Texas Series LLC

The goal of this article is to provide an overview of the Texas Series LLC.  While this is not an exhaustive guide, it is meant to provide real estate investors a brief explanation of the pros and cons of using this type of business entity for their investment purposes.

If you have any questions or would like to speak further about forming a Series LLC, feel free to give us a call at (817) 677-1199 between the hours of 9:00 AM and 9:00 PM, Monday through Saturday.  We’d love to talk with you about your business and your goals with entity formation.

This article was last updated on February 8, 2020.

Brief Overview

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 what we call the “Master LLC” (a/k/a the actual Series LLC filed with the Texas Secretary of State).  When referring to a “Series LLC,” the term “Series LLC” specifically refers to the actual master LLC, and the term “series” or “protected series” describes each sub-unit within the Series LLC.

In general, a Texas Series LLC can avoid numerous fees and inefficiencies associated with the creation of multiple related traditional Texas LLCs by its ability to divide assets and liabilities into different series, within one Master LLC.  In particular, historical use has shown that Texas real estate investors who hold multiple properties are the ideal candidates for the Texas Series LLC.

Before the Texas legislature became one of the few states in the United States to enact statues for the recognition and creation of 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.  

Setting up an LLC for each individual property was and still is a significant undertaking due to the high costs associated with forming entities for each property and keeping up with the required tax filings for each specific entity. As of the date of editing this article, the Texas Secretary of State charges $300 in filing fees for the formation of each LLC. At the state taxation level, each LLC would be issued a Texas taxpayer identification number and would be required to file Franchise Tax statements for each LLC on or by May 15th of each year.

The second option isn’t recommended 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. Granted, you could save on Texas Secretary of State filing fees and would only need to file one Franchise Tax statement per year.

However, if you own multiple properties within one traditional Texas LLC and got sued because of something that occurs on one specific property, you risk all of your properties in that lawsuit being subject to a judgment. This potentiality alone should strongly dissuade Texas real estate investors from considering this business structure.

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 the 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 example, if you own a traditional Texas LLC with three (3) properties, get sued, and have a judgment filed against the LLC, all assets of the LLC will be available to satisfy the judgment.

Specifically, let’s say you have a Texas LLC with three (3) properties and a visitor of Property #3 sues because a tree on Property #3 fell on his car, all 3 properties in the LLC would be available for a judgment, if Property #3’s visitor prevails in court.

But, what if you have your 3 properties structured in a Series LLC?  

Taking the previous example, you could place each property in a separate protected series.  If the same tree falls on Property #3, then the visitor of Property #3 could only sue and recover from the protected series holding Property #3, if all proper formalities and record keeping requirements are met for the Master LLC and each separate protected series.

Ironically, the same set of facts happened to one of our clients a few years ago, but fortunately, he had his properties set up in a Series LLC, but this didn’t stop the plaintiff’s lawyer from filing suit for damages beyond the limits of our client’s insurance policy in county court (likely due to the fact that the client had over ten rental properties).  Fortunately, the insurance company managed to settle the case with the plaintiff after the plaintiff’s attorney became aware of our client’s Series LLC structure.  

Finally, a little explanation regarding Series LLC terminology: 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: (1) file and defend lawsuits; (2) enter into contracts; (3) buy, sell, and hold title to property; (4) grant liens and security interests; and (5) exercise any power or privilege as necessary or appropriate to the conduct, promotion, or attainment of the business, purposes, or activities of the series.

The powers listed under Section 101.605 essentially lay out the basic premise of how a protected series operates to segregate assets within an already established entity, the Master LLC.  Essentially, all of these powers illustrate basic functions that allow the protected series to acquire, convey, dispose, operate, and own assets separate and distinct from the Master LLC. These enumerated powers also help in clarifying the interplay between the Texas’s UCC statutes and the operations of a protected series.  

For example, as the enumerated powers under Section 101.605 indicate that a protected series can contract and subsequently grant liens based on the contracts they enter into, it is reasonable to conclude that the protected series can execute a security agreement, and the protected series’s creditor can file a proper financing statement under the UCC.  However, this particular area of law has recently been updated by the Texas Legislature to reflect the intended interplay between the UCC and the operations of a protected series.

Specifically, Section 1.201(b)(27) of the Texas Business & Commerce Code has been recently amended to define a protected 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.

Regarding the interplay of federal taxation and protected series, 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.

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, and files only one franchise tax report as the master LLC.

Finally, some statutory restrictions relating to a protected series should be clarified.  Due to the particular structure of Subchapter M, Chapter 101 of the TBOC, protected series are not allowed to engage in several types of transactions, which include conversions, interest exchanges, mergers, and/or selling substantially all of a protected series’s assets pursuant to Chapter 10 of the TBOC. 

However, it must be noted that while a protected series can sell any or all of its assets, it simply cannot use the provisions afforded for approval of a sale of “substantially all” of its business and/or assets under Chapter 10 of the TBOC. The transactions limited to the protected series are essentially reserved for traditional LLCs or the Master Series LLC due to the fact that a protected series is not considered a “Domestic Entity” for purposes of Chapter 101 of the TBOC.  In particular, one power afforded under Chapter 10 that we will discuss later is the power of a traditional LLC to convert to a Series LLC.  

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 owing 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.

Statutory Authority

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:

Ҥ 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:

  1. 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);
  2. The LLC’s Company Agreement must contain a statement regarding the limitation of liability with respect to the series; and
  3. 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:

Notice of the limitation on liabilities of a series required by Section 101.602 that is contained in a certificate of formation filed with the secretary of state satisfies the requirements of Section 101.602(b)(3), regardless of whether:   (1) the limited liability company has established any series under this subchapter when the notice is contained in the certificate of formation; and (2) the notice makes a reference to a specific series of the limited liability company.Added by Acts 2009, 81st Leg., R.S., Ch. 84 (S.B. 1442), Sec. 45, eff. September 1, 2009.

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 to convert an existing traditional LLC to a Series LLC (and saving money in the process).

A well-drafted Certificate of Formation is the perfect opportunity to put a potential plaintiff on notice that the LLC has a comprehensive asset protection plan in place that fully complies with statutory requirements.  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.  

The client even went through the process of setting up several protected series, including conveying real estate to one of these series, only to find out that they were ineffective and useless due to the poorly drafted language in the Certificate of Formation.  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.

Texas Series LLC Conversion Overview

While it is possible to convert an existing Texas LLC to a Series LLC, it must be noted that substantial changes to the Certificate of Formation and existing company documents (company operating agreement, additional organizational minutes and resolutions, and set up of protected series) is required to effectively accommodate the statutory requirements of the TBOC and best practices for asset protection. 

For a client that has an existing LLC that they want to convert to a Series LLC, the first question that must consider is how much liability does the existing LLC have?  Particularly, does the existing LLC have any debts, contractual obligations, mortgages, state or federal tax liabilities, and/or pending or threatened litigation.  

If so, it is prudent to simply create a new Series LLC and dispense with any liability that could potentially affect any protected series that is created pursuant to a Series LLC conversion.

Statutory guidance and case law is sparse on the issue of whether the liabilities of a Master LLC will affect and follow any protected series created pursuant to a conversion plan.  As a matter of course, we do not recommend conversion of any existing Texas LLC with any pre existing liabilities.  

Simply put, it’s not wise to create protected series under a converted Master LLC that has liabilities that could potentially bust any liability shields created by protected series.  It’s much simpler and safer from a statutory and asset protection point of view to just create a new Series LLC.

However, we often have clients that create a traditional Texas LLC, leave it dormant for a period of time, and then wish to convert it to a Series LLC.  These are one of the few limited circumstances in which we would recommend a Series LLC Conversion.  

Texas Series LLC Conversion Procedure

The first steps that must be taken in order to convert an existing Texas LLC to a Series LLC is a thorough review of the existing LLC’s Certificate of Formation and existing corporate documents, such as the company operating agreement, minutes, resolutions, and any assets or liabilities associated with the existing LLC.  The goal is to determine what provisions need to be amended in the Certificate of Formation and provide a roadmap for modifying existing documents, such as the operating agreement, to conform with the Series LLC creation provisions we draft. It must be noted that the Certificate of Amendment must also comply with the requirements of Section 101.602 of the TBOC in a manner which is largely similar to the creation of a new Series LLC. 

Often, we find that the existing LLC is sparsely documented, which can lead to significant issues moving forward with the conversion process. If this is the case, we typically recommend that clients properly document their LLC’s company agreement and/or other minutes and resolutions before moving forward with the conversion process.

Furthermore, we generally recommend that the client obtain a Certificate of Account Status from the Texas Comptroller of Public Accounts before proceeding with a Series LLC conversion.  Compliance with state taxing authorities is required to ensure that the LLC has properly filed any and all outstanding Texas Franchise Tax returns, which is required to verify that the LLC is authorized to conduct business in the State of Texas.  Any missing Texas Franchise Tax Returns and/or involuntary terminations due to failure to file Texas Franchise Tax returns must be addressed before an existing LLC can be converted to a Series LLC.

Before filing the Certificate of Amendment, we typically recommend that the LLC undertaking drafting and approving a plan of conversion first.  While there is no specific statutory guidance detailing the means in which a traditional Texas LLC should be converted to a Series LLC, we tend to follow the requirements of Title 1, Chapter 10 of the TBOC regarding a conversion to a Series LLC. 

When examining the provisions of Title 1, Chapter 10 of the TBOC, the phrase, “same class and series of ownership interest,” is mentioned no less than eighteen (18) times throughout Chapter 10.  While the common understanding of “same class and series” indicates the split of ownership interest into different classes of membership interest and/or stock, depending on whether the business entity is an LLC or a corporation, there is potential for confusion due to the fact that Title 1, Chapter 10 of the TBOC does not explicitly disclaim or incorporate Series LLCs into that particular chapter.  Some scholars of Series LLCs indicate that this lack of clarity may provide a tenuous link for a court to potentially conclude that Series LLCs fall under the the requirements of Title 1, Chapter 10 of the TBOC for purposes of converting a traditional LLC to a Series LLC.  

As a result, our firm takes the approach that Title 1, Chapter 10 of the TBOC applies to Series LLCs and accordingly, we draft Series LLC Conversions with a view that a plan of conversion must be drafted and approved before a Certificate of Amendment is filed with the Texas Secretary of State.  

However, when converting to a Series LLC, we generally add provisions to the Certificate of Amendment memorializing the drafting, consideration, and execution of the plan of conversion, which further bolsters documentation indicating that the conversion was performed pursuant to Title 1, Chapter 10 of the TBOC.  

After the Certificate of Amendment is filed with the Secretary of State by paying the applicable $150 in filing fees, the converted LLC (the “new Series LLC”) must amend its current operating agreement to reflect necessary Series LLC provisions and provide guidance for how, when, and who can create protected series under the new Series LLC.  This is often the most overlooked step in the process. 

The operating agreement should be amended to reflect the Certificate of Amendment’s filing return from the Secretary of State and should include a robust article detailing the procedures for creating protected series.  Often, we see clients who have undertaken partial conversions, but have not properly converted their operating agreements to reflect Series LLC status.

All too often, we see clients who have procured operating agreements online that simply “allow” the new Series LLC to create protected series with no specificity as to how, when, and who can create the said protected series.  Furthermore, these sparse operating agreements do not include necessary statutory provisions and fail to address the LLC’s documentation requirements for creation, operation, and termination of a protected series.

In our opinion, this leads to a lack of uniformity in the creation of protected series, which could potentially be used by a plaintiff’s attorney as evidence that any protected series should be disregarded due to the lack of corporate formalities observed in the creation and operation of a Series LLC’s protected series.

Again, this is an unsettled area of case law as to the amount of specificity required for creation and operation of a protected series, but at our firm, we tend to over-document, rather than hope that ambiguity will save a client once a suit is filed by a plaintiff’s attorney.

While some firms would view our process for converting an existing LLC to a Series LLC as overkill, we cannot stress enough that the case law and arguments made for busting the liability shields of a Series LLC (“piercing the corporate veil”) are an ever-evolving area of Texas business law due to the limited statutory guidance available, which renders Series LLCs a creature of litigation guidance for the foreseeable future.  Thus, our view is it is better to over-document than leave a plaintiff’s attorney arguments over lack of documentation that could be combined with other veil piercing factors, which together, could be the proverbial “straw that broke the camel’s back.”  

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.

A past Series LLC client with ten (10) single family residential homes often used a nationwide title company to close his properties.  In general, this is entirely acceptable, but in this client’s case, the title company’s limited knowledge of the Texas Series LLC essentially rendered his properties owned by the Master LLC, thus destroying the liability protection afforded by segregating the properties into separate protected series.

In short, the title company’s hired attorneys deeded the properties to “XYZ, LLC,” instead of “123 Main St., a protected series of XYZ, LLC, a Texas series limited liability company,” etc.  No one caught this mistake until almost three years later.

Though we managed to resolve the situation and ensured that the ten properties were accurately deeded to each respective protected series, the client potentially risked all ten properties in a lawsuit.

Moral of the story:  if you’ve taken the time to properly set up a Series LLC, get your warranty deeds examined by a Series LLC attorney before approving them.  Also, if you are expecting to purchase numerous properties over the lifetime of your Series LLC, consider establishing a relationship with a local title company and an attorney who understands the specific requirements of deeding properties to a Series LLC.

Texas Series LLC Assets

Deeding Real Estate 

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 be 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 

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.

Finally, our naming convention recommendations are largely based on the Uniform Protected Series Act of 2017 (UPSA), which provides a comprehensive and uniform framework for the formation and operations of a Series LLC.  Currently, the UPSA has been adopted in Arkansas, Iowa, Nebraska, and Virginia. As of 2019, it has been introduced in the legislatures of Connecticut and Tennessee. Scholars in this area of uniform law believe that all states with a Series LLC will eventually pass a similar or comparable act, including Texas.

Based on the potentiality of Texas enacting the same or similar framework as the UPSA in the future, as of 2019, our firm has begun recommending that all individual protected series names including one of the following phrases in their series names: (1) “Protected Series”; (2) “protected series”; (3) “P.S.”; or (4) “PS.”  

For example, listed below is our current preferred naming conventions compliant with Section 202(2) of the UPSA:

  • 101 Main Street, a protected series of XYZ, LLC, a Texas series limited liability company
  • 101 Main Street, a protected series of XYZ, LLC
  • XYZ, LLC – 101 Main Street Protected Series
  • XYZ, LLC – 101 Main Street P.S.
  • XYZ, LLC – Protected Series A, B, C, etc.
  • XYZ, LLC – Protected Series 100, 101, etc.
  • XYZ, LLC – P.S. A, B, C, etc.
  • XYZ, LLC – P.S. 100, 101, etc.

Federal EINs 

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 and may potentially trigger tax consequences.

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

When applying 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 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.”  

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?”

In short, due to H.B. 3609, not any longer at either the state or county level.

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.

Before H.B. 3609, counties generally allowed a protected series to file assumed names without any significant issues.  However, since H.B. 3609 essentially removes the county’s power to file assumed name certificates on behalf of registered entities such as LLCs and corporations, counties can no longer accept any assumed name filings that contain designators that include “LLC.”

Essentially, H.B. 3609 has eliminated the loophole that previously allowed a protected series to create an assumed name to operate under at the county level.  As a result, we highly advise clients to choose a protected series name that they feel comfortable operating under.  

Furthermore, in our opinion, H.B. 3609 provides more persuasion for clients to refrain from opening a “management series.”  Instead, they should open a separate traditional LLC to act as the management arm of their real estate investment holdings In the past, clients would often form “management series” and file assumed name certificates at the county level to conduct business in a different name to add a level of separation between the protected series and the name in which they operated under. 

For instance, if “ABC Management, a protected series of ABC, LLC” wanted to do business as “XYZ Management,” they’d simply file an assumed name certificate at the county level.  Then, they’d draft contracts and landlord-tenant agreements, open bank accounts, and buy business cards under “XYZ Management.”  

This is no longer possible under H.B. 3609.  If a client wishes to operate a management series, they’re legally required to list the entire series name on any contracts, landlord-tenant agreements, bank accounts, and business cards.  And, from our perspective, this manner of management operations easily informs a potential plaintiff about the real estate investor’s business structure.

If the real estate investor operates a separate traditional LLC as a management company, any potential plaintiff is in privity of contract with the management company only; the Series LLC holding the property is not party to any agreement between the plaintiff and the management LLC, if properly drafted.  

Thus, absent fraud and if proper record keeping is maintained between the management LLC and the holding Series LLC, the plaintiff would have a difficult time convincing a court to pierce the corporate veil of the management LLC and then seek the assets of the holding Series LLC as part of a judgment against the management LLC. 

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.

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.

Rarely, we have encountered certain regional banks that insist on seeing a “filing number” for a protected series.  This is another instance of bank attorneys not been aware of the Series LLC provisions that do not require protected series filing with the Texas Secretary of State.

While we have had some success with these regional banks by writing emails detailing the requirements of Subchapter M, Chapter 101 of the TBOC, and producing copies of protected series operating agreements and assumed name certificates (if the client specifically requests us to do so), a handful of banks still will not budge on the Certificate of Formation or “filing numbers” they specifically require to open a bank account for a protected series.

Unfortunately, the sole option for clients in these circumstances is to find a local bank with attorneys that understand Series LLC and TBOC requirements.

Finally, it’s important to stress that forming a Texas Series LLC, creating protected series, but failing to file required Assumed Name Certificates and conduct business under those assumed names is considered incomplete for purposes of asset protection.  

While H.B. 3609 limits protected series from filing assumed names, business owners and investors should continue to conduct business activities under an assumed name for their management LLCs.  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.

Title Company Requirements

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 a 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.  In these instances, investors should politely point the closing agent to H.B. 3609 and reiterate it is now impossible for an LLC or protected series to file an assumed name certificate with any county in the State of Texas.

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. Recently, some national title companies started requiring that the management of the LLC and protected series either sign a resolution or affidavit attesting to the fact that the protected series operates according to Subchapter M, Chapter 101 of the TBOC.  Once again, it is best to ask the closing agent about their specific requirements in advance and 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.  While we understand the underwriting requirements necessitated for issuing title insurance, simply turning over private, internal documents should not occur without some level of negotiation.  However, 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.

Record Keeping Requirements

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 highly 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 always be created 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 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.

One particular aspect of litigation that tends to favor multiple bank accounts is the discovery phase of a lawsuit.  In the event a protected series is sued and that protected series’s assets are commingled with the assets of the Master LLC and other individual series in a single bank account, any reasonable plaintiff’s attorney is going to request bank statements for that entire account in order to determine whether the LLC is keeping complete and accurate records of each protected series’s activities.  Generally, veil piercing arguments are pled merely for the fact that the defendant is a protected series of a Series, but in our opinion, it only bolsters veil piercing arguments when a Series LLC uses a single bank account for everything.

It’s important to note that commingling funds is prima facie evidence for veil piercing arguments and as a result, the defendant’s burden of proving that commingling did not occur becomes paramount to limiting the scope of the lawsuit to the protected series initially sued.  However, if an individual series keeps separate bank accounts from the Master LLC and other individual series, the plaintiff’s attorney will have a difficult time articulating to a judge why they need banking statements from the Master LLC or any other individual series that was not a party of the lawsuit in the discovery phase, as a litigant is generally not entitled to discovery for any person or entity that was not a party to the lawsuit.

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.  Ultimately, you will need to weigh the burdens and cost associated with maintaining multiple bank accounts against the potentiality of a plaintiff’s attorney who will aggressively pursue discovery and hire outside experts to prove commingling of funds in a single account, even for the smallest of amounts.  In short, our opinion is to keep separate banking accounts unless you and your bookkeeper/CPA have impeccable record keeping skills.

Termination of a Protected Series

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 three 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); (2) drafting a certificate of termination and other relevant documents; and (3) 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, if properly drafted, 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 a recent case, we assisted a client with the termination of a protected series that had minimal documentation pertaining to the operation of the protected series.  In short, the protected series operating agreement was functionally non-existent. As the protected series agreement did not include specific provisions regarding winding-up, we had to resort to the minimal Master LLC operating agreement to find a wind-up provision that allowed the members (who were both members of the LLC and the protected series) to terminate the series by unanimous consent.  

What is particularly concerning about this aforementioned case is instances in which online boilerplate provisions that allow for the “management” to terminate an LLC based on unanimous consent, but like the previous case, the protected series agreement is either missing or silent.  What if the management of the LLC differs from the management of the series? This is often the case in Series LLCs with multiple real estate investors.  

If the protected series agreement is silent on how to terminate a protected series, does this mean that the the series must also get the consent of the management of the LLC to terminate the series?  And, what if the management of the LLC reaches an impasse with the management of the protected series regarding termination? These minor issues that could easily be remedied by proper documentation often lead to litigation.  

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.

Uncertainties 

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 point of uncertainty that is routinely discussed on real estate investment forums is the role of anonymity devices such as anonymous land trusts and anonymous filing trusts in connection with the filing and operation of a Series LLC.  While this particular subject is outside the scope of this article, we discuss these types of anonymity devices at length on our Texas Real Estate Anonymity page.

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.

Pricing

Filing + Documentation

$47500Flat Fee + $308.10 TX SOS Fees
  • Drafting and Filing a Certificate of Formation with required Texas Series LLC and asset protection provisions
  • Drafting Form 401-A (if you provide a Registered Agent) or hiring one for your Series LLC
  • Drafting a Texas Series LLC Operating Agreement with asset protection provisions
  • Drafting Organizational Minutes for the Texas Series LLC
  • Drafting a Banking Resolution for a Texas Series LLC
  • Drafting a Membership Transfer Ledger for a Texas Series LLC
  • 30 Minute Consultation With One of Our Business Attorneys

Filing, Documentation, & 1 Series

$79900Flat Fee + $333.10 TX SOS Fees
  • Drafting and Filing a Certificate of Formation with required Texas Series LLC and asset protection provisions
  • Drafting Form 401-A (if you provide a Registered Agent) or hiring one for your Series LLC
  • Drafting a Texas Series LLC Operating Agreement with asset protection provisions
  • Drafting Organizational Minutes for the Texas Series LLC
  • Drafting a Banking Resolution for a Texas Series LLC
  • Drafting a Membership Transfer Ledger for a Texas Series LLC
  • Drafting Minutes for the Creation of One Protected Series
  • Drafting and Filing an Assumed Name Certificate for One Protected Series
  • Drafting a Protected Series Operating Agreement for One Protected Series
  • Acquiring Federal Employer Identification Numbers (FEINs) for the Series LLC and Protected Series
  • 30 Minute Consultation With One of Our Business Attorneys

Filing, Documentation & 2 Series

$109900Flat Fee + $358.10 TX SOS Fees
  • Drafting and Filing a Certificate of Formation with required Texas Series LLC and asset protection provisions
  • Drafting Form 401-A (if you provide a Registered Agent) or hiring one for your Series LLC
  • Drafting a Texas Series LLC Operating Agreement with asset protection provisions
  • Drafting Organizational Minutes for the Texas Series LLC
  • Drafting a Banking Resolution for a Texas Series LLC
  • Drafting a Membership Transfer Ledger for a Texas Series LLC
  • Drafting Minutes for the Creation of Two Protected Series
  • Drafting and Filing an Assumed Name Certificate for Two Protected Series
  • Drafting a Protected Series Operating Agreement for Two Protected Series
  • Acquiring Federal Employer Identification Numbers (FEINs) for the Series LLC and Two Protected Series
  • 30 Minute Consultation With One of Our Business Attorneys

Anonymity Series LLC + 2 Series

199500Flat Fee + $358.10 TX SOS Fees
  • Drafting and Filing a Certificate of Formation with required Texas Series LLC and asset protection provisions
  • Drafting Form 401-A (if you provide a Registered Agent) or hiring one for your Series LLC
  • Drafting a Texas Series LLC Operating Agreement with asset protection provisions
  • Drafting an anonymous trust to serve as the sole Manager of the Series LLC
  • Drafting Organizational Minutes for the Texas Series LLC
  • Drafting a Banking Resolution for a Texas Series LLC
  • Drafting a Membership Transfer Ledger for a Texas Series LLC
  • Drafting Minutes for the Creation of Two Protected Series
  • Drafting and Filing an Assumed Name Certificate for Two Protected Series
  • Drafting a Protected Series Operating Agreement for Two Protected Series
  • Acquiring Federal Employer Identification Numbers (FEINs) for the Series LLC and Two Protected Series
  • 30 Minute Consultation With One of Our Business Attorneys

Optional Services

  • Conversion of a Texas LLC to a Series LLC – $649.00
  • Creation of One Protected Series (includes minutes, Operating Agreement, and Assumed Name Certificate) – $295.00
  • Protected Series Creation Template (includes documents necessary to create a protected series based on our Series LLC Operating Agreement) – $395.00
  • Warranty Deed Drafting to Transfer Property to a Protected Series – $189.00
  • Drafting a Series LLC Operating Agreement (for the Master LLC) – $295.00
  • Drafting a Residential Lease Agreement – $249.00
  • Acquiring a Federal Employer Identification Number for a Texas Series LLC or Protected Series – $55 per FEIN
  • Drafting IRS Form 2553 (S-Corporation Election) – $55.00
  • Drafting S-Corporation provisions for a Series LLC Operating Agreement or Protected Series Operating Agreement (includes an Operating Agreement Amendment) – $179.00
  • Drafting IRS Form 8832 (C-Corporation Election) – $55.00
  • Drafting C-Corporation provisions for a Series LLC Operating Agreement or Protected Series Operating Agreement (includes an Operating Agreement Amendment) – $179.00

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