Series limited liability companies (“Series LLCs”) are popular legal entities often utilized by real estate companies and investors. Although Series LLCs have been legal in Texas for some time, changes to the code governing Texas Series LLCs are set to take effect in 2022. While most key principles currently in place appear set to continue, the upcoming version of the code does appear to include some key changes which will effect Series LLCs moving forward.
A “Series LLC” is a specific type of limited liability company (“LLC”) that, if formed, organized, and maintained correctly, allows the LLC to form and operate multiple “series,” or “cells.” Although the series are legally part of the LLC, each series is, in essence, treated as, and may operate as, an individual stand-alone entity. An individual series may, among other things, enter into contracts, hold title to property, and serve as a member of other organizations. If maintained correctly, each series also enjoys individual liability; the debts, liabilities, and obligations of each series are enforceable against such series individually, not against the LLC generally or any of its other series.
Due in part to the liability protection Series LLCs offer their members, Series LLCs are commonly utilized by real estate investors as a Series LLC may allows the investor to hold multiple properties under the umbrella of one LLC but, at the same time, provides separation and liability protection as each property, or group of properties, can be placed in a separate cell. For example, an investor might create “Company XYZ LLC” as a series limited liability company. If the investor wants to purchase five separate properties for investment, the investor can create five series under Company XYZ LLC – as “Company XYZ Series A,” “Company XYZ Series B,” and so on . . . – and place one property in each. If a creditor obtains a judgment or lien against the property held by Series A, the creditor can’t satisfy the debt or judgment by going after property held by Series B, any other series, or Company XYZ LLC generally.
Series LLCs in Texas are currently governed by Texas Business Organization Code Chapter 101, Subchapter M (sections 101.601 – 101.636). However, beginning June 1, 2022, a new version of Subchapter M will take effect.
Starting June 1, 2022, a new version of Subchapter M is set to take effect. Although many of the current provisions will be left unchanged, the published, upcoming version of Subchapter M suggests a few significant changes will take effect. The most noticeable change is the inclusion of designations of specific categories of series. As currently written, the code simply refers to all series as “series.” To illustrate, Section 101.602(a) states:
However, the upcoming version of the code revises 101.602(a) to include specific categories of series:
The revised version of 101.602 goes on to explain that “registered series” will be created by filing a “certificate of registered series” with the Texas Secretary of State. A series that is formed without filing a certificate of registration will be deemed a “protected series.” Both protected and registered series will be entitled to the normal powers and capacities of a series, including the ability to (1) sue and be sued, (2) contract, (3) acquire, sell, and hold title to assets including real, personal, and intangible property, (4) grant liens and security interests, and (5) be a member, promoter, organizer, partner, owner, associate, or manager of an organization.
Instead, the main distinction between protected and registered series appears to be that registered series are designed to put the public on notice of the series’ existence. Although assumed name certificates can be used currently to put third-parties on notice of a LLC’s series, because series can and are created and accounted for internally, it can be difficult to confirm the existence or ownership of series. Accordingly, some financial institutions and businesses have been reluctant to conduct business with a series and have instead insisted that dealings be with a series’ parent LLC. By creating a simple mechanism for lenders, creditors, and other institutions that may be leery of conducting business with an individual series to use to easily confirm that a series is in fact registered to an individual LLC, the new version of the code may help facilitate business transactions using Series LLCs. Whether the updated versionof the code does in fact carry benefits for Series LLC owners remains to be seen as it has not yet taken effect, but Series LLC owners should familiarize themselves with the upcoming changes.