Texas Real Estate Investors Should Consider A “Series LLC” For Asset and Liability Protection
The simplicity and flexibility of the limited liability company (“LLC”) has made it the business entity of choice for Texas real estate investors, but many experienced real estate pros still are not aware of the benefits of the “series LLC,” a relatively new and more advanced and efficient entity for real property investments.
The series LLC is celebrating its tenth birthday in Texas in 2019 – it was codified as subchapter M of Chapter 101 of the Texas Business Organizations Code on September 1, 2009. Although originally intended to be used by mutual funds and the securities industries, series LLCs quickly found favor with real estate investors who were tired of the cost and administration of managing a large number of corporate entities. Traditionally, legal and business counselors had advised real estate investors to form a new entity (usually an LLC) for each individual property – keeping each asset in a separate company to avoid any liability from one property attaching to any others. This was smart, but cumbersome, as each separate LLC required its own formation documents, its own quarterly and annual reports, its own accounting, etc.
The series LLC greatly reduces many of those administrative issues. As the Business Organizations Code states, a series LLC may establish “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.” Essentially, this allows a business owner to set up multiple sub-companies within one series LLC – while only forming, maintaining, and administering one single entity.
Forming a series LLC is very much like forming a conventional LLC (though there is some specific language that must be included in the formation documents and should be included in all contracts). The series LLC would operate just like a regular LLC for a real estate investor’s first investment property. But whenever that investor agreed to purchase a second investment asset, she could simply place that asset in “Series B” of the series LLC instead of forming an entirely new LLC. Texas law recognizes each series LLC as a legally distinct entity for the purposes of liability, so a lawsuit involving “Series A” would not have any right to access the assets and liabilities of “Series B,” and so on. Specifically, the statute provides that “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.” The benefits to real estate investors with multiple assets are obvious.
The formation and operation of a series LLC is a sophisticated venture and should only be undertaken with the advice and counsel of an experienced business and real estate attorney.
Please do not rely on this article as legal advice. We can tell you what the law is, but until we know the facts of your given situation, we cannot provide legal guidance. This website is for informational purposes and not for the purposes of providing legal advice. Information about our real estate practice can be found here.