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Changes for Texas series LLCs

On Behalf of | Dec 21, 2022 | Real Estate

In 2009, Texas enacted legislation approving what’s known as a “series LLC”. Since that time, the series LLC has become an increasingly popular way for investors and entrepreneurs to own different assets and/or business units in a single LLC while at the same time segregating potential liability among separate series. The assets of a series LLC (sometimes referred to herein as the “parent LLC”) are allowed to be compartmentalized, “siloed”, and insulated from one another, without the headache of dealing with numerous entities, as was the case prior to the enactment of the series LLCs statute.

While conceptually the series LLC has a number of attractive features, third parties, like lenders and title companies, have not been so quick to accept them.  Regarding lending, real estate, and other commercial transactions, while the parent LLC has essentially all of the flexibility, rights and opportunities as the standard LLC, heretofore a series of the parent LLC has not been able to obtain a certified copy of its Certificate of Formation, or a Certificate of Good Standing (aka a “Certificate of Fact” in Texas), because there was no such filing to be made with the Texas Secretary of State.  These types of publicly filed documents and certificates from the Secretary of State are frequently required in commercial, lending, and real estate transactions, making such transactions more difficult for any series when compared to a standard LLC, limited partnership, or corporation.

In an effort to address these challenges, and seemingly in an effort to establish greater commercial functionality, attractiveness, and transparency for series LLC operations, Texas has recently followed the State of Delaware’s lead, and has made changes to the Texas Business Organizations Code (the “TBOC”) that went into effect as of June 1, 2022, allowing for what is now called a “registered series” and what is referred to as a “protected series”.  These changes will affect current and newly contemplated Texas series LLCs.

The changes to the TBOC do not appear to affect the statutory powers already granted to any existing series, there are no material governance changes in the amended law, and there is no change in the amended law regarding the protections afforded managers and members of a series.  However, TBOC Sec.101.601 changes now include the phrase “a protected series or registered series”, and will separate a series of the parent LLC into one of three categories: (1) a registered series, (2) a protected series, and (3) simply a series, being a series that is neither registered or protected.

  • Registered Series

As of June 1, 2022, a series may, but is not required to, become a “registered series” by filing a Certificate of Registered Series with the Secretary of State and paying the associated filing fee ($300). Under the amended law, a Certificate of Registered Series must state (1) the name of the parent LLC forming the registered series; (2) the name of the registered series; and (3) if the registered series is formed under a plan of conversion or merger, a statement to that effect.  The amended law also has new requirements for the name of a registered series. A registered series name must now contain the name of the parent LLC and must include the phrase ‘registered series’; or the abbreviation ‘RS’ or ‘R.S.’. For example, if the parent LLC’s name is “NEWCO, LLC”, the registered series’ name could be styled as “NEWCO, LLC – [insert specific series identification phrase or number here] Registered Series”.  Of note, the name of a registered series must also now be “distinguishable in the records of the Secretary of State”, meaning the Secretary of State will likely reject a Certificate of Registered Series if the distinguishability standard is not met. If a series files the requisite Certificate of Registered Series, such certificate will be an easily attainable and publicly filed document, and the Secretary of State will be able to issue a Certificate of Fact confirming the lawful existence of such registered series.  Theoretically, this will make commercial, lending, and real estate transactions less painful for a registered series.

  • Protected Series

Without such “registered series” filing, any series that is created will be considered a “protected” series, so long as it complies with the other requirements of a series under the TBOC, essentially what is currently known simply as the series.

There are potentially negative consequences that could come from the amended law.  Lenders, title companies, and others engaging in commercial transactions will almost certainly prefer to deal with a registered series, if not eventually require that such series must be a registered series in order to engage in any transaction.  Accordingly, those choosing the series LLC structure for its public record anonymity may either lose the flexibility to maintain such anonymity while engaging in commercial transactions, or they may be limited to cash transactions and obtaining lending from private, hard-money sources that will not mandate a registered series.

Under the former statute, there were minimal fees and administrative costs associated with the formation of a series, and winding-up and termination was generally an internal process.  Under the amended law, a registered series will have initial fees and costs similar to those of the standard LLC, and when it is time to terminate or wind up a registered series, such series must go through the formal winding up process, including the filing of a Certificate of Termination with the Secretary of State.

Franchise tax considerations could also be a determining factor when considering the Texas series LLC structure under the amended law.  Historically, only the parent LLC has been required to file a single annual return, and the margin for all series were combined and reported under the parent LLC to determine franchise tax owed, if any.  However, under the new law, it is unclear if this advantage of the Texas series LLC will remain, or if each “registered series” will be required to file its own return and determine its franchise tax separately, in addition to the parent LLC.

For existing Texas series LLCs, consideration should be given to whether or not correction instruments should be filed of record, particularly with regard to registered series which own real property, since the correction filing amending a series’ name to include “registered series” could be seen as a “material” change to documents previously filed of record.  Similarly, it is likely worth considering amending any series agreements, if such series is going to file to become a “registered series” with the Texas Secretary of State, to accurately reflect its designation.  For existing and newly contemplated series LLCs, correctly and specifically identifying a “protected” or “registered” series will be prudent in all agreements and signature blocks.

Historically, the key justifications for using the Texas series LLC were the ease of creation and documentation, and the absence of fees. The series LLC has been seen as an alternative to creating a multitude of separate LLCs, and many investors and business owners used the series LLC to hold individual investments, real estate properties or other assets under one LLC umbrella while maintaining the protection that comes with each investment, property or asset being owned by a separate series.  Though the recent amendments could very well improve the commercial functionality of each individual series choosing to become a registered series, it may also eliminate some of the historical justifications for using the series LLC in the first place.  The increased formality in creating (and winding up) a registered series, and the greater scrutiny on documentation, will almost certainly diminish the administrative ease of the Texas series LLC. While this may be advantageous for some, and not for others, the changes to the TBOC will likely affect whether the series LLC is the preferred structure for your business going forward.

 

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