Series LLCs
Series LLCs began in Texas in 2009 and are still a relatively new development in the limited liability structuring arena. In short, a series LLC takes the traditional multientity parent-subsidiary structure used for holding assets and compartmentalizing liabilities and rolls that multiple-entity structure into a single entity. Series LLCs are governed by subchapter M of the Texas Business Organizations Code (TBOC) (beginning at section 101.601). Series LLCs consist of what is called the “umbrella” LLC, which is akin to the parent in a parent-subsidiary structure, and “cells,” which are the underlying series LLCs that make up each series of the umbrella, similar to the subsidiaries in a parent-subsidiary structure. After the umbrella LLC is formed with the Texas secretary of state, the series LLCs are created by filing assumed name certificates (SOS Form 503, form 3-3 in this manual) for the different operations. These DBAs must then have their own distinct company agreements and other ancillary operational documents. Series LLCs are becoming popular largely among multiproperty owners and businesses with diverse services and streams of goods. The benefit of series LLCs to these types of businesses is that it is much easier to isolate liabilities from other operations than in the traditional parent-subsidiary method. Series LLCs are also much cheaper to form due to fewer necessary filing fees up front. To fully enjoy the liability isolation of each series, the series LLC must be run as any other LLC with separate bank accounts, operational documents, and so on.
A series LLC is formed in the same manner as a traditional LLC, by filing a certificate of formation (SOS Form 205, form 5-1 in this manual) with the Texas secretary of state. The one difference is that TBOC section 101.604 requires language placing the public on notice of the existence of the series LLC. The TBOC provides exemplar language that satisfies that notice requirement. It is generally easiest to place the following language into SOS Form 205 before filing:
(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.
Tex. Bus. Orgs. Code § 101.602(a).
Effectively, each series operates as its own LLC and can sue and be sued; contract, acquire, sell, and hold title to assets (personal property, real property, and intangible property) belonging to that series; grant liens and security interests in the series’ assets; own or manage another organization; and generally act and exercise any power necessary to achieve the series’ goals or activities. Tex. Bus. Orgs. Code § 101.605.
Limited partnerships (LPs) have long been the standard for real estate investment because they allow passive investors to invest in and fund land development without assuming operational risks. Series LLCs, on the other hand, are not used for large-scale land development because that same protection is not available. If the corporate veil were pierced due to fraud, passive investors in a series LLC would face a higher risk of liability, just as members of standard LLCs would. Today, series LLCs are typically used by single-owner and small-scale real property investors because these investors usually have singular operational control, but with multiple properties. LPs continue to be the dominant structure for large-scale land development, as they can use an operational LLC to control the LP and retain the risk placed on a general partner, allowing passive investors to come and go as limited partners.