Texas is one of a handful of states that recognize series limited liability companies. A Texas series LLC can carry on any business, purpose, or activity that is not otherwise prohibited by Texas LLC law. Each series has the power and capacity to:
- Sue and be sued;
- Enter into contracts;
- Acquire, sell, and hold title to assets of the series;
- Grant liens and security interests in assets of the series; and
- Exercise any power or privilege as necessary or appropriate to the conduct, promotion, or attainment of the business, purposes, or activities of the series.
These broad powers allow each series to act similar to an independent limited liability company.
How to Create a Texas Series LLC
Texas series LLCs are authorized by Section 101.601(a) of the Business Organizations Code (BOC):
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.
At first glance, this provision implies that a series LLC can simply be created by adding provisions in the LLC operating agreement. This is not the case. Section 101.602(b)(3) provides that the liability protection benefits of Texas series LLCs is forfeited if the LLC’s certificate of formation does not contain a notice of the limitation of liability provided by the Texas series LLC law. The Texas Certificate of Formation form (Form 205) does not provide this notice required by law. Most Texas LLC attorneys will add the required information using the Supplemental Provisions/Information box or an attachment to the Certificate of Formation.
Although Texas law has strict requirements for authorization of a series LLC, no separate filing is needed when a series is established. This means that, while the Secretary of State records may indicate whether separate series are authorized, they will not indicate whether a series has actually been created.
Limitation of Liability and Texas Series LLCs
The real benefit of a series LLC is confinement of liability to a particular series. To illustrate, let’s assume that the operating agreement of Parent LLC creates two series: Series A and Series B. Let’s assume that Series A is successfully sued. The BOC provides that the creditor can only look to the assets of Series A to satisfy its judgment. This protection is provided by Section 101.602(a)(1) of the BOC. That section provides:
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.
This protects both Series B and Parent LLC from the lawsuit against Series A. But what about protecting Series A from liabilities associated with Parent LLC? Let’s change the facts and assume that instead of Series B being involved in a lawsuit, it is Parent LLC that is successfully sued. This scenario is not covered by Section 101.602(a)(1). Thankfully, though, protection is provided by Section 101.602(a)(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.
Taken together, Section 101.602(a)(1) and (a)(2) provide complete segregation of liability. The parent LLC and each series are all treated as separate companies, and the assets of one cannot be used to satisfy the liabilities of the others.
The protection offered by Texas series LLCs is dependent on the proper operation of the series LLC. The liability protection will be forfeited if the LLC does not maintain separate records for each series and account for the series assets separately from other assets of the parent LLC or any other series.