Tuesday, September 7, 2010

Is it time to embrace the Series LLC?

Have you heard of a Texas "Series LLC"? 

If you are like most Texans, your answer is probably no, but the Series LLC has the potential to revolutionize the way in which corporate finance transactions are structured in Texas. 

The Series LLC was adopted by the Texas legislature effective September 1, 2009, by adding a new Subchapter M to Title 3 (Limited Liability Companies) of the Texas Business Organizations Code (See Section 101.601 et seq. of the TBOC).  The Texas Series LLC statute is patterned after a similar statute adopted by Delaware in 1996. 

Here's how it works.  A Texas limited liability company can choose to establish one or more series of members, managers, membership interests or assets that has its own separate rights, powers or duties with respect to specified property or profits and losses associated with specified property.  So long as proper procedures are followed, debts, liabilities, obligations and expenses of any one series are enforceable only against that series and not against any other series.

Setting up a "Series LLC" is somewhat analogous to setting up a subsidiary company because it permits the parent company to separate out certain assets and operations from the remainder of the company thereby protecting each company's (or each series's) assets and operations from potential claims from creditors of the other company (or series).

An advantage of the Series LLC is that it reduces the administrative burden of setting up multiple subsidiary companies to achieve asset protection goals.  A disadvantage is that because the Series LLC concept is new to Texas, creditors and courts are still learning to appreciate this new tool and the scope of its liability protection.  There is also a danger that other states may not respect the Series LLC.

I expect that we will see more and more Series LLC's in Texas as companies, creditors and courts become more comfortable with the extent of liability protection offered by the Series LLC.

Special thanks to Sean Bryan who inspired this post by presenting a Continuing Legal Education seminar on this topic last week to the Corporate Counsel Section of the Tarrant County Bar Association.

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