Texas Series Limited Liability Companies
Texas adopted legislation in 2009 allowing for series limited liability companies (SLLCs). An SLLC is not actually a distinct form business entity, but rather is an ordinary limited liability company that has been authorized to hold its assets in separate "cells" or "series." A series is not itself a business entity or organization, but it does have the power to sue and be sued, to enter into contracts, to buy and sell property, to grant security interests, and to exercise other powers necessary for the conduct of its business.
The potential benefits of a SLLC include:
- Asset protection. Each separate series within the company will hold its own assets and debts, thus shielding those assets from liabilities of the parent company or the other series.
- Flexibility. Each series can have its own members, managers, rights, powers and duties, allocations of profit and loss, tax elections, and business purpose.
- Reduced cost. In the past, it was necessary to form multiple LLCs in order to achieve the same flexibility and asset protection benefits that a single SLLC can offer. By forming only one SLLC, a client can save both on initial formation costs as well as ongoing accounting and filing expenses.
In order to have a valid SLLC, the parent company must include certain specific language in its Certificate of Formation and its Company Agreement. In addition, the company must maintain adequate records so the assets of each series can be reasonably identified by specific listing, category, type, quantity, formula, or other objective standard. An assumed name certificate should be filed for each separate series established by the company.
Federal tax law allows each series to elect its own tax treatment independent of the parent company and other series, and each series can also obtain its own federal EIN. However, only the parent company receives a file number and taxpayer number from the state, and the parent company is liable for state franchise taxes for all of its series.
While SLLCs potentially offer many potential advantages, they are not for everyone. For example:
- Because the format is still relatively new, some title companies, lenders, insurance companies, governmental agencies, and other business organizations may refuse to deal with a SLLC, or may impose unusual or onerous requirements to do so. In particular, many lenders will only make loans to traditional "special purpose" or "single asset" entities.
- Only a minority of states have adopted SLLC legislation, and even those states have not adopted a uniform approach. Accordingly, a Texas SLLC may not be able to do business in other states, or may not receive the same benefits in other jurisdictions.
- SLLCs may not provide the expected benefits in the context of federal bankruptcy proceedings.
- We do not yet have an established body of case law involving SLLCs. It is possible that courts may interpret the statute in unexpected ways.
- Even with the strong language in the SLLC statute, from an asset protection standpoint it is never advisable to "put all your eggs in one basket." Entities can fail for any number of reasons, including errors in formation, state forfeiture, lack of adequate records, commingling of assets, involvement in fraudulent activity, protracted litigation, internal disputes, and more.
For these reasons you may still wish to consider forming multiple entities if you have a numerous or exceptionally valuable assets, or if you have multiple business operations with significantly differing risk levels, management structures, debt structures, tax considerations, profit goals, or other operating characteristics.
The series limited liability company format looks to be an exciting and useful new tool for certain investors. If you are interested in learning more about SLLCs, please schedule an appointment with one of our experienced business law attorneys to get answers to your questions.