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In July 2009 I wrote this post about Texas’ adoption of the series limited liability company. Recently, I reviewed a certificate of formation for a Texas series LLC on the Texas Secretary of State’s website that failed to include the notice of limitation required by §101.602(b)(3) of the Texas Business Organizations Code.
Section 101.602(b) states:
Subsection (a) applies only if: … (3) the company’s certificate of formation contains a notice of the limitations provided in Subsection (a).
Subsection (a) states:
(1) the debts, liabilities, obligations, and expenses incurred, contract for, or otherwise existing with respect to a particular series shall be enforceable against the assets of that series only, and shall not be enforceable against the assets of the limited liability company generally or any other series; and
(2) none of the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to the limited liability company generally or any other series shall be enforceable against the assets of a particular series.
I include the following notice in my certificates of formation in order to comply with §101.602(b)(3):
Notice of Limitation on Liability of Series
The Company Agreement may establish or provide for the establishment of one or more designated series of members, managers, membership interests, or assets that (1) has separate rights, powers, or duties with respect to specified property or obligations of the Company or profits and losses associated with specified property or obligations, or (2) has a separate business purpose or investment objective.
Subject to the provisions of the Texas Business Organizations Code (1) the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to a particular series shall be enforceable against the assets of that series only, and shall not be enforceable against the assets of the Company generally or any other series, and (2) none of the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to the Company generally – or any other series – shall be enforceable against the assets of a particular series.
Specific series of assets shall be separately labeled or enumerated in such a manner as to identify each series’ assets, structure, and operations. Pursuant to §101.614 of the Texas Business Organizations Code, and as more fully set forth in the Company Agreement, a specific series and its business and affairs may be wound up and terminated without causing the winding up of the Company. The winding up of a series shall not affect the limitation of liability of members and managers of other series or the Company at large.
Failure to include this notice (or a notice substantially similar to it) in the certificate of formation will bust the liability shields of the LLC and that of each of its series.
Including this notice in the certificate of formation, by itself, is not enough to protect the assets of the LLC and each of its series. A closer look at §101.602(b) reveals that the LLC must also maintain records for each series and account for the assets associated with each series separately from the other assets of the company and other series as-well-as provide, in the company agreement, the same notice provided in the certificate of formation and set forth above.
If your company agreement does not also include the language of §101.602(a)–or if you fail to properly account for the assets of the company and each series–you expose the entire structure to liability. Litigators suing a series will certainly determine whether or not the requirements of §101.602 have been met and if not, will add the other series to the litigation to satisfy the judgment.
Many business owners who form their own entities by simply filing a certificate of formation with the Texas Secretary of State without consulting an attorney run the risk of falling into traps such as this. It’s far less expensive to hire an attorney to get your company set up correctly then to defend a lawsuit that could have been prevented.
