Texas Series LLC Basics
A Texas Series LLC is a limited liability company that can include one or more series, or divisions, under the same LLC umbrella. Each series can have its own assets, liabilities, members, and managers that are separate from those of other series. A series can also be a corporation, limited partnership, or any other type of business entity that is recognized in Texas. The Texas Series statute is codified under Section 101.601 of the Texas Business Organizations Code.
Texas Series LLCs can help a company save time and money . A Texas Series LLC allows a company that needs to operate multiple divisions, whether financial, real estate, or otherwise, to form one LLC with one set of formation documents, applications, licenses, and annual reports instead of forming one for every division. Furthermore, each division can be properly segregated into separate liability assets if the courts recognize the liability protections between series, which can protect other divisions from being liable for the debts and liabilities of another series.
However, legal authorities have questioned the legal standing of a Texas Series LLC and whether liabilities between series are protected. Furthermore, Texas Series LLCs have not yet been subjected to any Texas appellate decisions.
The Value of an Operating Agreement
While there is no single law in Texas that requires all LLCs to have an operating agreement, these documents are vital to the formation of an LLC because they help maintain the limited liability protections for its members. An operating agreement sets forth the financial and managerial rights and duties of the LLC and its members and managers. For Series LLCs, the operating agreement’s importance becomes magnified because all of the Series must follow the terms of the agreement to ensure the validity of each Series’ liability protections.
A well-drafted operating agreement will clarify which Series of the Texas Series LLC own certain assets and what limitations each Series may have within the overall structure. If there is no operating agreement, the LLC will default to Texas law under the Texas Business Organizations Code, Section 101.001. The default provisions may not address issues specific to your LLC or its Series, and they may not clearly define available remedies for any breaches. For a Texas Series LLC, the operating agreement’s terms will outline how assets are owned and which classes of ownership that are available.
When creating the series, the operating agreement ideally should also address:
Because the new Series LLC is a "new" entity created from a current LLC, Texas’ limited liability protections will not automatically extend to the Series unless the formation is correctly done. A structured operating agreement will ensure that all of the Series and the LLC will avoid the risk of losing the ability to limit liabilities. When establishing a Series LLC, it is critical that the operating agreement is comprehensive to preserve the liability protection that the company was originally formed for.
Core Components of a Series LLC Operating Agreement
The operating agreement for a Texas Series LLC must include a series designation, which is a written statement that attaches the name of the designated series to the provisions of the operating agreement that relate to the designated series. The operating agreement must also state:
Members of a Series: The series’ members may be different from the general members. The Series LLC may allow the members from the general LLC or other designated series to participate in the management of the designated series as determined by the operating agreement. Conversely, the desires of the Series LLC’s members may be excluded from management decisions regarding the designated series.
Asset Protection Mechanisms: While an operating agreement cannot explicitly supersede Texas statutes and regulations, it can describe the intention of the LLC to keep each operational series’ assets separate from the general LLC or other LLCs and series. Including a series’ premium or retainer fee can be one method of guaranteeing its creditors that a series has enough assets to settle claims against it. Some Texas courts have held that members and guarantors can contractually agree to repayment delivery methods so long as they do not violate governing statutes and regulations (i.e., limiting annual distributions to net profits).
Personalizing Your Operating Agreement
Just as no two businesses are exactly alike, no two operating agreements between Texas Series LLC members should be exactly alike. But what kind of customizations are appropriate for a company that already has the protection of the Series LLC’s unique structure? Consider some of the following examples.
Your company can tailor its operating agreement to specify exactly how it will be governed. Will all of the members have equal say in business decisions, or will the company be more top-down in nature, where one person has authority to make most decisions on behalf of the group? Will all voting be done in person, or is mail-in voting permitted? A custom operating agreement allows you to answer all of these questions and more.
An issue that often can run into trouble in a group setting is how to divide up profits between members. A well-crafted operating agreement can specify how exactly your team will divide profits, whether 50-50 or otherwise.
A custom operating agreement can keep disputes from disrupting your company by specifying how your team will handle differences of opinion. Will you mediate, go to arbitration, litigate, or something else? By spelling out these procedures clearly, you won’t have to lose sleep wondering how to place a dollar value on the company or otherwise bring a conflict to a conclusion.
Template Vs. Tailor-Made
Opting to use a template operating agreement for your Texas Series LLC can be an effective way to save some money. If the series LLC is simple and you can follow instructions easily, a template can be a great tool for establishing the legal framework of your company. Even for a complex company, a template allows you to do most of the legwork. Adding, removing, or changing subdivisions/layers of an existing Texas Series LLC isn’t in the TBOC. The law assumes that as long as the parent series exists, the series exists. That decision is up to the manager and members. Again , every rule has its exceptions. You may find a template that is somewhat different from the program you want to run. The templates that I’ve seen are basic and biased towards legalese. Too much legalese often causes confusion and hinders clarity of thought. Some places you need to blunt the sharp corners a little bit. The legalese help describe the legal process in a manner that is generally clear, but you could also go with clearer language. Your intent should be the determination on how to build the operating agreement. If you want something that hasn’t been done before… it may be worth your while to go with a custom drafting option.
Errors To Steer Clear Of
Common errors that we see when business owners draft their own Texas Series LLC Operating Agreements include:
- Not addressing or adequately addressing transfer of interest and successor series. The same concept that applies to member and manager transfers for a Texas LLC will generally apply to transfers of interest and managers of a Series LLC. That is, to effectuate a transfer of an LLC member’s interest, the consent of the other members is generally required. Members can agree to allow a member to transfer, assign or sell their interests and set forth the circumstances under with such transfer may occur. A Series LLC should address whether a member can transfer its series interest to a transferee without any restriction (subject to any rights of creditors or similar limitations) or must first obtain permission from the Series.
- No consideration for contested series agreements. Special consideration should be placed on succession plans for Series Managers in the event that a Series Manager becomes incapacitated, dies or is removed. A Texas Series LLC should provide the criteria for selecting a successor Series Manager, how a transfer of interest to a transferee may be effectuated by the Series Manager and the process by which a member may challenge a "succeeding" Series Manager’s authority to continue the Series by an action brought pursuant to Section 101.605(b) of the Texas Business Organizations Code.
- Insufficient authority provided to Series Managers. To the extent the Series Manager has oversight and/or decision making authority over the Series, existing Texas law requires that such matters be addressed in the Series LLC’s operating agreement. Simply using the non-specific phrases "managing member" or "manager" without further detail in the Series Operating Agreement (or any other reference incorporated by reference) may not be sufficient under the new Texas Series LLC statute.
- Not addressing Enforceability. A Texas Series LLC can potentially improve business owners’ liability protection and tax efficiencies. A poorly drafted Series LLC agreement will not necessarily allow members to take full advantage of these benefits. The Texas Series LLC statutes have not been thoroughly tested in the courts. Hence, the enforceability of certain provisions in Series LLC agreements are still uncertain, including those provisions that attempt to limit or eliminate liability among certain members of the Series LLC. A Texas Series LLC member should work to include as many of their risk management strategies in their Series Operating Agreements to maximize the potential benefits of their Series LLCs, keeping in mind that the enforceability of such strategies is still uncertain.
Keeping Your Series LLC In Good Standing with Texas Law
For starters, Texas Series LLCs must pay the Texas $300 Franchise Tax due each year for the entire Series LLC, whether or not there is any basis for the tax. This is a corporate level tax, and no other Series pays a tax. Thereafter, there is an annual public filing with the Secretary of State, and a payment, due each year at the anniversary of the filing of the Articles of Organization. The CTE listing the Series and subsidiaries in Texas must be confirmed every year. The CTE filing only covers those Series that are listed on the filing. So for example, if you have one umbrella company , and you form a new Limited Liability Company, you do not need to file the new Limited Liability Company with the Secretary of State, until the next annual filing. At that time, you can add other Series. If you want another Series to take effect sooner, then you need to file a Change and Texas LLC for that Series. While the Texas Annual report filing is a public filing, a foreign filing is not. This is an extremely practical way of keeping up with the status of a Texas Series LLC. There may also be other types of transactions that require foreign filings.