Series LLCs in Texas allow for the establishment of separate series each of which operate as separate companies with their own members, membership interests, rights, obligations, assets, and liabilities. While the separate series operate as separate companies, they are not considered separate entities under the Texas Business Organizations Code. Thus, only one filing fee is paid for the series LLC (and not each of the series), and the series LLC registers as one entity with the Texas Secretary of State.
Series LLCs were originally created in Delaware for the mutual fund and asset securitization industries. They are now also commonly used for real estate investors holding multiple properties. Instead of forming multiple LLCs, each of which holds a separate property, one series LLC can be formed with the separate properties held in separate series.
The primary benefit of the series LLC is that any liability within a series is contained within that series and does not spill over to the other series or the series LLC. For example, one series might contain a single family rental, and another series might contain an apartment complex. If a creditor obtains a judgment against the series holding the single family rental, the creditor cannot collect on the judgment against the series holding the apartment complex. The apartment complex is protected (absent arguments the creditor might raise that the series should not be treated as a separate entity).
Despite this benefit and others, there are some risks and unknowns with series LLCs. They were created in Texas in 2009, which believe it or not means they are still relatively new as far as the law is concerned. This results in some uncertainty in the law, as judges have yet to determine how to handle certain problems unique to series LLCs. One such example is if a series can file bankruptcy and, if it can, how it affects the other series and the series LLC.
To create a series LLC, the language in Section 101.602(a)(1)-(2) of the Texas Business Organizations Code must be contained in both the series LLC’s certificate of formation and company agreement. Moreover, separate records must be maintained for the assets of each series.
The series LLC’s company agreement should be well thought out. It is the master document on which the separate series agreements (which are much simpler) will relate. The company agreement should anticipate that outside investors at differing levels of investment and control might be involved with future series. Accounting for this situation and other possible situations requires the preparation of custom drafted provisions tailored to the client’s needs and anticipated needs.
Johnsen Law handles series LLCs and other real estate matters for clients. Contact Johnsen Law to learn more.
