/ 3 min read
A series limited liability company (a "Series LLC") is a type of limited liability company that, unlike traditional limited liability companies, can have multiple series within a single created entity, each of which can have its own assets, liabilities, and members. A "series" refers to a designated and segregated portion of the limited liability company's assets and liabilities that is treated as a separate entity for legal and tax purposes. Each series in a Series LLC can have its own distinct business purpose, members, managers, and ownership structure.
For example, a real estate Series LLC might have a different series for each property it owns, with the same or different investors and managers assigned to each series. Additionally, each series can be insulated from the liabilities of the other series within the same Series LLC, which is commonly understood to be the primary purpose for creating separate series. To that end, each series in a Series LLC is treated as a separate legal entity, meaning that it has its own liabilities and obligations that are separate from the liabilities and obligations of the other series within the same company. This allows businesses to compartmentalize risks associated with different aspects of their operations, without having to form separate companies for each one.
Texas both recognizes and allows the creation and use of Series LLCs, which are governed by Chapter 101 of the Texas Business Organizations Code. To form a Series LLC in Texas, the organizers must file a certificate of formation with the Texas Secretary of State and include specific language in the certificate that indicates that the company is a Series LLC. Series LLCs in Texas are also required to maintain separate records for each series, including separate financial statements and records of meetings (which aligns with the intended effect of allocating liabilities and obligations to each series). Texas recently enacted a new law creating two types of series—registered and promote series—though the distinctions between these two series fall outside the scope of this article, and the statements made in this article about a Series LLC generally apply to both such specific series types.
The most realistic perspective to consider whether to utilize a Series LLC is to compare a Series LLC to the creation and use of multiple limited liabilities for the same purposes as is intended for each series. The following are considered potential benefits of using a Series LLC instead of multiple companies:
Benefits:
- By using a single Series LLC with multiple series, businesses can save money on administrative costs associated with forming and maintaining multiple limited liability companies, such as the filing fees required by the Secretary of State for each entity. In addition to cost savings, having only one entity filed with the Secretary of State also involves simplified filing requirements to maintain said entity.
- A Series LLC may offer more flexibility than traditional limited liability companies by allowing businesses to easily compartmentalize risks and organize their assets into separate series, though such actions should be taken carefully to avoid violating the rule against maintaining separate books and records for each series.
On the other hand, there are also some important potential drawbacks to consider:
Drawbacks:
- Series LLCs can come with heightened legal uncertainty. Since Series LLCs are a relatively new type of business entity, there is a limited body of case law interpreting the laws that govern them. This can make it difficult to predict how courts will rule on certain legal issues that may arise, including the risk that a court may disregard the liability shield if it determines that the Series LLC was not properly organized or maintained.
- Using a Series LLC may also create unintended limitations down the road for someone’s business, in the event that person ever decides to conduct business in a different state that may not legally recognize Series LLCs.
- While Series LLCs can provide greater flexibility than traditional limited liability companies as noted above, they also require additional complexity in terms of organizational structure, record-keeping, and compliance. This can make them more difficult to manage than utilizing several limited liability companies.
Considering these factors, Series LLCs can primarily be viewed as a potentially cost-effective way to maintain a diverse portfolio, whether involving real estate or other projects in which allocating liabilities and obligations is a priority. That being said, the primary purpose and goals in those instances remain to be the allocation of liability and obligations itself. Considering the legal and administrative complexities currently associated with a Series LLC, in my opinion, the potential cost savings from reduced filing fees, in most cases, do not outweigh the more black-and-white certainties that maintaining separate limited liability companies typically provide.