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The traditional Texas LLC has long been a favorite of real estate investors and others. Recently, however, a new type of LLC – the Series LLC – has become the preferred way to own multiple properties and businesses. This article discusses structural and operational details of a series company as they relate to an asset protection program.

Series LLC´s are available in a number of states, but this firm prefers Texas and Nevada. For more basic information on LLC´s generally and the LLC formation process in particular, please read our more basic article on LoneStarLandlaw.com entitled LLC´s in Texas – Company Formation. This discussion will build on the foundation laid by that previous article.

Attached to this article is a checklist that will help the reader assemble the information necessary to begin forming a Texas series LLC.

The Texas Series LLC – like traditional Texas LLC´s, corporations, and limited partnerships – is governed by Title 3, Chapter 101 of the Texas Business Organizations Code ("BOC"). Changes to the BOC in 2009 have made the BOC a model of progressive legislation and improved Texas´ already deserved reputation as an excellent place to do business and engage in asset protection.

A series LLC allows an investor to hold assets and liabilities within separate compartments or "series" which effectively operate as sub-companies. The Texas series LLC shares characteristics with the traditional Texas LLC, including the benefit of informal management, an effective liability shield, and pass-through taxation; but the Texas series LLC also has the ability to segregate assets and insulate them from liability arising from other assets within the same company.

Is the Texas Series LLC risky because it is a new vehicle? No. The series company has been around for many years in Delaware and Nevada, where it has a solid, court-tested track record, and is spreading rapidly to other states. It is an idea whose time has come.

Lawyers are frequently asked "How many LLC´s do I need, and how many properties can I safely hold in one LLC?" The Texas Series LLC eliminates these issues for most clients. It is an ideal asset protection tool because it has a liability barrier and it simplifies the lives of its members, who no longer need multiple companies to do business. And a Texas Series LLC can own any type of property anywhere in the world (but it must have a registered agent with a physical address in Texas).

What if you currently have only one property or business to put into the company? Should you still set up a series LLC? Perhaps the question should rather be "Why not?" since it is not necessary that you already have multiple properties or businesses to form a series LLC. You can delay implementation of additional series until other properties are acquired. There is no downside in the form of costs or extra filing requirements. As one buys properties, additional series can be easily established – and no filings with the Secretary of State are necessary.

Clients who are averse to the idea of multiple series may of course elect to form a traditional LLC. This type of entity continues to be useful for a single investment or business purpose.

Note that in order to be established as a series company, specific wording must be included in the company´s Certificate of Formation. The Certificate of Formation is the initial document that is filed with the Texas Secretary of State. It supplies the essential information required by the BOC in order to establish a Texas series LLC. It should also put the public on notice of certain key asset protection provisions.

It is possible to convert an existing traditional LLC to a series company by means of a Certificate of Amendment and payment of a $175 filing fee. Unfortunately, nearly all of the company documentation (organizational minutes, company agreement, etc.) needs to be replaced.

A series LLC contains "series" or compartments in which properties or businesses can be held separately and distinctly from the assets held by other series in the same company. In other words, Series A could contain a rental fourplex; Series B could contain a strip center; Series C could contain a business that buys and sells real estate notes; series D could contain a general contracting business; and so on. Each series is insulated from the other.

Let´s look at a common example: suppose there was foreclosure on a property contained in Series A, and there was a deficiency at the foreclosure sale (i.e., the property sold for less than the amount owed). The lender then sued and obtained a deficiency judgment. Assuming that the company and its transactions were properly structured, the judgment would be enforceable only against Series A assets – not against the assets of Series B, Series C, or any other series. This is not true of a traditional LLC.

The individual series are, in effect, sub-companies and there is technically no limit to the number of series a company can have, although prudence might dictate that there is a reasonable limit to the number of properties one might to hold in a single LLC – even a series LLC. We recommend a cut-off at about 25. One should also consider carefully before "mixing and matching" entirely different businesses within the same company. Generally speaking, one should not place an enterprise in one series that:

Entities with the foregoing characteristics should probably be placed in a separate LLC, referred to among asset protection lawyers as "single purpose entities" or "SPE´s." Examples? Restaurants, retail stores, and apartment complexes. Merely because the BOC permits entirely different enterprises to be contained within the same company does not mean that one actually should do so. Individual circumstances must be closely examined and evaluated.

Clients occasionally ask if they should form a corporation, general partnership (also referred to a "tenants in common" or TIC), or limited partnership instead of an LLC. Our response:

Although there is no such thing as a "bulletproof" plan to avoid personal liability or protect assets, you can get close. The series LLC is an important step in getting there.

The basic principle of asset protection is this: the more fences a plaintiff and his attorney have to jump, and the more money they have to spend in order to get to you personally, the better protected you are. One way or another, plaintiffs have to pay their lawyers, and that means either cash or contingent fee – and few good lawyers will take a real estate fraud case on a contingent fee, particularly if they know they will have to penetrate a bona fide LLC before they can get to any real assets.

For more details on asset protection, read our companion article Asset Protection in Texas.

Our recommended structure involves two LLC´s – a management company and a holding company – and a living trust for the homestead. The fact that the holding company exists quietly in the background (either in Texas or Nevada) and does not usually enter into contracts or business dealings makes it nearly impossible to sue successfully (the reason is the legal doctrine of "privity"). Few investors or business persons need anything more complex. While asset protection lawyers are certainly capable of developing more exotic structures, it is preferable to keep matters simple whenever possible.

Of course, this two-company structure does not fit everyone. There may be good reasons to vary this model from case to case.

The two-company structure contemplates a "shell" management or operating company (which is entirely unaffiliated with the asset-holding series LLC) to serve as the front line of defense against tenants, creditors, and plaintiff's attorneys. If you already have a traditional Texas LLC or corporation, and are wondering what to do with it now that a series LLC is available, this is an excellent use for it – so long as the existing company does not carry excess baggage into its new role.

The management company should own no substantial amount of real or personal property – perhaps its office furniture and equipment, although these can be leased – and it should be the entity that hires and pays employees who connect with the public. Any funds collected should pass through to the holding company (We characterize these payments as consulting fees). Third parties should all do all business with the management company and should never even be made aware of true underlying ownership or the location of hard assets. In other words, they should not even know that the holding company exists. It is a separate, stand-alone entity. No cross-ownership.

In addition to its management duties, the management company serves as a target that is deliberately put into public view in order to draw fire away from the member/owners and their assets. If anyone obtains a judgment against the management company, it will likely be uncollectible. Imagine the frustration of a plaintiff and his attorney after spending enormous time, money, and effort to get a judgment against this entity – only to find out there is nothing there.

If your management company is sued and tied up in litigation, what then? Simple. Form another management company and move on.

Clients often ask if they should use a particular series of the holding company as the management entity. The answer is absolutely not. The management company, to achieve maximum effectiveness, should be a separate LLC in order to draw fire away from the asset-holding entity.

It is critical that your attorney draft the series LLC´s governing documents so that they discourage creditors from even contemplating the seizure of your membership interest. Asset protection provisions should be included from the outset in the Certificate of Rormation and then extensively set out in the company agreement. Basic "plain Jane" documents (such as those available online) do not maximize asset protection and should never be used by anyone who is serious about asset protection. For more information on this subject see our companion article LLC´s in Texas – Governing Documents.

This office favors establishing two classes of members and announcing this fact in the company´s certificate of formation or articles of organization. Class A members are "regular" members who have full ownership and voting rights; Class B members are those who acquire their membership interest by execution on a judgment or similar means. They cannot vote and are not entitled to distributions except with the unanimous approval of the Class A members. How better to deter creditors than to make it clear from the outset that any interest they obtain will be essentially worthless?

In order to maintain the viability of the company as a separate legal entity that provides a liability barrier for its members, company "maintenance" is essential. Doing the minimum – filing initial paperwork and paying a filing fee – and then doing nothing else to support the company´s existence is not enough to maintain a liability shield over time. It will not protect you from plaintiff´s lawyers determined to reach a member´s personal assets or get a judgment against a member individually. This is the doctrine of "piercing the corporate veil." Essentially, if a court decides that the company is not a "real" free-standing, independent entity, but merely the "alter ego" of its member(s), it can order that the company´s liability barrier be pierced and individual members held personally liable.

Even if you have a properly constituted, operating Texas Series LLC or Nevada Series LLC, you may still be sued in your personal capacity. Unless you have personally guaranteed indebtedness of the company, this is a form of lawsuit abuse – yet certain lawyers will do it anyway. Your lawyer should respond by sending out written discovery (including interrogatories and requests for production) to find out if the other side has any basis for holding you personally liable. If no such basis exists, your lawyer should file a motion for partial summary judgment to have your personal name removed from the case as a defendant. He or she should also ask for attorney´s fees and costs for having to go through this process. If you have properly maintained your LLC, this motion should be successful. If not, this defense can be reasserted at trial. A related article on www.LoneStarLandLaw.com, Litigation in Texas, is recommended reading.

Any and all investment property or assets currently held in a personal name should be moved into the LLC by means of a warranty deed or bill of sale without delay. A Texas Series LLC or Nevada Series LLC can hold different properties and/or businesses in separate, insulated compartments – for example, title can be held in the name of "ABC LLC – Series A." Putting the property into the company without specifying a series will result in the property becoming a general asset of the LLC (without series insulation) so such deeds need to be carefully worded. Properties owned by the company can be located in Texas or any other state. For more details, see our companion article entitled Deeding Property to an LLC.

Clients often wonder if the transfer of property into an LLC is barred by the "due on sale" clause in their deed of trust. Firstly, this clause (if you read it carefully) does not prohibit a transfer; it merely gives the lender the option to accelerate the note if a transfer occurs. Secondly, this almost never happens so long as the loan is not in monetary default. In fact, we have never seen a loan accelerated because of a transfer to a borrower´s personal company. See our companion article entitled Due on Sale in Texas.

One factor that should be considered in deeding property into an LLC is whether or not the property is to be transferred with an assumption of the existing loan or "subject to" the existing loan (i.e., the LLC does not take liability for the loan). This choice has accounting implications – whether or not the company will in the future be carrying the loan on its books as a company debt. An appropriate clause specifying assumption or "subject to" should be included in the deed.

It is not advisable to transfer a Texas homestead into an LLC since the homestead is already protected by the Texas Property Code against forced sale or execution upon a judgment. Personal and homestead-exempt assets should be kept separate from investment assets. This is a cardinal rule. Read our article, Homestead Protections in Texas.

Investors with multiple properties and/or businesses should consider forming a Texas series LLC, which offers unprecedented benefits in terms of simplicity and economy. It is particularly effective when used as part of this firm´s recommended two-company structure. We recommend that you consult a qualified asset protection attorney who will tailor his advice and documents to your individual circumstances and investment plan. Questions relating to structuring an asset protection plan as well as follow-up questions on company formation are included in the legal fee charged by this office. No internet service will do that.

Information in this article is proved for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. Although we will respect your confidentiality, this firm does not represent you unless and until it is retained and agrees in writing to do so.

THIS DOCUMENT IS NOT INTENDED TO BE USED, NOR CAN IT BE RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES IMPOSED UNDER UNITED STATE FEDERAL TAX LAWS. THIS DOCUMENT DOES NOT CONSTITUTE DOES NOT CONSTITUTE A TAX OPINION OR OTHER ADVICE TO WHICH CIRCULAR 230 IS RELATED.

Copyright © 2012 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his websites, http://www.LoneStarLandLaw.com, http://www.TexasSeriesLLC.com., and http://www.TexasAssetProtection.com.

or more information on limited liability companies, read our articles on the subject. Go to www.TexasSeriesLLC.com or www.LoneStarLandLaw.com.

Texas and Nevada series limited liability companies are a specialty of ours. Company formation is handled online and services are priced accordingly - i.e., office conferences increase these fees significantly. Note that fully 90% of the new companies we form are series companies, since we no longer recommend corporations or traditional LLC´s for most of our clients´ investments – although there are exceptions.

Prices are quoted in terms of legal fees plus costs (which are beyond our control and subject to change without notice). Company books are part of the package – we insert our own sophisticated documentation into these books (minutes, company agreement, etc.) customized to your business plan and designed to maximize asset protection.

Texas Series LLC formation. Legal fees for series LLC formation in Texas are $750 plus the filing fee ($325), $90 for the company book (our cost – includes black vinyl notebook, seal, and custom membership certificates – upgrade available for $45 additional), and $20 domestic shipping by UPS ground (overnight/air is $20 additional per book) for a total of $1,185 for the complete Texas package. For this total, you must supply your own registered agent with a physical street address in Texas. If we serve as registered agent, add $250.

Two-company structure (recommended for investors with several properties). If the client wishes to establish a two-company asset protection structure, which we highly recommend (utilizing a series LLC as an asset-holding company plus a separate "shell" management company), then legal fees for forming these two companies simultaneously are reduced by $100.

Nevada Series LLC formation. Incorporating a Nevada company into the mix appeals to many clients who like that extra measure of geographical and legal distance. Fees for series LLC formation in Nevada are $750 plus $165 in costs, which include the $75 filing fee (add $125 for expedited handling), $90 for the company book (our cost – includes black vinyl notebook, seal, and custom membership certificates), and $20 domestic shipping by UPS ground (overnight/air is $20 additional per book) for a total of $1,025.

If you do not have an address or someone to act as your registered agent in Nevada (required), we can arrange this for you at an additional cost of $375 per year, which supplies your company with both an address (mailbox in Las Vegas) and a registered agent with a physical street address. There are no franchise taxes in Nevada, but after establishing an LLC the state will require payment of an annual business license fee of $225. Note that a Nevada LLC is recommended for a holding company only – not for a management company for Texas properties since it would have to pay expensive fees to register and do business in Texas.

Conversion of Traditional Texas LLCs. Some clients will request that we convert a traditional Texas LLC to a series company. We generally discourage this option for a number of reasons, but under certain circumstances it may be acceptable. $550 excluding filing fee of $150 and any other costs (e.g., company book).

Optional add-ons. These include:

This can be complex work – so feel free to ask for an exact quote for the combination of entities and features you're seeking. Costs are beyond our control and are subject to change. Fees and costs must both be paid in advance, since we immediately start writing checks for the client. Go to the "Make Payment" button on the website for payment options. If payment is made by check, it should be made payable to David Willis and overnighted to our dedicated registered agent address: 330 Rayford Rd., Suite 401, The Woodlands, TX 77386 (Note: we cannot proceed until the check clears).

______________________________________________________________________________

            _______ Texas             ________ Nevada

            NAME AND ADDRESS                                              PERCENTAGE INTEREST

            NAME AND ADDRESS

                                                                        Services, formation costs, and $_______________ [optional]

                                                                        Services, formation costs, and $_______________ [optional]

                                                                        Services, formation costs, and $_______________ [optional]

                                                                        Services, formation costs, and $ ______________

            _____ Not applicable to us.  We are not making any loans to the company at this time.

            _____ Yes, we will be both injecting capital and making one or more loans to the
                                 Company.  We _____ do     _____ do not need a promissory note prepared (extra
                                 fee of $75).  Terms of note are as follows:
                                  ________________________________________________

            ______ operating a single business – this is single-purpose entity or "SPE."

            ______ owning and holding multiple investment properties (“holding company”)

            ______ managing multiple investment properties (“management company”)

            ______ owning a combination of businesses and investment properties

            ______ other: _________________________________________________________

            _______ series LLC with separate “series” for separate properties or businesses

            _______ traditional (non-series) LLC suitable for a single property or business

            Example:        Series A: rental property at 123 Oak St., Houston, TX 77057
                                              Series B: my general contracting business called “Mr. Fix-It”

            Series A: _____________________________________________________________

            Series B: _____________________________________________________________

            Series C: _____________________________________________________________

            Series D: _____________________________________________________________

            ______ one managing member - name: ________________________________
                    address: ________________________________________________________

            ______ co-managing members (common for business partners or husbands and wives)

                                    name: ________________________________________________
                                            address: ______________________________________________

                                    name: ________________________________________________
                                            address: ______________________________________________

            _______ we will be hiring a non-member manager:

                                    name: ________________________________________________
                                            address: ______________________________________________

            _______ The managers of the company will also manage the individual series (this is the usual case) .                      

            ______   We will have a separate managing member for each series/property.

                            Details: __________________________________________________

                                         ___________________________________________________

            ________ No officers at this time

            ________ Yes, the officers will be:

                                    President: __________________________________________________

                                    Vice-President: _____________________________________________

                                    Secretary: _________________________________________________

                                    Treasurer: _________________________________________________

            _____ We have someone to serve as registered agent:

                                    Name: ___________________________________________________

                                    Street Address (not POB, PMB, UNIT X - 1200, or the like, or the S of S
                                             will reject our filing): _________________________________________

                                    ________________________________________________________

            _____ Texas: We would like the attorney to serve as registered agent (add $250
                                 annually). Registered address will be 330 Rayford Rd., Suite 401, The Woodlands, TX 77386.

            ______ Nevada:            UPS STORE 0715
                                                               Attn: Diane Watson
                                                               4616 W. Sahara Ave.
                                                               Las Vegas, NV 89102-3796
                                                               Tel. (702) 878-8999
                                                               Fax (702) 878-5108
                                                               store0715@theUPSStore.com

            ________ the sole managing member
                    ________ any managing member
                    ________ both managing members (if there are co-managing members)
                    ________ president (if officers are named)
                    ________ secretary (if officers are named)
                    ________ other: _______________________________________________________

            ________ any managing member of the company
                    ________ both managing members (if more than one)
                    ________ president (if officers are named)
                    ________ secretary (if officers are named)
                    ________ other: __________________________________

            _______ Our DBA will be ______________________________________________

            _______ No DBA at this time

           _______ I am attaching a copy of the deed(s) to this checklist. Please go ahead and prepare one or more deeds (add $175 per deed excluding filing fees). If there is/are loan(s) against
                    the property, specify:

                                  ______ the company will assume this existing debt
                                          ______ the company will take the property “subject to” the existing debt
                                          ______ do not mention existing indebtedness in the deed

            _______ I am not deeding properties into the LLC yet – maybe later

            _______ We would like to have management and consulting agreements included
                                      in order to facilitate capital flows between our two companies (add $350)
                    _______ We do not need these agreements at this time

            _______ the black vinyl notebook is OK
                    _______ I prefer the red and black leatherette (add $45) – heavier, display quality.

            _______ UPS ground shipping is OK
                    _______ I prefer 2-day air (add $20)

            Ship the company book to:

            _______ the company’s registered address shown above
                    _______ my address shown below

                                                                       
                                                                       
                                                                       Person completing this form:

                                                               __________________________________________
                                                                        Name

                                                               __________________________________________
                                                                        Mailing Address

                                                               __________________________________________
                                                                        Email

                                                               __________________________________________
                                                                        Phone

This completed form may be emailed to LoneStarLandLaw@aol.com or may be faxed to (832) 201-5321.