Texas Series LLC
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’re going to try to explain the how and why the Texas Series LLC became a favored business entity of real estate investors.
Table of Contents
- Series LLC – Brief Overview
- Defining a Series LLC
- Comparing the Texas Traditional LLC to a Texas Series LLC
- Statutory Authority for the Texas Series LLC
- Formation of a Series LLC in Texas
- Conversion of a Texas Traditional LLC to a Texas Series LLC
- Series LLC Insulation
- Series LLC Assets
- Series LLCs and Assumed Names (DBAs)
- Series LLCs and Good Record Keeping
- Uncertainties Surrounding the Series LLC
- Series LLC Fees
- Contact Us
In Texas, a Series LLC is a variation of the Traditional LLC business formations model. Primarily, the difference between a Traditional LLC and a Series LLC is that the Series LLC includes special language from the Texas Business & Organizations Code (TBOC) in the Certificate of Formation and Company Agreement that allows the LLC to create an unlimited number of “series” within the legal framework of a single LLC.
Each series of a Series LLC has the independent traits and characteristics of an independent Traditional 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” refers to the specific way to describe each unit within the Series LLC.
In general, the Series LLC’s ability to divide assets and liabilities into different series (or units), within one master LLC, helps avoid numerous costs and inefficiencies associated with the creation of multiple related LLC or other business entities. In particular, Texas real estate investors who hold multiple properties are considered the ideal business formations candidates for use of 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 LLC would render all properties subject to the liabilities of that one LLC. Simply put, if you had multiple properties within one LLC and got sued because of one specific property, you risked all of your properties in that lawsuit.
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 series of the master LLC, it provides for asset protection for your other properties in the event you are sued. Specifically, if one particular series is sued, the remaining properties (assets), and the real estate investor personally, would be insulated from the lawsuit affecting that specific 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 Series LLC allows an owner to divide assets and liabilities into separate series, often called “cells,” which essentially function as sub-companies of the LLC. It’s important to note that while the individual 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 an individual 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, an individual series can obtain an Employer Identification Number (EIN) 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.
Comparing the Texas Traditional LLC to a Texas Series LLC
Example 1 – 4 Rental Properties Owned by 1 Traditional LLC: Here’s a scenario in which you own four single-family residence rental properties that are leased to four different families. In this example, you create one Traditional LLC to own all four rental properties. This business organization structure helps to protect the LLC’s members (owners) from the liabilities associated with the four rental properties. For example, if a guest of a tenant in rental property #4 is injured while on the premises of rental property #4, the injured party would need to sue the LLC, not the owners of the LLC. This is the typical LLC liability shield that most investors are aware of. However, if the injured party sues the LLC, in this example, all four properties would be at risk if the injured party prevails in court and secured a judgment against the LLC. If you want to insulate the other three properties from the liabilities of the property that is the subject of the lawsuit, you would need to either create separate LLCs for each property (Example 2) or create one Texas Series LLC and deed the properties to one sub-series for each rental property (Example 3).
Example 2 – 4 Rental Properties Owned by 4 Different Traditional LLCs: If we use the same four rental properties mentioned in Example 1, in this example, we created four Traditional LLCs in which each LLC would hold one property. Like Example 1, the owners of the LLCs would have the same standard LLC liability shield, but by placing the properties into four separate traditional LLCs, each property would be protected from the liabilities associated with the other properties. For example, if rental property #2 gets sued because of an injured party, the injured party could only sue the LLC holding rental property #2, not the owners of the LLCs or any of the other LLCs holding the 3 other rental properties. As a result, this example provides insulation for each property. However, if you choose to adopt this method for insulating your properties, you will need to create 4 separate LLCs (each with a filing fee of $300), file 4 annual reports with the Texas Comptroller of Public Accounts, maintain 4 separate bank accounts, and file 4 IRS Form 1065s (or 4 Schedule C’s if you are a single-member LLC). Basically, this method requires keeping 4 independent sets of financial documents.
Example 3 – 4 Rental Properties Owned by 1 Series LLC and 4 Sub-Series: Using the same set of facts as the previous examples, but this time, you create one Texas Series LLC with four sub-series. Instead of four separate LLCs, each property will be owned by a sub-series. And, similar to example 2, if someone gets injured at rental property #2 and sues, the injured party can only sue the sub-series holding rental property #2. Because each sub-series insulates the assets it owns, the Series LLC (“Master LLC”) and the three other sub-series that own the other properties are insulated from the liabilities of the sub-series that owns rental property #2. And, with a Series LLC, you would only need to file 1 annual report with the Texas Comptroller of Public Accounts, as the Comptroller currently views Series LLCs as one entity. Furthermore, as the TBOC does not explicitly require separate bank accounts, you can elect to keep one bank account for the Series LLC, provided that you can accurately and specifically account for the financial activities of each specific sub-series. And currently, a Series LLC can file only one 1065 (or 1 Schedule C if you are a single-member LLC).
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 improve Texas’s reputation as a state that is amenable to business and recognizes the importance of asset protection.
Specifically, Sections 101.601 and 101.602 of the TBOC state:
§ 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
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;
- 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 knowledgable in the Series LLC and asset protection can have disastrous results, and accordingly, should be avoided. 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.
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 sub-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 the restated Certificate of Formation with Texas Series LLC provisions;
- Complete the Texas Secretary of State Form 424 (Certificate of Amendment) and include applicable Series LLC provisions;
- Draft a new Operating Agreement for the master LLC and Series Operating Agreements for any series created (be sure to include specific articles regarding Series LLC protections and methods for creation of a new sub-series;
- Ensure that these steps are properly recorded in Minutes of Meeting for the LLC; and
- Create new sub-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, an investor should then transfer the properties into individual series of the series LLC (holding company). Preferably, each property should go into its own individual series.
However, lenders sometimes 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 LLCs in the deed to put the public on notice that the property was transferred into an individual series of a Texas series LLC.
Naming a Sub-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 individual sub-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 sub-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 sub-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 sub-series after the property address that each sub-series holds. For instance, if you own 123 Main Street in Dallas, you would name the sub-series, “123 Main Street, an individual 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 sub-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, an individual 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 sub-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.
Sub-Series of a Texas Series LLC and Employer Identification Numbers (EINs)
Another unresolved aspect of Texas Series LLCs is whether each sub-series must have a separate Employer Identification Number (EIN) issued by the Internal Revenue Service (IRS). However, it is very clear that if a sub-series wishes to open a bank account, they must apply for and obtain an EIN.
In 2010, the IRS issued Proposed Regulations that indicated each sub-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 sub-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’ Proposed Regulations: each sub-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 sub-series will be classified under the “check-the-box” regulations that govern Traditional LLCs, and each sub-series may make federal tax elections it is eligible to make separately and independently of the Master LLC and any other sub-series.
Finally, this means that each sub-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 the eventual implementation of the IRS’ Proposed Regulations. Furthermore, we recommend clients consult with a CPA acquainted with the IRS’ Proposed Regulations to make a decision as to how they should file federal income taxes for their series LLC. Additionally, it must be noted that, as of 2019, the IRS’ Proposed Regulations have not been implemented.
Acquiring an EIN for a Sub-Series of a Texas Series LLC
When you apply for an EIN on the IRS’ EIN Obtainment 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 sub-series of the Texas Series LLC. Specifically, the IRS’ online tool will not allow you to use subsequently use the Series LLC’s name on subsequent applications for sub-series.
For example, if you registered an LLC with the name “XYZ, LLC,” you would use “XYZ LLC” on the IRS’ EIN application tool. Please note that the IRS’ EIN application tool does not permit the use of special characters. But, how do you acquire the EIN for the first sub-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 sub-series?
Our method of obtaining an EIN for a sub-series involves using both the LLC’s name and the sub-series name in the EIN application. For example, we’ll say that we’re trying to obtain an EIN for “555 Main Street, an individual series of XYZ Holdings, LLC, a Texas series limited liability company.” We would enter the following into the IRS’ EIN application: “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’ EIN application: “XYZ HOLDINGS LLC – Series 105.” Please note that the “-” is one of the few special characters that the IRS’ EIN obtainment application recognizes.
Additionally, we have several areas we specifically described on IRS Form SS-4. First, we generally designate the Series LLC (Master LLC) as the “Responsible Party” of any sub-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 sub-series is a “Holding Series.”
Termination of a Texas Series LLC Sub-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 sub-series of a Texas Series LLC, the sub-series differ from a Traditional LLC or the Series LLC (Master LLC) because the sub-series are not viewed as actual filing entities 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 described in the sub-series agreement); 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 sub-series of a Texas Series LLC. Most sub-series 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 sub-series 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 sub-series by proper documentation of corporate formalities and execution of a sub-series agreement. Furthermore, if a sub-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 sub-series to immediately wind up upon the sale and disposition of all assets of that specific sub-series. Due to the limited amount of case law involved with buying and selling properties and placing them in the same sub-series, our firm recommends voluntarily winding-up a 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 sub-series to all the corporate dealings and assets of the master LLC and all other sub-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 individual series;
- 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
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,” or “SPE’s” amongst the asset protection community. Other examples of SPE’s 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 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 individual series level, a series must hold title and/or operate under its own name. For instance, if the name of your 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 an individual 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 individual 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 and in the county in which the individual series does business in.
Individual 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 “XYZ, LLC – Series A d/b/a Prime 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 an individual series of an LLC is not an independent and separate legal entity, and thus, does not have the right to file an Assumed Name Certificate. Basically, an individual series of an LLC cannot have an assumed name.
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 an individual series of an 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 “Prime Holdings” without the need for disclosure that the principal behind “Prime Holdings” is actually “XYZ, LLC – Series A.”
Individual Series DBAs and Banks
Filing an Assumed Name Certificate for an individual series is vitally important if the individual series wishes to open a bank account specifically and solely for the use of the individual 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 both the Texas Secretary of State and the county in which they operate.
However, if “XYZ, LLC – Series A” wants to do business as “Prime Holdings,” a bank will generally require an Assumed Name Certificate filed with the county in which Series A operates under the assumed name, “Prime Holdings.”
Also, banks are often misinformed about the state filing requirements for a sub-series of a Series LLC in Texas. In our practice, we’ve routinely encountered bankers who believe that a sub-series must file a Certificate of Formation for an individual sub-series in Texas. While this information is correct for a traditional LLC and/or a Master Series LLC, this is not correct for a sub-series of a Series LLC. A sub-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 and in the county in which it primarily conducts business. 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 sub-series.
It’s important to stress that forming a Series LLC and failing to file Assumed Name Certificates and then do 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 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 LLC or 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 individual series, which is impossible to provide, as Certificates of Fact are only obtainable for the Series LLC (Master LLC). Title companies that harbor these views indicate a significant misunderstanding of the 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 generally advise clients to obtain a Certificate of Fact for the Series LLC and then politely direct the closing agent to the Series LLC Operating Agreement provisions that allow for the creation of the sub-series in question, provide documentation of the creation of the sub-series (if available), and show the closing agent the specific sub-series agreement. In our opinion, it is best to create the sub-series and all applicable documentation before closing to prevent unnecessary issues like this.
Reasonable minds differ as to whether a sub-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 sub-series. However, based on 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 sub-series that is not yet in existence. As a result, we advise clients to formally create a sub-series before closing on any real estate that may be deeded directly to the sub-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 both the Texas Secretary of State and the county in which Series B operates.
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 an individual series of a Texas 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.
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 sub-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) o the TBOC, individual 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 an individual series must be separate from both the assets and liabilities of other individual 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 individual 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 individual series should be made when the assets and properties held by each individual 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 an individual 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, internal records must be kept to accurately and thoroughly identify the activities, assets, and liabilities of each individual 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 sub-series. Again, it is ideal (and likely much easier) to open separate bank accounts for each sub-series. Additionally, we have numerous clients that use Quick Books to keep track of basic accounting for their Series LLCs and have found Quick Books fairly simple and intuitive to keep specific sub-series accounting separate from one another, and to allocate costs between multiple sub-series, if needed.
Uncertainties Surrounding the Texas Series LLC
A majority of the uncertainties surrounding the 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 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 individual 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.
|Texas Series LLC Package||$449|
|Preliminary Name Check with Texas SoS||✔|
|Expedited Document Drafting||✔|
|Certificate of Formation Preparation||✔|
|Electronic Filing of Certificate of Formation with Texas SoS||✔|
|Email Delivery of Series LLC Documents||✔|
|Hire a Registered Agent Upon Request||✔|
|Customized Master LLC Operating Agreement||✔|
|Organizational Meeting Minutes||✔|
|Detailed Series LLC Compliance Instructions||✔|
|Completed Transfer Ledger||✔|
|Creation of One Sub-Series||+$295|
|Federal EIN Obtainment||+$65|
|Tax Election Preparation||+$65|
|Deed to Transfer Real Estate to Master LLC or Sub-Series||+$189|