Tag: corporate litigation

What Is A Series LLC?

By: James C. Mosser

This post is an overview of a longer article entitled “What Is A Series LLC?”

Many Texas practitioners deal with a client’s business formations as part of their everyday business or ancillary to the other matters they work on for clients. Since I am a lawyer at a small law firm, I am in the latter group.

I like the business formation landscape. There is plenty of interesting nuance and choices. This depends on the client and the purpose of the transaction. In certain circumstances, the new darling is the Limited Liability Company (LLC) and especially the Series LLC. The hot debate in Texas amongst those in the know concerns how to treat a Series LLC nonfiling entity.

Black’s Law Dictionary defines “entity” as “[a]n organization or being that possesses separate existence for tax purposes. Examples would be corporations, partnerships, estates and trusts. Entity includes person, estate, trust, governmental unit.”

However, there’s a problem with the supposedly official definition of an entity, which wrongly excludes the Series LLC.

Over the last two years, many Texas attorneys and commentators have discussed the Series LLC and advised that the nonfiling entity (Series) is not a legal entity. However, the Series specifically is described in the Business Organizations Code (BOC), starting at BOC 101.601. A scholarly reading of the BOC will reveal that these commentators are wrong.

Most commentators in Texas have decided that the Series LLC is not an entity. More egregious is that the Secretary of State has assumed the same position based on badly reasoned writings lacking in any legal theory or support. Then, to make matters worse, the State Comptroller has decided that the Secretary of State is the decision maker when it comes to determining what an entity is in the State of Texas, instead of the Texas legislature.

A reading of the state law given to us by the legislature shows the real definition: BOC 1.002, Definitions. At paragraph (18), “domestic entity” means an organization formed under or the internal affairs of which are governed by this code. This definitely includes the Series LLC.

However, because of the unfathomable attitude of the State Comptroller and the Secretary of State, we are left with a group of powerful regulators acting contrary to the Texas Constitution and the laws of Texas as passed by the Texas legislature!

So, who cares? You should care because if you are not a Texas filing entity according to the Comptroller, you pay taxes for the other Series entities that owe taxes, even if your Series does not owe any money.

A last note: Some commentators claim they do not know how a Series LLC will be treated by Texas (if it is foreign) or other non-Series States. I am not positive how it will be treated by Texas. But a properly formed Series LLC should be given the full faith and credit of the sister states old Public Acts and given effect to the “internal affairs doctrine related to the operations of a series limited liability company.” Art. IV, Sec. 1, of the United States Constitution.

Today, this leaves the Texas transactional practitioner in the position of not recommending the formation of a Series LLC in Texas. Maybe the real resolution is just to form multiple LLCs in Texas, as we have been doing for years.

To learn more about the Series LLC in Texas, read James Mosser’s full article, “What Is A Series LLC?”

As always, our blog posts are not legal advice and do not constitute an attorney-client relationship! If you want legal advice, you need to retain a lawyer.