Working at a real estate law firm and practicing as a real estate agent, I’ve been exposed to thousands of real estate transactions. We work with many investors/clients and advise them on how to set up their real estate portfolios using a Series LLC in Texas.
What is a Series LLC in Texas?
A Series LLC is a unique form of limited liability company (“LLC”) in which the articles of formation specifically allow for unlimited segregation of membership interests, assets, and operations into independent series. In other words, the Series LLC in Texas allows you to create series, or “cells”, within the LLC that can have different name, management and members, assets, bank accounts, and separate books and records.
What is the purpose of the Series LLC in Texas?
It is to add an extra layer of protection to your LLC by segregating assets into series which will allow you to shield liability from all the assets from the other series. For example, if you had 10 properties, you could put each property in a separate series and if you got sued they could only sue one series and would not be able to collect on any of the other properties. Just the series they contracted with. Unfortunately, you only get the benefit if you actually segregate the assets by deeding the properties into the different series.
One of the concerns that arises when deeding properties with an existing lien(s), is the due on sale clause. This should always be addressed when you are dealing with these type of entity formations due to the risk associated with them. When a client asks if the due on sale clause can be triggered, the answer must without exception be yes. No matter how minimal, there is and will always be a risk in deeding a property from your personal name to a Series LLC or any entity, including a trust. Having a fiduciary obligation, it would be a complete disservice and potentially negligent to advise any other way.
Each series is treated as a separate entity and can enter into contracts, sue or be sued, and hold title to real and personal property.
With that being said, let’s breakdown the risk a bit further. Let’s say an investor with 10 properties operates under a sole proprietorship and owns all his properties individually. If they were to get sued, like I’ve seen so many times, what would be up for grabs for the plaintiff if they were to prevail? The answer is all 10 properties. From a business perspective I would say that is pretty risky. What successful businessman would be willing to risk all 10 of their properties after all the hard work and effort they put forth to get there? Would you even want to risk one property? I doubt it.
Let’s look at the other option. You get a Series LLC and you have ten different series’, one property in each series. If you were to get sued, only the property that is in the series would be up for grabs. There are even ways to potentially limit liability on all properties if properly set up. You have minimal risk from a liability standpoint.
You can sleep better knowing that your portfolio is protected against unforeseen liabilities.
If you are reading this article, you probably have heard the statistics of a due-on-sale being called. I’m not gonna sit here and say it can’t happen, but the question becomes what is more likely to happen? A lawsuit or a due-on-sale clause being triggered? One thing I know for sure, even if the due on sale clause is triggered, there is still a process to foreclose. In most Deeds of Trusts, there are notices that need to be given to rectify the situation. In that time-frame you can deed it back or refinance. If you get in a lawsuit and have 10 properties up for grabs, the process to rectify that scenario would likely be much more costly.
In the end, is there risk in deeding properties in a Series LLC in Texas? The answer is yes, but what’s the alternative? In order to truly see what is in your best interest, I recommend getting competent advice from a real estate attorney that understands the Series LLC in Texas thoroughly. Don’t be an investor that wishes they would have set up their portfolio properly once it’s too late.