During consultations with clients, I am often asked what are the requirements for keeping the limited liability shield among different series of a series limited liability company (“SLLC”). The short answer is the assets of a particular series must be maintained in such a manner so that the assets of the series can be “reasonably identified.” The Texas Business and Organizations Code, the governing authority for LLCs, provides a little more guidance on this issue. To ensure liability protections, the SLLC must maintain its records to account for the assets of each series. This requirement is satisfied if either:
- The assets of a particular series can be reasonably identified by specific listing, category, type, quantity, or computational or allocation formula or procedure, such as a percentage or share of any assets.
- The SLLC maintains its records using any other method in which the identity of the assets can be objectively determined.
The expansive nature of the statute seems to indicate the burden to maintain separate records is low; however, as of now, there has not been a direct court challenge on this issue.
One concern faced by owners of LLCs and SLLCs is what the legal world calls “piercing the veil,” which means that a court will disregard the liability protection afforded to LLCs and SLLCs. In other words, a creditor of one series or of the SLLC itself may reach the assets of another series. The good news for the SLLC is the Texas Business and Organizations code limits veil piercing of Texas LLCs and allows piercing only when the LLC has been used to perpetrate an actual fraud. Thus, for a creditor to find a member or manager liable for the LLC’s contractual obligations a plaintiff must show that the member or manager used the LLC for the purpose of perpetrating, and did perpetrate, an actual fraud against the plaintiff for the direct personal benefit of the member or manager. Therefore, as long as you don’t perpetrate a fraud against someone and maintain separate records for individual series, it seems like the risk of veil piercing is a low one.
To further reduce the risk of losing liability protection, I believe a SLLC should follow the appropriate LLC formalities for each individual series, such as:
- Accounting for the assets and liabilities of each series of the SLLC separately from the SLLC itself and any other series of the SLLC.
- Keep your personal assets and liabilities completely separate from those of your SLLC. You must be able to show that the LLC is treated differently from yourself and that you are not co-mingling your personal assets with business assets.
- Consider having separate bank accounts for each series, or at the very least keep detailed records of funds in an account that is attributable to a particular series, especially if the assets held by each series are substantially different, either operationally or in terms of tax treatment. Remember, you need to be able to show how much money in a joint bank account belongs to each individual series.
- Maintain minutes and resolutions for the governing members or managers, as applicable, for each individual series and the SLLC itself. A quick note here: the TBOC does not require the managers or members to hold meetings and it is not a factor for veil piercing, but it is a good business practice.
- Make sure you indicate the particular series that is a party to a contract and not the SLLC itself or any other series.
The attorneys at Walt Fair, PLLC are well versed in the ins and outs of SLLCs and LLCs. If you have questions about SLLCs, please call or email us and we will be happy to help.
