Series LLC’s are not well known and frequently misunderstood by laypersons and even some attorneys. This type of business structure can be a great tool if designed correctly. There are only six states that offer series LLC’s and Texas is one of them. Even though Texas has offered Series LLC’s since 2009, they are still underutilized and many people would benefit from them. Watch this short video to find out how:
What is a Texas Series LLC?
1. Series Are Similar to Corporation Subsidiaries. Texas law allows for the formation of a “Series LLC.” It is similar to a parent corporation that owns one or more subsidiary, corporations. The Master LLC is formed with the filing of a Certificate of Formation (which includes specific statutory launguage) in the Texas Secretary of State’s office and paying a $308 filing fee. The Master LLC can then create a subsidiary series LLC by performing two simple steps: (1) preparing a supplemental addendum to the company Operating Agreement and formally naming the subsidiary series, and (2) filing an Assumed Name Certificate with the Texas Secretary of State identifying the subsidiary series LLC as owned by the Master LLC.
Once created, each subsidiary: a. Operates as its own profit/loss center;
a. May have different owners;
b. May have different management;
c. Voting may be different for each subsidiary, and
d. The assets of each subsidiary Series are protected from the losses and
liabilities of the other subsidiaries.
2. Savings. For investors owning more than one investment property, a Series LLC will offer significant savings over the use of individual LLCs for each property because the investor will not pay the $308 filing fee each time a series LLC is created. The only fee incurred in creating the subsidiary is $25 for filing the Assumed Name Certificate.
3. Liability Protection. The asset held by each subsidiary is protected from third party claimants against every other subsidiary. This means a slip-and-fall victim injured on property owned by one series (let’s say, “Subsidiary A”) cannot make a claim against any other
series (i.e., “Subsidiary B”) for injuries sustained on the premises of Subsidiary A.
4. To optimize asset protection between subsidiaries, the investor must do the following: a. Keep the assets and financial records of each subsidiary separate and distinct from every other subsidiary. This means maintaining separate books of account for each
subsidiary. While a single bank account may be maintained by the Master LLC, an accounting system must be employed that accurately tracks the income and expenses of each subsidiary series; i.e., setting up separate “companies” in your QuickBooks (or other accounting) program.
b. Each investment property should be owned only by one subsidiary; there
should no co-ownership of a property by two subsidiaries.
c. File the proper Assumed Name Certificate with the Texas Secretary of State that indicates its ownership relationship to the Mater LLC.
d. All contracts, deeds, notes, etc., should be signed in the name of the
subsidiary series, not the Master Series.
5. Taxation Issues. (A) Franchise Tax. The Texas Comptroller of Public Accounts requires that the Master LLC file only one franchise tax report under a single taxpayer identification number. This means that the income of all subsidiaries must be combined under a single franchise tax report filed by the Master LLC.
(B) The IRS treats the Master LLC and its subsidiary series as separate entities. This will not change the way a normal LLC reports its income, expenses, and allocations for federal tax purposes. The bottom–line is that net income will flow through to the owner(s) of the Master LLC.
6. Governance. The entire Series (the Master LLC and each subsidiary series) will be governed by the terms of the Operating Agreement of the Master LLC, but may be modified in pursuant to any distribution or internal management rules that may be adopted each time a subsidiary series is created.
Here is the exact texas of the enabling statute from theThe Texas Business Organizations Code Section § 101.602:
(a) Notwithstanding any other provision of this chapter or any other law, but subject to Subsection (b) and any other provision of this subchapter:
(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 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.
(b) Subsection (a) applies only if:
(1) the records maintained for that particular series account for the assets associated with that series separately from the other assets of the company or any other series;
(2) the company agreement contains a statement to the effect of the limitations provided in Subsection (a); and
(3) the company’s certificate of formation contains a notice of the limitations provided in Subsection (a).
(c) Subsection (a) or any provision contained in a limited liability company agreement or certificate of formation pursuant to Subsection (a) does not restrict:
(1) a particular series or a limited liability company on behalf of a particular series from expressly agreeing in the company agreement or other written agreement that any or all of the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to the company generally or any other series of the company shall be enforceable against the assets of that particular series; or
(2) a limited liability company from expressly agreeing in the company agreement or other written agreement that any or all of 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 the company generally.
Almost every client I describe a series LLC to responds with the same concern. What are the costs and upkeep associated with the umbrella LLC and its various series? While a complete answer is beyond the confines of a blog post, the short answer is this: Each series needs its own set of books whether it is a simple Excel spreadsheet or a separate account under Quickbooks. Although it may make life easier, it is not required that each series even have its own bank account. In the end, all the income/losses will flow through to the individual tax returns of the members – no different than any other LLC.
The actual creation of a series is as simple as filing a DBA with the state. There is no need to obtain a separate tax i.d. for the new series Another feature of the series LLC is that each series could have different members and different sharing arrangements. For example series “A” may be just one person and a rent house while series “B” may have ten owners of an apartment complex, each with a different percentage ownership.
The alternative would be to create a new LLC every time, pay a $300 filing fee, and obtain a new tax i.d. from the IRS. Lastly, you can convert your existing LLC to a series LLC by filing an amended formation document with the Texas Secretary of State.
If you want to know more, just call David Disraeli at 512-464-1110