected series.
Each series of a Texas Series LLC has the independent traits and characteristics of a Traditional Texas LLC, but is managed under the purview of the Master LLC (a/k/a the Series LLC). When referring to a “Series LLC,” the term “Series LLC” specifically refers to the actual master LLC, and the term “series” describes each unit within the Series LLC.
In general, a Texas Series LLC’s can avoid numerous costs and inefficiencies associated with the creation of multiple related traditional Texas LLCs or other entities by its ability to divide assets and liabilities into different series (or units), within one master LLC. In particular, historical use has shown that Texas real estate investors who hold multiple properties are generally the ideal business formations candidates to use the Texas Series LLC.
Before the Texas legislature became one of the few states in the United States to enact statues for creating the Series LLC, Texas real estate investors often had to decide between forming a business entity, such as an LLC for each individual property they owned, or holding title to multiple real properties within one business entity. Before the Texas Series LLC, the first option was largely a headache due to the high costs associated with forming entities for each property and keeping up with the required tax filings for each specific entity.
However, the second option was also not viable from an asset protection standpoint due to the fact that owning multiple properties within one traditional Texas LLC would render all properties subject to the liabilities of that one Texas LLC. Simply put, if you own multiple properties within one traditional Texas LLC and got sued because of one specific property, you risk all of your properties in that lawsuit being subject to a judgment.
Today, the Texas Series LLC has become one of the preferred business formation entities for real estate investors. Now, real estate investors can streamline the administrative side of managing an LLC by simply registering and paying for one business entity, but also be afforded the liability protection that would normally require multiple business entities to achieve. Because the Texas Series LLC allows for each specific property to be owned by a separate protected series of the master LLC, it provides for asset protection for your other properties in the event you are sued, provided that all properties are owned by a different protected series and all TBOC required formalities and record keeping are observed. Specifically, if one particular protected series is sued, the remaining properties (assets), and the real estate investor personally, would be insulated from the lawsuit affecting that specific protected series.
Defining a Texas Series LLC
The Texas Series LLC shares similar characteristics and functions with the traditional Texas LLC, such as informal management, pass-through federal taxation, and an effective liability shield if all record-keeping requirements and formalities are observed. However, a Series LLC distinguishes itself by its ability to divide, compartmentalize, and segregate assets and liabilities within individual series of the company. As a result, this offers a business owner more flexibility and significantly more asset protection if all formalities and record-keeping requirements are observed.
The significant difference between a traditional Texas LLC and a Series LLC is the degree of asset exposure each type of business entity allows. For instance, if you own a traditional LLC, get sued, and have a judgment filed against the LLC, all assets of the LLC will be available to satisfy the judgment. However, if you own a Series LLC and an individual series has a judgment filed against it, judgment creditors can only look to that specific series to satisfy that judgment. Basically, the liability is contained within that specific series that was sued and liability does not affect any other series, the master LLC, or you as an individual. Granted, asset and liability protection begins and ends with how well you follow proper record-keeping and formality requirements.
A Texas Series LLC allows an owner to divide assets and liabilities into separate series, often called “cells,” “series”, or “protected series,” which essentially function as sub-companies of the Texas Series LLC. It’s important to note that while the protected series of a Series LLC function as sub-companies, Section 101.633 of the Texas Business Organizations Code (“TBOC”) clearly indicates that individual series are not recognized stand-alone entities in the state of Texas.
Section 101.605(5) of the TBOC defines a protected series as statutorily authorized to:
- 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, purposes, or activities of the series.
Furthermore, a protected series can obtain a Federal Employer Identification Number (FEIN) from the Internal Revenue Service (IRS) in the name of the series, if it chooses. Additionally, an individual series can choose to operate and be treated separately for federal income tax purposes. An individual series can also open and maintain a bank account, if it chooses.
When an individual series is created, an assumed name certificate should be filed with the Texas Secretary of State and the county in which the series’s business is located. In general, filing an assumed name certificate should be approximately $50.00.
Regarding state taxation, the Texas Comptroller has stated 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.” Essentially, this means that the master LLC pays $300 to register with the Texas Secretary of State, receives only one Texas taxpayer identification number for the master LLC, and files only one franchise tax report as the master LLC.
Finally, Section 1.201(b)(27) of the Texas Business & Commerce Code has been recently amended to define a series of a Series LLC within the definition of a legal “person.” This is an important update to Texas’s UCC statute because this definition of person is incorporated in the Texas UCC definition of debtor. This means that if an individual series owns assets that are secured by a debt, then the individual series can (and should) be named on the UCC-1 financing statement that is required to perfect the lender’s security interest in the property. Before this change to the Business & Commerce Code, Series LLCs were often exposed to liability because the master LLC was often listed on the UCC-1 financing statement, instead of the individual series. This update closes that loophole and ensures that the master LLC and/or any other series won’t be exposed to the debts of one series under Texas’s UCC statute.
Statutory Authority for the Texas Series LLC
Like the traditional Texas LLC, limited partnerships, and corporations, the Series LLC is governed by Chapter 101 of the TBOC. Since the Texas Series LLC was authorized by the 81st Texas Legislature in 2009, subsequent amendments were made to further enhance Texas’s reputation as a state that is amenable to business and recognizes the importance of asset protection.
In Texas, Series LLC statutes begin with Sections 101.601 and 101.602 of the TBOC:
“§ 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) may carry on any business, purpose, or activity, whether or not for profit, that is not prohibited by section 2.003.
§ 101.602. Enforceability of Obligations and Expenses of Series Against Assets
(a) Notwithstanding any other provision of this chapter or any other law, but subject to Subsection (b) and any other provision of this subchapter:
(1) the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to a particular 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 series.
(b) Subsection (a) applies only if:
(1) the records maintained for that particular series account for the assets associated with that series separately from the other assets of the company or any other series;
(2) the company agreement contains a statement to the effect of the limitations provided in Subsection (a); and
(3) the company’s certificate of formation contains a notice of the limitations provided in Subsection (a).
Added by Acts 2009, 81st Leg., R.S., Ch. 84, section 45, eff. September 1, 2009.”
Formation of a Texas Series LLC
Breaking Sections 101.601 and 602 down, the TBOC indicates that to properly establish a Series LLC in Texas, several requirements must be met:
- The LLC’s Certificate of Formation must contain a notice of limitation of liability with respect to the LLC’s series (tracking Section 101.602);
- The LLC’s Company Agreement must contain a statement regarding the limitation of liability with respect to the series; and
- The LLC’s records for an individual series must account specifically for the assets associated with that individual series separately from the other assets of the LLC or any other series.
Regarding the Certificate of Formation requirements, Section 101.604 of the TBOC requires that specific language be drafted in the LLC’s Certificate of Formation.
Specifically, Section 101.604 of the TBOC states:
The subsections of Section 101.604 indicate that an LLC does not need to establish any specific number of series when drafting a notice regarding Series LLC limited liability in a Certificate of Formation. Additionally, the notice in the Certificate of Formation does not need to make reference to any specific series. Thus, it is possible to draft a general notice regarding Series LLC limited liability and the required statutory language in a Certificate of Formation in cases where the LLC is not initially structured as a Series LLC. This would allow the LLC future flexibility to establish series within the LLC without the need of paying $150 for a Certificate of Amendment.
A well-drafted Certificate of Formation is the perfect opportunity to put notice to the world that the LLC has a comprehensive asset protection plan in place. As a result, lean Certificates of Formation, often originating from internet forms and LLC formation services not overseen by attorneys knowledgeable in Series LLCs and asset protection can often have disastrous results. These forms and services are rarely adequate for any serious form of asset protection, and almost always fall short in the stringent requirements needed to form a Texas Series LLC. In fact, most of these services do not properly track the Certificate of Formation requirements under Section 101.602 and lead people to believe that they have indeed formed a Series LLC, when in fact they have not.
Recently, we assisted a client that used one of these readily available services and discovered that he operated for over a year under the presumption that the form service had drafted appropriate Series LLC requirements in the Certificate of Formation, when in actuality, it was entirely deficient. Unfortunately, the client ended up spending twice as much as it would have cost to properly set up a Series LLC to correct the mistakes of the cheaper form service.
While it is possible to convert an existing traditional Texas LLC to a Series LLC via a Certificate of Amendment, almost all of the existing company documentation (company agreement, organizational minutes, etc.) will need to be rewritten to accommodate the statutory requirements of the Series LLC. In short, it isn’t very cost-effective to convert a traditional LLC to a Series LLC. Furthermore, a conversion of this type is generally not recommended if the traditional LLC has debts, contractual obligations, tax liabilities, and/or pending or threatened litigation.
Overall, it’s much simpler and safer from an asset protection standpoint to start a Series LLC as a new entity. However, we do offer a Texas Series LLC Conversion service to clients with established Traditional LLCs and little to no liabilities for a flat rate of $449 plus $150 Texas Secretary of State filing fees. Costs for establishing protected series, and/or changing the LLC’s name are extra.
Converting a Traditional Texas LLC to a Texas Series LLC
In general, the following list is needed to appraise the current status of the traditional Texas LLC and determine the necessary steps toward conversion to a Texas Series LLC.
- Thoroughly review the existing Texas Traditional LLC’s Certificate of Formation;
- Determine which provisions, if any, in the existing Texas Traditional LLC’s Certificate of Formation must be amended or deleted;
- Determine which provisions, if any, must be added to the existing Texas Traditional LLC’s Certificate of Formation to successfully convert it to a Texas Series LLC. Specifically, under the Texas Business Organizations Code, a Texas Series LLC’s Certificate of Formation must contain notice of series limitations as provided in Section 101.602(a) of the Texas Business Organizations Code;
- Adopt a plan of conversion from a Traditional LLC to the Series LLC as required by Section 10.101 et. seq. of the Texas Business Organizations Code;
- Order a Certificate of Account Status from the Texas Comptroller;
- Once the plan of conversion is approved by members or managers (whatever the case may be in the LLC’s Certificate of Formation), draft a Certificate of Amendment with Texas Series LLC provisions;
- Complete the Texas Secretary of State Form 424 (Certificate of Amendment) and include applicable Series LLC provisions;
- Draft a amended and restated Operating Agreement for the master LLC and draft Series Operating Agreements for any series created (be sure to include specific articles regarding Series LLC protections and methods for creation of a new protected series;
- Ensure that these steps are properly recorded in Minutes of Meeting for the LLC; and
- Create new protected series in accordance with the newly drafted Operating Agreement with Series LLC provisions.
Texas Series LLC Insulation
As stated earlier in this article, a Texas Series LLC contains individual series in which assets may be held separately from other assets held by the master LLC or other series of the company. Let’s look at an example where a real estate investor owns multiple properties that are a mixture of residential and commercial. Let’s say the real estate investor structures the properties as such:
- Series A – contains a residential duplex;
- Series B – contains a commercial strip mall;
- Series C – contains a single-family residential home;
- Series D – contains a business solely for the purpose of buying and selling real estate notes.
As these different assets and business structures are spread throughout the individual series of the LLC, each series will be insulated from another series, in addition to being insulated from the assets and liabilities of the master LLC.
Now, let’s say that the real estate investor falls on hard times and the single-family residential home in Series C goes through foreclosure. At the foreclosure sale, there is a deficiency (the property is sold less than the amount owed to the lender). Afterwards, the lender sues and obtains a default judgment against Series C. This judgment would only be enforceable against Series C assets. The assets of Series A, Series B, Series D, and the master LLC would be insulated from the default judgment.
Now, the result would be very different if the real estate investor had all the properties and the leasing company under the umbrella of a traditional Texas LLC. The lender’s default judgment could reach all the properties, the assets of the real estate note business, and any other assets held by the LLC. In short, this type of scenario is one of the most compelling reasons to establish a Series LLC to divide and limit liability.
It’s also important to note that the master LLC can own property as the company at large. In short, not everything must be apportioned to an individual series. The master LLC can transfer property into “XYZ, LLC,” which would render the property a general company asset due to the fact that a specific series was omitted in the transfer documents. It’s also important to note that series designations must be listed in transfer documentation specifically to ensure that they are legally transferred to the specific series for which the property was intended.
Texas Series LLC Assets
Deeding Real Estate to a Texas Series LLC
If practicable, investment or rental properties should be acquired directly in the name of an LLC. With a two-company LLC structure (one traditional LLC acting as a management company and a series LLC acting as a holding company), the best method of acquiring rental or investment property is to acquire properties in the name of the management company. After closing and rehab (if necessary), investors should then transfer the properties into individual series of the series LLC (holding company). For optimal asset protection, each property should go into its own individual series.
However, some lenders require that a real estate investor take title to investment properties in his/her personal name due to underwriting concerns. If an investor runs into a scenario like this, it would best to immediately transfer the investment property into an individual series of the holding company after closing.
When deeding property into an individual series of a Texas Series LLC, the deed should be absolutely specific as to which individual series the property is being transferred to. For instance, deeding the property to “XYZ, LLC” will simply deed the property to the master LLC, which will not be protected by series insulation. Instead, deeding property to an individual series should specifically mention the series, such as “123 Main Street, an individual series of XYZ, LLC, a Texas series limited liability company” Additionally, it is wise to include wording from the TBOC regarding Series LLC protections in the deed to put the public (and potential plaintiffs) on notice that the property was transferred into an individual series of a Texas Series LLC.
Naming a Protected Series of a Texas Series LLC
One of the most common questions our firm receives about the Texas Series LLC is how to name each protected series It’s important to note that the TBOC does not mention any specific naming convention, nor does it provide guidance on the matter. In Texas, attorneys differ on their recommendations of naming a protected series. Some attorneys recommend naming conventions with letters, such as “XYZ, LLC – Series A.” This approach works if you have a limited number of assets and do not anticipate having more than 25 individual protected series. Other attorneys recommend using numerals, such as “XYZ, LLC – Series 101, Series 102, etc. Our issue with this approach is that it does not give the real estate investor a simple and efficient means in which to readily identify the assets of each series.
Our recommendation that we advise clients who do not have a preference on naming conventions is to name each protected series after the property address that each protected series holds. For instance, if you own 123 Main Street in Waco, you would name the protected series, “123 Main Street, a protected series of XYZ Holdings, LLC, a Texas series limited liability company. This naming convention helps readily identify the asset and provide clear notice that the series is a protected series of a Texas series limited liability company.
For clients who like this approach, but wish to truncate the name length, we recommend “123 Main Street, a protected series of XYZ Holdings, LLC.” While this truncates the information identifying the LLC as a Texas series limited liability company, it still provides a naming convention that assists a real estate investor in readily identifying the assets of a particular series. If a real estate investor chooses this particular naming convention, we highly recommend that the phrase “a Texas series limited liability company” be appended to the end of the protected series name on any warranty deeds to provide notice to the world that the series is a protected series of a Texas series limited liability company.
Protected Series of a Texas Series LLC and FEINS
Another unresolved aspect of Texas Series LLCs is whether each protected series must have a separate Federal Employer Identification Number (FEIN) issued by the Internal Revenue Service (IRS). However, it is very clear that if a protected series wishes to open a bank account, they must apply for and obtain an FEIN.
In 2010, the IRS issued Proposed Regulations that indicated each protected series should be treated as a separate entity for purposes of federal income taxes. However, the IRS’ Proposed Regulations are vague and do not address filing requirements or entity status of protected series and a Series LLC for federal income tax purposes though. In general, a Series LLC is considered an entity for local and state law purposes. And, if a Series LLC is considered an entity for local and state law purposes, it is generally treated as an entity for federal income tax purposes.
However, it is possible that an organization that is characterized as an entity for federal income tax purposes may not have a filing obligation for income or information tax purposes. For example, Sections 301.6031(a)-(1)(a)(3)(i) indicates that a partnership with no income, deductions, or credits for purposes of federal income tax for a taxable year is not required to file a partnership return for that taxable year.
All this leads to one analysis of the IRS’s Proposed Regulations: each protected series of a Texas Series LLC will be treated as a separate entity for federal income tax purposes, if and when the Proposed Regulations are implemented. This means that each protected series will be classified under the “check-the-box” regulations that govern Traditional LLCs, and each protected series may make federal tax elections it is eligible to make separately and independently of the Master LLC and any other protected series.
The potentialities for each protected series to make individual federal tax elections highlights the importance of a properly drafted Operating Agreement for the master LLC and Series Operating Agreements for any protected series. Due to tax regulations and specificity regarding membership interest and accounting, scenarios may present themselves where a master LLC is taxed as a partnership, protected series A is taxed as an S-Corporation, and protected series B is taxed as a C-Corporation. Each requires specific and individually tailored language in their respective Operating Agreements to ensure that the federal tax elections taken for each entity are properly documented and will be respected by the IRS under audit. This leads us to caution against Series LLC creation services who routinely recommend including protected series creation language without detailing a strict requirement for creating individual Operating Agreements for each protected series. While this may be efficient short-term, we have often encountered clients who took an S-Corporation election only to find out that their Operating Agreement did not include the requisite language reflecting membership interest and accounting for an S-Corporation. In general, remedying this requires an overhaul of the Operating Agreement.
Finally, implementation of the IRS’s Proposed Rules indicates that any protected series will be required to have a separate EIN. As a matter of course, we highly recommend to our clients that they obtain an EIN for banking purposes and recognize the eventual implementation of the IRS’s Proposed Regulations. Furthermore, we recommend clients consult with a CPA acquainted with the IRS’s Proposed Regulations to make a decision as to how they should file federal income taxes for their Series LLC.
Acquiring an EIN for a Protected Series of a Texas Series LLC
When you apply for an EIN on the online IRS’s EIN Assistant tool, you must provide the full legal name of the LLC applying for the EIN. While this is simple for the Series LLC (master LLC), this presents a problem for any protected series of the Texas Series LLC. Specifically, the IRS’s online EIN Assistant tool will not allow you to use subsequently use the master LLC’s name on subsequent applications for each protected series.
For example, if you registered an LLC with the name “XYZ, LLC,” you would use “XYZ LLC” on the IRS’s EIN Assistant tool. Please note that the IRS’s EIN Assistant tool does not permit the use of special characters. But, how do you acquire the EIN for the first protected series of the LLC when the IRS does not allow subsequent use of the same LLCs name and does not currently have a means for designating an EIN for a protected series?
Our method of obtaining an EIN for a protected series involves using both the LLC’s name and the protected series name in the EIN application. For example, we’ll say that we’re trying to obtain an EIN for “555 Main Street, a protected series of XYZ Holdings, LLC, a Texas series limited liability company.” We would input the following into the IRS’s EIN application tool: “555 MAIN ST a series of XYZ HOLDINGS a Texas series LLC.” We have an alternative method for clients that prefer to use letters or numbers, such as: “XYZ Holdings, LLC – Series 105,” In this case, we would enter the following into the IRS’s EIN application tool: “XYZ HOLDINGS LLC – Series 105.” Note that the “-” is one of the few special characters that the IRS’s EIN obtainment application recognizes.
Additionally, we have several areas we specifically detail on IRS Form SS-4. First, we generally designate one member as the “Responsible Party” for the master LLC and all protected series. Second, we specifically indicate that the EIN requested is for a separate series of a Texas series LLC on “Type of Entity.” Finally, if the EIN is being obtained for banking purposes, we note that the protected series is a “Holding Series.”
Termination of a Texas Series LLC Protected Series
First, the TBOC addresses wind ups of LLCs in two different locations: Chapter 11 (pertaining to Termination of Domestic Entities) and Chapter 101 (pertaining specifically to Texas LLCs).
In the case of a Texas Traditional LLC, winding up typically involves three steps: (1) an event causing a wind-up (typically voluntary or a specific event described in the operating agreement), (2) providing notice to creditors, if any; and (3) filing a Certificate of Termination and a Certificate of Account Status with the Texas Secretary of State.
In the case of a protected series of a Texas Series LLC, dissolving a protected series differs from a Traditional LLC or the Series LLC (Master LLC) because a protected series is not viewed as an actual filing entity by the Texas Secretary of State or the Texas Comptroller of Public Accounts. As a result, winding down a series involves only two steps: (1) an event causing a wind-up (typically, a voluntary decision or a specific event, such as the sale of real estate the series was holding); and (2) providing notice to creditors, if any.
Section 11.103 of the TBOC appears to confirm this concept as it states: “a non-filing entity terminates on the completion of the winding up of its business and affairs. Notice of the termination must be provided by the non-filing entity in the manner provided in the governing documents of the non-filing entity if notice of termination is required under the governing documents.” Furthermore, Sections 101.614 – 101.622 of the TBOC specifically detail the wind-up procedures related to a protected series of a Texas Series LLC. Most protected series operating agreements include wind-up procedures that track both Chapter 11 and Sections 101.614 – 101.622 of the TBOC. In the absence of specific wind-up provisions in a protected series operating agreement, you would need to look to the Operating Agreement of the Series LLC (master LLC) and the TBOC for guidance.
In our practice, we generally advise clients to formally create protected series by proper documentation of corporate formalities and execution of a protected series operating agreement. Furthermore, if a protected series is created for the sole purpose of holding investment property that may be sold (flipped) within 18 to 24 months, we generally recommend adding a specific event for wind-up that forces the protected series to immediately wind up upon the sale and disposition of all assets of that specific protected series. Due to the limited amount of case law involved with buying and selling properties and placing them in the same protected series, our firm recommends that investors voluntarily wind-up a protected series upon sale of its asset to prevent any unnecessary Plaintiff’s arguments for commingling assets and/or attempts at piercing the corporate veil that could, at the very least, increase the scope of discovery against a protected series to include all the corporate dealings and assets of the master LLC and any other protected series.
Problematic Assets and Business Models
Business owners should exercise caution when considering whether to incorporate entirely different businesses within the same Series LLC. In general, it’s not wise to place an asset or business in an individual series that:
- Has significantly different federal and/or state tax treatment from other protected series (while it is possible, this has the potential for issues with the IRS, unless each protected series is properly documented);
- Has back taxes due and owning and/or is currently on a payment plan with the IRS;
- Operates under a significantly different debt structure than other individual series, such as debts that require personal guarantees and/or development loans;
- Is a business model that creates or has a much more significant level of liability or potential for lawsuits than businesses in other individual series; and
- Is a business model that serves as a management entity with public exposure (vendors, contractors, tenants, etc.), as this type of function is best incorporated in a separate LLC from the Series LLC (while it is possible to create a management series and other holding series under the same Series LLC, it is strongly discouraged).
If you have a business model and/or assets that meet any of the aforementioned characteristics, it would be wise to place them in a separate traditional Texas LLC, apart from the Series LLC. These types of assets and/or business models are often referred to as “single purpose entities
in the asset protection community. Other examples of single purpose entities are: residential and/or commercial management companies, retail stores, and restaurants. Finally, just because the TBOC allows different business models and asset structures to exist within the same Series LLC does not always mean that it’s a wise idea to do so.
For long-term Texas real estate investors, two LLCs are recommended for optimal asset protection. One traditional LLC would function as a management company, and the other Series LLC would function as a holding company for the investor’s properties. It’s important to note that the holding company does not enter into business dealing and contracts outside of transferring properties to each individual series. This generally makes its assets unreachable in most cases, if proper record keeping is followed.
Texas Series LLCs and Assumed Names (DBAs)
Filing a DBA for One of The Protected Series
Briefly referring back to the powers of an individual series under Section 101.605 of the TBOC, an individual series has the powers to:
- File suit and be sued;
- Ability to independently contract as an individual series; and
- Ability to hold title to personal and real property.
In order for the individual series to fulfill these functions and powers at the protected series level, a series must hold title and/or operate under its own name. For instance, if the name of your protected series is “XYZ, LLC – Series A,” you would be required to file an assumed name certificate for “XYZ, LLC – Series A.” Filing an assumed name certificate for a protected series is required because technically, an individual series is not an independent legal entity, and as a result, it is operate under an assumed name other than what is listed in the master LLC’s Certificate of Formation. Thus, an Assumed Name Certificate must be filed for each protected series.
Furthermore, to fully comply with Section 71.103 of the TBOC, the Assumed Name Certificate filing must be filed with the Texas Secretary of State. Previously, Assumed Name Certificates were required to be filed in the county in which the protected series primarily conducts business. However, the 86th Legislature in 2019 passed H.B. 3609, which removed the local (county) filing requirements for business entities that are required to register with the Texas Secretary of State, such as the Traditional Texas LLC and the Texas Series LLC. Basically, one only needs to file an Assumed Name Certificate with the Texas Secretary of State to comply with the TBOC. H.B. 3609 went into effect September 1, 2019.
Protected Series Filing a DBA
Another common question regarding Series LLCs and Assumed Names is whether an individual series that has already filed an Assumed Name Certificate can also file an Assumed Name for that specific series. For example, if “XYZ, LLC – Series A” has already been registered with both the Texas Secretary of State and the county in which it does business, can Series A now file an Assumed Name Certificate as “102 1st Street Holdings?”
The Texas Secretary of State has routinely rejected these Assumed Name Certificate filings under the following logic: “Our records do not show an entity by the name shown on the document which was submitted for filing.” In short, the Texas Secretary of State is saying that a protected series of a Texas Series LLC is not an independent and separate legal entity, and thus, does not have the right to file an Assumed Name Certificate. Basically, a protected series of an Texas Series LLC cannot have an assumed name, at least at the state level.
However, counties are more lenient and routinely allow these types of filings. From an asset protection standpoint, filing this type of Assumed Name Certificate helps add a degree of anonymity to a protected series of a Texas Series LLC, and should be done if possible. Furthermore, this allows the individual series to lawful print stationary and business cards under an assumed name such as “102 1st Street Holdings” without the need for disclosure that the entity behind “102 1st Street Holdings” is actually “XYZ, LLC – Series A.”
Furthermore, while we strongly discourage clients from creating a management series and instead recommend they create a separate Traditional Texas LLC to act as a management company for their properties, we generally recommend if clients create a management series, they file an Assumed Name Certificate at the county level to provide another level of anonymity. For example, if a client sets up “XYZ, LLC” and has “XYZ, LLC – XYZ Management,” we recommend they file an assumed name as “XYZ Management,” or some derivative thereof. Furthermore, we highly advise that clients operate the management series under the assumed name and acquire business cards, tenant lease agreements, and any other contracts under the name of the assumed name only.
Series DBAs and Banks
Filing an Assumed Name Certificate for a protected series is vitally important if the protected series wishes to open a bank account specifically and solely for the use of the protected series. For instance, if “XYZ, LLC – Series A” wants to open a bank account under the name, “XYZ, LLC – Series A,” then they will need to file Assumed Name Certificates with the Texas Secretary of State, as of September 1, 2019.
Due to 2019’s H.B. 3609, banks may continue to be reluctant to open a bank account for a protected series without filing an assumed name certificate at the county level. Since H.B. 3609 went into effect, we have counseled numerous clients regarding this legislative update and while most banks acknowledge this change and proceed with only an assumed name certificate filed with the Texas Secretary of State, we have encountered a few banks that are resistant to this update.
Here’s another scenario: let’s say that “XYZ, LLC – Series A” wants to do business as “102 1st Street Holdings,” a bank will typically require an Assumed Name Certificate filed with the county in which Series A operates under the assumed name, “102 1st Street Holdings.” This is common practice and will not be affected by H.B. 3609.
Also, banks are often misinformed about the state filing requirements for a protected series of a Series LLC in Texas. In our practice, we’ve routinely encountered bankers who believe that a protected series must file a Certificate of Formation for an individual protected series in Texas. While this information is correct for a traditional LLC and/or a Master Series LLC, this is not correct for a protected series of a Texas Series LLC. Some states require filings for protected series, but Texas is not one of them.
A protected series in Texas does not file a Certificate of Formation, but it does file a Certificate of Assumed Name with the Texas Secretary of State. By and large, banks who are aware of the TBOC’s requirements for a Texas Series LLC generally require an assumed name certificate and an EIN to open an an account solely in the name of a protected series.
It’s important to stress that forming a Texas Series LLC, creating protected series, but failing to file Assumed Name Certificates and conduct business under those assumed names is considered incomplete for purposes of asset protection. Business owners and investors should conduct as much business activities as possible under an assumed name. It’s simply not wise to make it easy for a potential plaintiff’s attorney to easily find the identity and location of the true business owner and/or investor behind a transaction or business entity.
Texas Series LLCs, Assumed Names, and Title Companies
First, it must be noted that many lenders and title companies are new to dealing with real estate transactions involving Texas Series LLCs, so this is an ever-changing niche area of business and real estate law.
Title companies generally require an LLC to provide a certificate of good standing, regardless of whether the LLC is a traditional Texas LLC or Texas Series LLC. Many title companies are persistent and uncompromising about this requirement. Some title companies may even demand a certificate of good standing (sometimes called a “Certificate of Fact”) for an protected series, which is impossible to provide, as Certificates of Fact are only obtainable for the Texas Series LLC (Master LLC). Title companies that harbor these views indicate a significant misunderstanding of the Texas Series LLC concept and the TBOC.
Due to the fact that individual series are created privately, without state or public filing, no official means exists to establish that an individual series (not the master LLC) is in good standing with the state of Texas. In these situations, we typically advise clients to obtain a Certificate of Fact for the Texas Series LLC and then politely direct the closing agent to the Series LLC Operating Agreement provisions that allow for the creation of the protected series in question, provide documentation of the creation of the protected series (if available), and show the closing agent the specific protected series operating agreement. In our opinion, it is best to create the protected series and all applicable documentation before closing to prevent unnecessary issues like this.
Reasonable minds differ as to whether a protected series should be created before deeding property, and some scholars in this specific niche of business organizations argue that the creation of a series can be evidenced by the deeding of a property to a new protected series. However, based on our experience with title companies, it is highly unlikely that many of the title companies would completely satisfy their underwriters’ requirements if they were to consent to deeding property to a protected series that is not yet in existence. As a result, we advise clients to formally create a protected series, properly document its creation, draft a protected series operating agreement, and then close on any real estate that may be deeded directly to the protected series.
Business owners and investors should also anticipate that a title company and/or lender will require that an Assumed Name Certificate be on file to indicate that the LLC is doing business by and through one of its individual series. For example, if “XYZ, LLC – Series B” is a party to a real estate transaction, the title company and/or lender will expect evidence that an Assumed Name Certificate for Series B has been filed with the Texas Secretary of State. Some may still require an assumed name certificate filed with at the county level, despite the recent passage of H.B. 3609 that took effect on September 1, 2019.
Furthermore, business owners and real estate investors should anticipate that a title company and/or lender will require copies of a company resolution that authorizes the creation of the individual series which is a party to the transaction and a resolution authorizing the individual series to enter into the transaction. Once again, it is best to have these documents drafted before showing up to a closing.
Often, out-of-state title companies that do not have Series LLC statutes in their specific state often do not know that a protected series of a Texas Series LLC have the authority by statute to hold title to real property and/or grant liens. It is sometimes necessary to point the title companies and/or their attorneys to Section 101.605(3) and (4) of the TBOC, which reflects the specific powers of an individual series.
In a recent case, a client attempted to purchase property under the name of his protected series, but the title company was insistent that a protected series of a Texas Series LLC is “not a legally recognized entity in Texas, and a series was just an assumed name.” Up to this point, we’ve never heard this argument by a title company. It was particularly surprising that the title company was based in Texas. After several emails detailing Sections 101.601 and 101.602 of the TBOC (specifically, the right of a protected series to acquire and hold property) to the title company’s attorney, we resolved the issue for the client. But, this case goes to show that your mileage may vary with title companies, especially if an investor decides to purchase property directly in the name of the protected series.
Rarely, title companies also demand copies of the company agreement as a matter of course. It is often prudent to negotiate and possibly educate the title companies about the fact that company agreements are private, internal documents solely between the members of the LLC. The aforementioned instance of title companies demanding Certificates of Fact for a protected series is one of the few instances where we feel it is necessary for clients to reluctantly provide these documents.
Texas Series LLCs and Good Record Keeping
Good record keeping with the master LLC and individual series is both required and vitally important. According to Section 101.601(b)(1) of the TBOC, protected series insulation is only preserved if “records maintained for that particular series account for the assets associated with that series [is] separated from the other assets of the company or any other series.” Furthermore, Section 101.603(b) of the TBOC indicates that 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 allocation formula or procedure.” Essentially, assets and liabilities of a protected series must be separate from both the assets and liabilities of other protected series and the master LLC. Commingling of assets and liabilities must be avoided at all costs.
To comply with the requirements of Section 101.603(b) of the TBOC, it is not absolutely necessary to establish bank accounts for each individual series, but it is recommended. Record keeping without separate bank accounts would entail establishing a coding system for assets and expenditures of the master LLC and each protected series within one banking account to meet the statutory reasonableness requirement under Section 101.603(b). However, separate bank accounts for the master LLC and protected series should be made when the assets and properties held by each protected series are significantly diverse and different, either from an operational standpoint or by terms of federal tax treatment.
According to TBOC Section 101.603(b), the records requirement is met if records are maintained in a manner so that a protected series’s assets can be “reasonably identified by specific listing, category, type, quantity, or computational or allocation formula or procedure, including a percentage or share of any assets, or by any other method under which the identity of the assets can be objectively determined.”
Furthermore, it must be stressed that records should be well documented and kept in anticipation of litigation. As it is becoming for common for plaintiff’s attorneys to make arguments to pierce the corporate veil in cases not involving actual fraud in recent years, internal records must be kept to accurately and thoroughly identify the activities, assets, and liabilities of each protected series.
We highly recommend that any potential clients that are considering starting or converting to a Texas Series LLC have a meeting with their bookkeeper and/or CPA to ensure that everyone is clear as to how they will account for each separate protected series. Again, it is ideal (and likely much easier) to open separate bank accounts for each protected series. Additionally, we have numerous clients that use Quick Books to keep track of basic accounting for their Texas Series LLCs and have found Quick Books fairly simple and intuitive to keep specific protected series accounting separate from one another, and to allocate costs between multiple protected series, if needed.
Uncertainties Surrounding the Texas Series LLC
A majority of the uncertainties surrounding the Texas Series LLC arise from the fact that the Series LLC is still a relatively new business entity. In most states, the strength of its liability protection and the legal interplay of the relationship of individual series to each other and the master LLC have not seen much litigation so far. Furthermore, only approximately one-third of states in the United States have adopted the Series LLC business entity form.
One key uncertainty is whether the courts of a state that does not have the Series LLC would respect the liability scheme and shields provided by the Series LLC. No case law has emerged on that point at this time. Additionally, the states that adopted the Series LLC form have done so in a uniform manner. One key distinction between states that have adopted the Series LLC is whether they require public and/or state filings to record and evidence the formation of an individual series of a master LLC. In Texas and Delaware, there are no public and/or state filing requirements. However, Illinois does require public filing. This brings uncertainty as to whether a state that requires more stringent requirements for a Series LLC would respect an individual series of an out-of-state LLC that has more lax requirements. As a result, it is recommended that business owners and investors who want to form a Texas Series LLC only do business and own real property within the state of Texas at this time.
Alphonse v. Arch Bay Holdings, LLC, 548 F. App’x 979 (5th Cir. 2013) is a prime example of the uncertainties surrounding the novelty of the Series LLC and conflicts of state law. Arch Bay Holdings, LLC was a Series LLC formed under Delaware law. One of its individual series, Series 2010B, owned a loan secured by Alphonse’s home located in Louisiana. Alphonse sued Arch Bay under the Louisiana Unfair Trade Practices Act after his home was sold at a foreclosure sale. A lower court dismissed Alphonse’s case, in part because Delaware law controlled Arch Bay’s liability, and under Delaware law, Series 2010B was the real party in interest, not the master LLC, Arch Bay. However, the Fifth Circuit Court of Appeals reversed the dismissal. The court explained that the laws of the state of incorporation of a business entity generally determine issues relating to the internal affairs of an entity, but different principals could apply where the rights of third parties, such as Alphonse, are concerned. Indicating that treatment of a Series LLC is a “novel and complex” matter of state law, the court held that Louisiana law should be applied to determine whether Series 2010B or Arch Bay was the proper party to the suit. As of this time, the question remains unanswered, as Louisiana does not have a Series LLC statute.
Other uncertainties regarding the Series LLC have included lender/borrower transactions and bankruptcy law. Regarding lender/borrower transactions, should a lender be required to inspect all of the borrower’s books and records for the master LLC and all protected series to make a determination that proper record keeping was done for the specific series that is a party to a transaction? Also, if a loan is secured by all assets of an individual series borrower, should the lender mandate that all liability protections of the individual series be waived to enter into the transaction? Finally, regarding bankruptcy law, there is great uncertainty as to whether individual series will become parties to a bankruptcy filed by the master LLC.
In conclusion, the Texas Series LLC has pros and cons to every type of business entity structure for a specific situation, and the Series LLC is no different. In favor of the Texas Series LLC is its significant flexibility, streamlined administration, and lower cost to create individual series. However, due to the aforementioned uncertainties, it is prudent to keep all assets and properties within the state of Texas to avoid potential unanswered questions if litigation arises.