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The traditional Texas LLC has long been a favorite of real estate investors and others, especially after limited partnerships were made subject to the Texas franchise tax January 1, 2007. Many lawyers who formerly created investment structures based LP´s with a corporation as the general partner then shifted their focus to LLC´s, which are cheaper to file and less complicated to manage and maintain.

Recently, however, a new type of LLC – the Series LLC – has become the preferred way to own multiple properties and businesses. New filings at the Secretary of State reflect that formation of other types of entities is down significantly, while formation of LLC´s – including the new Series LLC – now composes the majority of new filings. It is not an exaggeration to declare that for most private real estate investors the LP and the corporation are all but dead, and the LLC has taken its place. Additionally, the Series LLC now offers a very nearly perfect vehicle for investors who own or intend to acquire multiple properties and who want to sort these properties into separate cells.

This article discusses structural and operational details of a Series LLC as they relate to an asset management and protection program. Note that it is not necessary to implement the series aspect of a series company unless and until you are ready to do so; until then the company operates exactly the same as a traditional LLC. Therefore there is no downside to electing to form a Series LLC rather than a traditional LLC – even if there is no immediate intention to create series – since useful options and flexibility are preserved for future operations.

Series LLC´s began in Delaware in 1996 and are now available in a number of states, but this firm prefers Texas and Nevada, which have very similar statutes. For more basic information on LLC´s generally and the LLC formation process in particular, please read our article on LoneStarLandlaw.com entitled LLC´s in Texas – Company Formation. This discussion will build on the foundation laid by that previous article.

A Series LLC allows an investor to hold assets and liabilities within separate cells or "series" which effectively operate as sub-companies. The series are not stand-alone legal entities in their own right – at least not technically – but in many respects they act as if they were, since they can enter into contracts and buy and sell property in the series name. That fact notwithstanding, the Texas Comptroller on its website states that a "Series LLC is treated as a single legal entity. It pays one filing fee and registers as one entity with the Texas Secretary of State. It files one franchise tax report as a single entity, not as a combined group, under its Texas taxpayer identification number."

As mentioned above, an individual series of a Series company is statutorily empowered to enter into contracts, file and defend lawsuits, and own property – all in its own name. A series can obtain its own EIN if it chooses and be treated separately for federal tax purposes (See proposed IRS regulations at 26 CFR Part 301 issued Sept. 14, 2010). A series may (but is not required by the statute) to have its own bank account. A series can (and should) operate under its own assumed name. Given all of these characteristics, declaring that a series is not technically a stand-alone legal entity may be a distinction without a difference.

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 a Series LLC also has the ability to segregate and compartmentalize assets and liabilities within individual series.

How does this differ from a traditional LLC? The answer is found in one word: exposure. In the case of a judgment against a traditional LLC, all assets of the LLC are available for purposes of satisfying that judgment. Not so with a series company. If a series is sued, liability is contained within that series and does not spill over to other series or to the company at large.

Is the Series LLC risky because it is a new vehicle? Not at all. The Series LLC is now available in at least eight states and is accumulating a solid, court-tested track record. It is an idea whose time has come, particularly for real estate investors, who can acquire multiple properties and place each property in its own series, thereby avoiding establishing multiple LLC´s.

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 (the "BOC"). Changes to the BOC made by the 81st legislature in 2009 – including authorization of the Series LLC – 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. There is no longer any good reason to go to another state to form an LLC unless one is specifically looking for an extra layer of protection as part of our recommended two-company strategy – i.e., the management company is a Texas LLC and the holding company is a Nevada LLC.

BOC Sec. 101.601 and 101.602 read:

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 many clients, at least up to a point. Our answer to the first question is most often "One LLC or perhaps two if you elect our recommended two-company structure." Our response to the second question is "No more than 20 or 25 properties should be held in a single Series LLC." Note that this is strictly our (somewhat arbitrary) opinion. The statute permits an infinite number of series, but prudence suggests that even a Series LLC should have some outside limit on the number of properties it owns. When an investor has established Series A through Series Z – that´s 26 properties – it is definitely time to establish another entity to hold assets.

The Series LLC is an ideal asset protection tool because it has a liability barrier and it simplifies the lives of its members, who no longer need complex structures or 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 an investor has only one property or business to put into the company? Should he or she still consider setting up a Series LLC? Perhaps the question should rather be "Why not?" since there are no significant additional up-front costs and one can delay implementation of the first series until an appropriate time. Until series are created, the company behaves exactly the same as a traditional LLC. So it is not necessary that one already have multiple properties or businesses in order to proceed with forming a Series LLC. In fact, if real estate investment is in a client´s future, it is wise to go ahead and establish the correct structure now.

Forming a Series LLC therefore preserves flexibility for future operations. As one buys investment properties or assets, additional series can be easily established and no state filings or legal fees are necessary. The company agreement should be written so that a series is automatically established when it receives title to a property or asset – for example, in the name "ABC LLC – Series A" – without necessity for amending the company agreement or taking action by means of a special meeting of members. Of course, a special meeting can always be held to document the establishment of a series (or any other significant LLC event) if the members consider it prudent to do so.

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. A traditional LLC is also suitable to act as the "management company" in our recommended two-company structure, since its purpose is not to hold assets but to act as a pass-through shell.

In order to establish a Series LLC, BOC Sec. 101.604 requires that specific wording must be included in the company´s Certificate of Formation – the "COF" – which is the initial document filed with the Texas Secretary of State. The COF supplies the essential information required by the BOC in order to establish a Texas series LLC and it should be carefully worded.

Note that there is no "standard form" from the Secretary of State or any other source that is sufficient to legally establish a Series LLC. Even if there were, there are many clauses and provisions that this firm considers to be advisable to include in the COF in order to maximize asset protection. The filing of the COF is an excellent opportunity to put the public on notice that your company has serious asset protection provisions in place. Accordingly a "minimalist" one-page type filing should never be considered by any serious businessperson to form either a Series LLC or even a traditional LLC.

It is possible to convert an existing traditional LLC to a Series LLC by means of a Certificate of Amendment and payment of a $175 expedited filing fee. Unfortunately, nearly all of the company documentation of the traditional company (organizational minutes, company agreement, etc.) will need to be replaced, so there is little in the way of cost savings. Note that this approach is not recommended unless the existing traditional company is free of baggage such as debts, tax liabilities, contractual obligations, pending or threatened litigation, and the like. If it is, then by all means proceed with the conversion process.

A Series LLC contains individual series in which properties or businesses can be held separately and distinctly from the assets held by other series and by the company at large. In other words, each series may contain a separate rental property (a common arrangement); or, alternatively (by way of example), 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. The important point is that each series is insulated from the other as well as from assets and liabilities held by the company at large.

A point of clarification here: a Series LLC can still own property without a series designation – as an asset of the company at large. For example, property transferred into "ABC LLC" would become a company asset, even if the company is a Series LLC, because no specific series was named in the transfer.

A word about warranty deeds, bills of sale, assignments that convey assets into individual series: avoid all internet and so-called "standard forms." They are seldom adequate for any serious purpose, and they are certainly inadequate in the context of a Series LLC.

Let´s return to the main distinction between a traditional LLC and a Series LLC. Look at a common example: suppose there is a foreclosure on a property contained in Series A, and there is a deficiency at the foreclosure sale (i.e., the property sold for less than the amount owed to the lender). The lender then sues and obtains a deficiency judgment. Assuming that the series 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 against the assets of the company at large. This is not true of a traditional LLC. All by itself, this is a compelling reason to establish a Series LLC rather than a traditional LLC.

Good recordkeeping is important. In fact, series insulation is preserved only so long as "the records maintained for that particular series account for the assets associated with that series separated from the other assets of the company or any other series." (BOC Sec. 101.601(b)(1)). In other words, records must be maintained "in a manner so that the assets of the series can be reasonably identified by specific listing, category, type, quantity, or computational or allocational formula or procedure. . . ." (BOC Sec. 101.603(b)). Implicit in the statute is the idea that the assets and liabilities of a series can and should be kept separate both from the assets and liabilities of other series and those of the company at large. Commingling among these categories should be avoided. This is not as daunting as it may sound; a simple coding system for company assets and expenditures (all within a single checking account) would satisfy the statutory requirement. It is not necessary to establish a bank account for each series in order to comply with Sec. 101.603(b) – although a real estate investor may decide to take this step if the properties held by each series were significantly and substantively different from one another.

As always, both lawyer and client should keep records in anticipation of litigation, particularly litigation that includes "pierce the veil" allegations – such allegations being virtually automatic in today´s lawsuits. Internal documents that reasonably identify the activities of each series are therefore important in fending off such piercing attempts.

The individual series – although not technically separate legal entities – are, in effect, empowered by the BOC to operate as sub-companies. There is no limit to the number of series a company can have, although prudence would 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 20, nor more than 26 (the number of letters in the alphabet). One should also consider carefully before "mixing and matching" entirely different businesses within the same company. Generally speaking, one should not place an asset or enterprise in one series that:

Both title companies and lenders are new to transactions and title policies involving specific series, so this is an evolving area of practice. For instance, title companies typically require a certificate of good standing for an LLC, whether it is a traditional LLC or a Series LLC. Title companies can be obsessive about this. We have even encountered title companies that demand a certificate of good standing for specific series. This reflects a misunderstanding of the law and the series concept. Since series are created privately, without necessity for public notice or a state filing, no official method exists for establishing that a series (as opposed to the company at large) is in "good standing." Some lawyers argue that the statute should be amended to provide for registration of series and therefore the ability of the state to determine if a particular series is in good standing or not. This author opposes this idea on anonymity and asset protection grounds. As much company activity as possible – including the creation of series – should be kept out of the public records. Amending the statute to require series registration and good standing would only serve to make Texas a less attractive asset protection destination.

Anticipate that a title company will also require a company resolution evidencing the both creation of a series and its authority to enter into the subject transaction. It may be necessary to educate the title company and possibly its attorney as to the fact that individual series are empowered by statute to hold title to real property and grant liens (BOC Sec. 101.605(3) and (4)). The title company may also demand a copy of the company agreement – a demand this office typically refuses. Company agreements are private, proprietary documents that are not the business of anyone but members of the company.

One should also anticipate that a title company will require that an assumed name certificate be filed indicating that the company is doing business by and through one of its series – e.g., "ABC LLD DBA Series A." This is not a problem and, in fact, is required by Texas Business & Commerce Code Sec. 71.103 – the "Assumed Business and Professional Name Act" – which requires a notarized DBA filing "for a limited liability company, [if the enterprise proposes to operate under] a name other than the name stated in its certificate of formation or a comparable document." The Act requires this filing at both the state and local county levels. Note, however, that the state currently rejects DBA filings for individual series (e.g., "ABC LLC – Series A DBA Ace Investments) on the grounds that (technically speaking) a series is not a stand-alone legal entity. The result is that these types of filings must instead be accomplished at the county level. Fortunately, county clerks do not have a problem with them. Obtaining a DBA for "Ace Investments" is of course vital if you wish (and you should) to establish a bank account under the name of Ace Investments and have checks printed in that assumed name.

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, particularly when used as part of our recommended two-company structure.

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 well-defended, bona fide LLC before they can get to any real assets.

Our suggested asset protection plan for Texans is the following:

Although the basic plan involves establishing one LLC, our recommended structure for serious, long-term real estate investors involves two LLC´s – a management company and a holding company – and, as a supplementary step, 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 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 than this. While asset protection lawyers are certainly capable of developing more exotic structures, our preference is to keep matters simple whenever possible.

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

The two-company structure contemplates a "shell" management or operating company (either a traditional or Series LLC which is entirely unaffiliated with the asset-holding 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, the management company may be an excellent use for it – but only so long as the existing company does not bring excess baggage into its new role.

The management company should own no substantial amount of property – perhaps its office furniture, equipment, and vehicles – although these can be leased. The management LLC should be the entity that hires and pays employees who interact with the public. Any funds collected should pass through to the holding company on a regular basis (in our system, we characterize these payments as monthly consulting fees). Third parties should all do all business with the management company and should never even be aware of true underlying ownership or the location of hard assets. In other words, the public should not even know that the holding company exists. It is a separate, stand-alone entity. No cross-ownership. No apparent connection and no similar name – which is why I like to call the holding company something different – perhaps "San Saba Drilling and Production LLC" or "Austin Pharmaceutical Distillers LLC." After all, why the give the public (or their lawyers) any clue at all that you are in the real estate investment business?

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 members/owners and their assets. If anyone obtains a judgment against the management company, it will 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. It is empty.

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

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 an entirely separate LLC in order to draw fire away from the asset-holding entity.

It is critical that your attorney draft Series LLC´s governing documents so that they discourage creditors from even contemplating action against your membership interest. Asset protection provisions should be included from the outset in the Certificate of Formation and then extensively set out in the company agreement and organizational minutes. Basic "plain Jane" documents (such as those available online) do not maximize asset protection and should never be used by anyone interested in 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 (authorized by BOC Sec. 101.607(a)) and announcing this fact in the company´s Certificate of Formation. 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 – creditors, in other words. Class B members 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 membership interest they control 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 advised. Doing the minimum – filing initial paperwork and paying a filing fee – and then doing nothing else to support the company´s existence may not enough to maintain a liability shield over time. It may not protect individual members from plaintiffs´ 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" which is equally applicable to piercing the LLC veil. Essentially, piercing occurs when a court decides that the company is not a "real" free-standing, independent entity with a life of its own, but is merely the "alter ego" of members who should be held personally liable. The piercing doctrine is limited in Texas; however, it is sound practice to avoid any basis for piercing allegations since the addition of LLC members as defendants in their individual capacities significantly complicates a lawsuit. See our article Piercing the Veil in Texas.

Even in the case of a properly constituted, operating Texas Series LLC or Nevada Series LLC, a member or manager may still be sued in a personal capacity. This occurs often when the plaintiff is represented by an unscrupulous lawyer. Unless the member or manager has personally guaranteed indebtedness of the company, this is a form of lawsuit abuse – yet certain lawyers will do it anyway. Such attorneys are deterred by neither rules nor ethics and can be ruthless in seeking every avenue to reach assets.

The company´s defense attorney 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 anyone personally liable (They seldom do). If no such basis exists, the LLC´s lawyer should then file a motion for partial summary judgment to have individuals removed from the case as defendants. The lawyer should also ask for attorney´s fees and costs for having to go through this process. If the LLC has been properly maintained, this motion should be successful. If not, this defense can be reasserted at trial.

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 to an asset can be held in the name of "ABC LLC – Series A." However, putting 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 balance of the note if a transfer occurs. Secondly, acceleration almost never happens so long as the loan is not in monetary default. In fact, this office has never seen a loan accelerated because of a transfer to a borrower's personal company, so long as payments are kept current. 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 (the company expressly promises to pay the note) or "subject to" the existing loan (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" may (but is not required to) be included in the deed. If the deed does not mention this issue, it will still have to be dealt with at the accounting level.

It is required in the Certificate of Formation that the organizer indicate who will be the initial manager of the company. Recently, this firm has devised a creative but approved way to show an "anonymity trust" (our term) as the initial manager, while using an attorney as organizer and registered agent – all in order to achieve anonymity for the client. This is a new and exciting development that requires sophisticated trust documentation to complete.

Taking the trust concept a step further, it is also possible to utilize a full-scale living trust (more extensive than an anonymity trust) thus providing an excellent place to put the homestead in order to avoid probate. The living trust becomes the sole member and manager of the LLC; it also owns the homestead. Note that this structure would be suitable only for use with the holding company. Again, the virtue of simplicity is served.

This is a technique for reducing the worth of your company – but only in the public records. Why do this? To deter creditors and lawsuits. Here is how it works: the LLC signs a line of credit Promissory Note for up to one million dollars (payable to an anonymous existing Nevada company this firm has formed) that is backed by a Security Agreement to be filed in the public records. The client also (of course) receives from us a Release of Note and Lien to be privately held and then filed whenever the client chooses to do so. This is a useful strategy for making your company appear to be an undesirable target – and remember, deterrence is an important part of any asset protection strategy. If a potential plaintiff and his attorney investigate your holdings, they may find that you have fifteen properties but owe a million bucks. Under those circumstances, you are less likely to be seen as a deep pocket and therefore less likely to be sued.

Is this a fraudulent device? Not at all. The note in question is a line of credit note. There is no public mention of how much money, if any, has been advanced. It may be none at all, and such is the case here. But the important point is that someone searching the records may well assume that the money has been advanced – perhaps all one million dollars of it. Again, good AP is about deterrence.

Investors with multiple properties and/or businesses should consider forming a Texas Series LLC or Nevada Series LLC, both of which offer unprecedented benefits in terms of simplicity and economy. A Series LLC 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.

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 as legislatures meet and important cases are decided. 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 © 2013 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.