Bulletin: TX2022003

Dear Associates:

This bulletin summarizes the changes effective June 1, 2022, to the Series Limited Liability (LLC) sections of the Business Organizations Code (BOC). This bulletin also provides our guidelines in reviewing series LLCs documentation.

A series LLC allows an investor to place certain assets and liabilities in compartmentalized groupings and operate the grouping as subcompanies of the main Series LLC. The series are not separate entities from the main LLC; however, if properly formed, the series are shielded from liability of actions under other series. For example, if there is a lawsuit or a foreclosure that affects property vested in Series A, then other series (Series B, Series C, etc.) are not subject to the outcome. There is no limit on the number of series a series LLC may hold.

There are three categories of series LLCs that are valid in the state of Texas:

Protected Series - will have both a Certificate of Formation and Company Agreement that contain a statement of limitations of liability of the series, separate records and accounting for each series, and follows BOC Sec. 101.602.

Registered Series - will have a Certificate of Formation, Company Agreement with a statement of limitations of liability of the series, a certificate of registered series filed with the Secretary of State, separate records and accounting for each series, and follows BOC Sec. 101.602. This provides a sense of public validity of the series, and the Secretary of State can issue a Certificate of Fact confirming the existence of the series.

Ordinary Series - which will not have a certificate of registered series, nor the limitation language in the Certificate of Formation, and not formally established in accordance with BOC Sec. 101.602. These would be the least reliable of the 3 categories and may cease being used over the next several years.

STG does not require any particular type of LLC to be in title. However, in the case of a series LLC, the deed should specifically reflect which series the title is vested in. Failure to do this could result in the property being acquired as an asset of the main LLC company and losing the series’ insulation and protection.

The new law requires that Registered Series LLCs include the phrase “Registered Series or RS/R.S.” in the name and contain the name of the company at large.

Example vesting for a Registered Series is as follows:

AAA, LLC-Series A (RS), a registered series of AAA, LLC a Texas series limited liability company.

Protected Series and Registered series may file assumed name certificates with the Secretary of State as part of the new changes. The filing with the county offices in which they do business is no longer the only option. Tex. Bus. & Com Code § 71.002(2) and 71.051.

Also, there is a new process to convert a Traditional LLC to a Series LLC by means of a Certificate of Conversion. This can also be used to convert a Series LLC to a Traditional LLC. BOC Sec. 101.631. The Company Agreement must also be reviewed to determine if it prohibits a conversion or specifies the manner of adopting a plan of conversion.

Series LLC underwriting requirements:

• Review Certificate of Formation for language of limitation of liability for each Series.
• Company Agreement must contain a notice of limitation of liability for each Series and identify the individual(s) with authority to act/sign.
• Review the Company Agreement for express language that allows for the automatic creation of a Series by acquiring an asset into a series named in the deed or the requirement of a transfer instrument or by Resolution to create the Series.
• Review evidence that the company records, usually found in the Company Agreement, show each Series accounting is maintained separately from the other assets of the company or other series either from the managing member or the company accountant.
• May need to require an Amendment or Certificate of Conversion with the Secretary of State if the Certificate of Formation does not contain the proper limitation of liability language for each Series.
• Review the company agreement to determine the governing authority of the series. The certificate of formation only controls if the company agreement is silent on that issue.

If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter.

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