7 Deadly Mistakes That Destroy Your Series LLC Protection
Meta Description: Avoid the 7 critical mistakes that turn your Texas Series LLC into worthless paper. Learn how real estate investors lose protection and how to fix it.
Your Series LLC Isn't Protecting You (And You Don't Know It)
I got a call last month from a real estate investor in Austin. He was being sued by a tenant who slipped on ice at one of his rental properties. He had a Series LLC—set up himself after reading online articles—and assumed he was protected.
He wasn't.
Within 20 minutes of reviewing his structure, I found five critical errors that completely destroyed his asset protection. The corporate veil would be pierced in about 30 seconds in court.
The worst part? He had no idea. He thought having a Series LLC meant automatic protection. It doesn't.
A Series LLC is the most powerful asset protection tool for Texas real estate investors—when set up correctly. But one mistake can collapse the entire structure and expose every asset you own.
After forming 120+ Series LLCs over 40 years, I've seen the same mistakes repeated over and over. Here are the seven that will cost you everything.
Mistake #1: Treating Series as "Virtual" Entities
The Error: Thinking the series are just accounting categories rather than legally separate entities.
What I See: - One bank account for all series - Funds moved freely between series - Expenses paid from whichever series has money - No separate accounting for each series - "It's all my money anyway" mentality
Why It's Deadly: Texas law requires series to maintain "separate and distinct records." If you commingle funds between series, a court will treat them as a single entity. One lawsuit collapses everything.
Real Case: Investor had 8 properties in 8 series. Used one bank account, moved money between properties as needed. Tenant sued over mold at Property #3. Because funds were commingled, the court treated all 8 properties as a single LLC. Judgment attached ALL properties, not just the one with the problem.
The Fix: - Separate bank account for each series (non-negotiable) - Separate QuickBooks file or accounting (or at least class tracking) - Never transfer money between series without proper documentation - Document any inter-series loans with promissory notes, interest, payment terms - Each series pays its own expenses from its own account
Cost: 30 minutes to set up accounts properly Benefit: Actual asset protection when you get sued
Mistake #2: No Written Operating Agreement (Or Generic Template)
The Error: Using the Certificate of Formation as your only governing document, or downloading a free operating agreement from the internet.
What I See: - "We filed with the state, that's enough" - Generic operating agreement with no Series-specific provisions - Operating agreement never signed by members - Operating agreement that mentions Delaware or Nevada law - No provisions for how series are created or managed
Why It's Deadly: The Certificate of Formation just registers your LLC with the state. It says nothing about: - How series are created - How assets are allocated to series - Member rights and obligations - Distribution rules (critical for charging order protection) - Management authority - What happens in lawsuits
Without a proper operating agreement, you have no asset protection. Period.
Real Case: Investor formed Series LLC online. Never created an operating agreement. Got sued. Creditor's attorney asked for the operating agreement in discovery. Investor had nothing. Judge treated it as an informal arrangement, not a legal entity. Pierced in one hearing.
The Fix: Your operating agreement MUST include:
Master LLC Level: - Multi-member structure (even if you're the only owner) - Manager-managed designation (separates ownership from control) - Charging order as exclusive remedy language - Distribution restrictions - Capital contribution requirements - Texas law governing provisions
Series Level: - How series are created (board resolution, written designation) - Asset allocation method (clear assignment to specific series) - Separate record-keeping requirements - Liability limitation between series - Manager appointment for each series - Series-specific capital accounts
Investment: $1,500-2,500 for proper drafting Value: $500,000+ in protected assets
Mistake #3: Poor Asset Assignment Documentation
The Error: Casually mentioning which property belongs to which series, or keeping it in your head.
What I See: - "Property A is in Series 1, Property B is in Series 2" (verbal only) - No written designation - No board resolutions creating series - Properties deeded to "ABC LLC" instead of "ABC LLC, Series 1" - Deed never recorded showing series ownership - No Schedule A attached to operating agreement
Why It's Deadly: If you can't prove which assets belong to which series, they're all in the master LLC—defeating the entire purpose. Plus, title insurance and banks won't recognize series ownership without proper documentation.
Real Case: 6 properties "assigned" to 6 series, but deeds showed "Smith Holdings LLC" as owner. No series designation on title. When Property 3 got sued, plaintiff's attorney argued all properties were owned by the master LLC (and he was technically correct). Investor had to settle for 3× what the case was worth because all properties were at risk.
The Fix:
When Acquiring Property: 1. Board resolution creating the new series BEFORE purchase 2. Deed to "ABC LLC, Series X" (series name in deed) 3. Title insurance issued to the specific series 4. Operating agreement Schedule A updated listing assets by series 5. Bill of Sale if personal property (equipment, furniture)
For Existing Properties: 1. Create series via board resolution (dated, signed, filed in LLC records) 2. Deed property to correct series via quitclaim deed 3. Re-record with county 4. Update title insurance (usually just notification) 5. Update Schedule A
Time Required: 2 hours per property Protection Gained: Actual series separation that holds up in court
Mistake #4: Single-Member Series LLC
The Error: You're the only member of the entire Series LLC structure.
What I See: - "It's my business, I'm the only owner" - Spouse isn't listed as member (even in community property state) - Children or other family not included - LLC treated as extension of personal identity
Why It's Deadly: Single-member LLCs are the easiest to pierce. Courts regularly disregard them as "alter ego" of the owner. The whole point of charging order protection (creditors can only get distributions, not ownership) collapses in single-member LLCs.
Texas Specific Issue: In Shook v. Walden, the Fifth Circuit held that charging order protection doesn't apply to single-member LLCs in Texas. A creditor can literally seize the LLC, not just distributions.
Real Case: Investor owed $200,000 to a business creditor. Had 4 properties in Series LLC worth $800,000 equity. Single-member LLC. Creditor foreclosed on the LLC membership interest itself, took control of the entire LLC, and forced sale of all properties. Charging order protection never applied.
The Fix:
Option 1: Add Family Members - Spouse as 1% member (gift, not community property) - Adult children as 1-2% members - You retain 97-98% ownership - Now multi-member = charging order protection applies
Option 2: Second LLC as Member - Create separate LLC (can be single-member) - That LLC owns 1-2% of Series LLC - You own both LLCs, but Series LLC is now multi-member - More complex but works if family members not available
Option 3: Trust as Member - Revocable trust owns 1-2% - You own 98-99% - Achieves multi-member status - Also helps with estate planning
Critical: Small percentages (1-2%) to other members is enough. They don't need control, just membership.
Cost: $500-1,000 to add members properly Savings: Your entire asset portfolio from creditor seizure
Mistake #5: No Separate Record Keeping
The Error: Throwing all receipts in a shoebox and sorting it out at tax time.
What I See: - One QuickBooks file with everything mixed together - No separate financial statements by series - No annual meetings or minutes - No resolutions for major decisions - No separate tax returns or schedules by series - "My CPA handles all that"
Why It's Deadly: Texas law explicitly requires series to "maintain separate and distinct records." If you can't produce separate financials for each series in court, the series collapse into the master LLC.
Plus, this is THE #1 thing plaintiff attorneys look for when trying to pierce your LLC. If your record keeping is sloppy, they know the rest of your structure is too.
Real Case: Discovery in lawsuit requested: - Financial statements for Series 3 (defendant property) - Bank statements for Series 3 account - List of expenses paid by Series 3 - Capital account for Series 3
Investor couldn't produce any of it. Everything was mixed. Plaintiff's attorney argued "These 'series' exist only on paper." Judge agreed. Pierced, game over.
The Fix:
Minimum Required Records PER SERIES: - ✅ Separate bank account with monthly reconciliation - ✅ Separate ledger in accounting software (or separate file) - ✅ Annual balance sheet and P&L by series - ✅ Capital account showing contributions and distributions - ✅ List of assets owned by that series - ✅ Annual meeting minutes (even if just you) - ✅ Board resolutions for major decisions (property purchase, large expenses, loans)
Master LLC Level: - ✅ Annual meeting of members - ✅ Minutes documenting series creation/dissolution - ✅ Master operating agreement with amendments - ✅ Tax returns showing series activity (Schedule K-1s if multi-member)
Time Investment: 30 min/month per series (2 hours/month for 4 series) Payoff: Your LLC actually works when you need it
Mistake #6: Ignoring Annual Compliance
The Error: Thinking that once the Series LLC is formed, you're done.
What I See: - No annual meetings since formation - Operating agreement never updated - New series added verbally but not documented - No registered agent (or lapsed registration) - No annual reviews of structure - Properties bought/sold without updating documentation
Why It's Deadly: LLCs must maintain "corporate formalities" to deserve limited liability protection. If you treat your LLC like a checking account instead of a legal entity, courts will too.
Real Case: Investor formed Series LLC in 2016. Never held annual meeting. Never updated operating agreement when he added 3 new series. Never documented new property assignments. Got sued in 2023. Plaintiff's attorney showed 7 years of zero formalities. Judge: "This is a sham entity." Pierced.
The Fix:
Annual Checklist (Every January): - [ ] Hold annual meeting (even if just you and spouse) - [ ] Create minutes documenting: - Assets owned by each series - Income and expenses review - Any new series created - Major decisions made in past year - Manager reappointment - [ ] Update operating agreement Schedule A (asset list) - [ ] Verify registered agent is current - [ ] Review insurance coverage - [ ] Review deed recordings (correct series ownership?) - [ ] Check bank account separations (any commingling?) - [ ] File tax returns on time
When Adding/Removing Properties: - [ ] Board resolution creating new series OR assigning to existing - [ ] Deed property correctly ("ABC LLC, Series X") - [ ] Record with county - [ ] Update title insurance - [ ] Update Schedule A - [ ] New bank account if new series
Time Required: 2-3 hours/year Risk Avoided: "Corporate formalities" defense in lawsuit
Mistake #7: DIY Formation Without Legal Review
The Error: Forming Series LLC yourself using online articles and generic forms.
What I See Every Month: - "I read that Series LLCs are great, so I made one" - Certificate of Formation filed, nothing else - Operating agreement from LegalZoom (doesn't address series) - Structure copied from friend's LLC (different state, different needs) - No attorney ever reviewed it
Why It's Deadly: Series LLCs are complex. The Texas statute is only 4 paragraphs, leaving enormous gaps that must be filled by your operating agreement. Without expertise, you'll miss critical protections.
Plus, every situation is different: - Commercial vs residential properties - Number of properties - Equity levels and debt structure - Other business interests - Estate planning goals - Tax optimization strategies - Partnership situations
A generic Series LLC template can't address your specific needs.
Real Case: Investor formed Series LLC using online tutorial. Put 6 properties in 6 series. Didn't realize 3 properties had liens that exceeded value (underwater). Should have been in separate LLCs, not series (series consolidation risk). When one property went into foreclosure, the bank argued consolidated debt across all series. Legal nightmare.
The Fix:
Before Forming Series LLC, Get Professional Analysis: - How many properties (now and projected)? - What are the liability risks (commercial, residential, student housing)? - What's your debt structure (series consolidate for lenders)? - Do you have partners (need detailed member provisions)? - What are your estate planning goals (integration with trusts)? - What's your tax situation (S-corp election make sense)?
After Formation, Get Annual Review: - Are your series still structured correctly? - Did you add properties without proper documentation? - Is your operating agreement still current with law changes? - Are your records sufficient for court defense?
Investment: $3,000-5,000 for proper initial formation Alternative Cost: $50,000-500,000 when bad structure fails in lawsuit
What to Do If You've Made These Mistakes
Don't panic. Most Series LLC problems can be fixed. Here's the process:
Step 1: Self-Assessment Go through this checklist: - [ ] Do I have separate bank accounts for each series? - [ ] Do I have a written, signed operating agreement? - [ ] Are my deeds recorded showing series ownership? - [ ] Is my LLC multi-member? - [ ] Do I keep separate financial records? - [ ] Have I held annual meetings? - [ ] Did an attorney design this structure?
Step 2: Get Professional Review If you checked "no" to ANY of the above, get a professional review. Most attorneys (including me) offer free initial consultations to identify gaps.
Step 3: Remediate Issues Common fixes: - Amend operating agreement ($1,500-2,500) - Add family members ($500-1,000) - Re-record deeds ($200-500 per property) - Establish separate bank accounts ($0, just time) - Create retroactive minutes for past years ($500-1,000) - Document current asset assignments ($500)
Total Fix Cost: Usually $3,000-6,000 Compare to: Losing everything in a lawsuit
The 80/20 Rule for Series LLC Protection
You want the practical takeaway? Here are the 20% of actions that provide 80% of protection:
Critical 20%: 1. Separate bank accounts - Non-negotiable, do this today 2. Multi-member structure - Add spouse or child as 1% member 3. Written operating agreement - Texas-specific, series-specific 4. Proper deed recording - Series name on title 5. Annual documentation - One meeting per year with minutes
Get those five right, and you're 80% protected. Miss any one, and your protection drops to near-zero.
The One Question That Matters
Here's how I assess whether a Series LLC is properly structured:
"If you got sued tomorrow and had to defend this structure in court, could you produce documentation showing you treated each series as a separate legal entity?"
If the answer is anything other than an immediate "yes," you have work to do.
Don't Wait Until You're Sued
The time to fix your Series LLC is now—before you need it. Once you're sued, it's too late to create proper documentation (judges see right through retroactive fixes made during litigation).
I've had consultations with investors who said, "My LLC is fine, I just want you to look at it." Then we find critical gaps. And they say, "Let's fix it next month."
Two months later they call back: "I just got sued. Can you fix it now?"
Too late.
Free Structure Review: Let me review your Series LLC structure and identify any gaps. No obligation, no pressure—just honest analysis of whether your protection will hold up.
📞 Call: 512-464-1110 📧 Email: david@pcfo.net 📅 Schedule: Book a free review
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About David Disraeli: 40+ years in asset protection law. 120+ Series LLCs formed. Specializing in Texas real estate investor protection. A+ BBB rating.