Asset protection just got a huge boost in Texas, and few people noticed. They should have.
Governor Abbott signed into law Senate Bill 2314, effective September 1, 2023. It affects the asset protection a person can receive through a limited liability company.
Before we get to the big reveal, let’s give a little background.
LLC Asset Protection
There are several types of entities that can be formed in Texas. The most popular is the limited liability company (LLC). The owners of an LLC are referred to as members. LLCs that have only one owner are called single-member LLCs, while LLCs that have more than one owner are called multi-member LLCs.
LLCs are beloved because they give so much asset protection to the members. If a member is sued for a personal matter that is unrelated to the LLC’s operations, then the creditor is not allowed to seize the member’s ownership interest in the LLC. Instead, the creditor is limited to a “charging order” against that member’s interest. That means the creditor can only receive any distributions that would be made by the LLC to the member.
The creditor cannot participate in the management of the LLC, force the LLC to make a distribution or compel the LLC to be sold to pay off the debt. The creditor cannot, therefore, turn its charging order into cash to pay off the member’s debt.
Not surprisingly, creditors do not like LLCs. They especially do not like single-member LLCs, which they view as shams.
In recent years, several court cases questioned the asset protection provided to single-member LLCs. They have treated a single-member LLC like a sole proprietorship, with the result that the member’s interest in the LLC and its assets are not protected from creditors.
Not surprisingly, that trend has cast a pall over single-member LLCs.
The Effects of Senate Bill 2314 on Single-Member LLCs
Now let’s get to SB 2314. It amends the Business Organizations Code to ensure that a charging order remains the sole and exclusive remedy against a person who is the sole member of a single-member LLC, just like it protects a member of a multi-member LLC.
And, just like that, the cloud over single-member LLCs has been lifted. That is a major development in asset protection for small businesses.
Specialized Courts Could Play a Role in Growing Texas Big Business
Moving on, let’s talk about the new subset of courts that was just authorized in Texas: business courts. Although it is a bit late to the game, Texas now joins the dozen or so states that have a complete array of specialized courts made just for big business and their complicated lawsuits.
There is a lot to unpack in the new law, but the gist is this. On September 1, 2024, several specialized business courts, if they receive funding, will begin operation in Texas. They are intended to handle high-dollar business disputes. A specialized appellate court will also be created to hear appeals from the courts. The business courts will share jurisdiction with regular Texas district courts over an array of business-related cases.
The Judges will be appointed by the Texas governor, with advice and consent of the Texas Senate. They will only serve for two-year terms but are eligible for re-appointment. To be considered, a judge must have at least 10 years of experience in complex civil business litigation or transactions or have served as a judge of a Texas court with civil jurisdiction.
The hope is that specialized courts with sophisticated judges will make Texas even more attractive to big business.
The 88th Legislature was good for business.