What is a Series LLC?
The series LLC is the newest form for business entities in Texas, being created by the Texas legislature in 2009. The Texas Business Organizations Code authorizes a series LLC to have an unlimited number of segregated ‘cells’ of membership interests, assets, and operations independent of the parent LLC and other cells. The series LLC allows investors to hold assets and liabilities within separate cells which are effectively separate sub-companies, though the cells are not distinct legal entities. Individual series cells are allowed to enter contracts, hold and convey property, enter and defend lawsuits, and exercise any power as necessary to conduct business. The series LLC shares the typical benefits of a LLC: the flexibility of management, limited liability, and pass through taxation. The main difference being the ability to segregate and compartmentalize the assets and liabilities as needed to protect the business. The Texas series LLC has been favored by real estate investors in recent years.
One of the primary benefits of the series LLC over the traditional LLC is the cost. While the traditional and series LLC both cost $300 in filing fees in Texas, a series LLC is allowed unlimited amount of cells within the parent LLC. There is no additional fee for creating cells within the series LLC. Filing as a traditional LLC instead of a series LLC for the multiple cells would cost $300 for each individual LLC. When a series LLC is operated correctly, investors can insulate each cell from the liabilities of other cells and the parent LLC, since the liabilities of an individual cell is only enforceable against the assets of that cell.
The Texas series LLC has become a favored method for muli-property owners to insulate and compartmentalize their properties and business assets. For property owners who rent many different properties is a cost effective method to creating the necessary limited liability protection for your assets. Another popular use of the series LLC is to segregate different streams of your business.
Some considerations before you jump into creating a series LLC tomorrow: the accounting, taxation, and banking/title issues may cause the series LLC to be more limiting or onerous to the typical Texas small business. The Texas Business Organizations Code requires a series LLC to maintain records and accounting for assets associated with a cell separate from the other cells’ assets or the parent LLC assets. The records must be maintained so that it can be reasonably ascertained the identity of the cell’s assets. Couple this with the Texas Comptroller’s regulation that a series LLC will file and pay only one franchise tax in the name of the parent LLC and you have some work for yourself or your accountant. While good accounting and recording keeping are important for any small business, for a series LLC it is paramount. Failing to follow the statutory requirements for accounting and record keeping can result in the liability being transferred across cells and even to investors.
Since series LLCs are relatively new in Texas, title companies and lenders sometimes are not familiar with the structure and purpose of the series LLC. Often a title company will require a certificate of good standing for an LLC, which can often cause conflict when such a certificate is not available for an individual cell. Similarly, banks require an EIN for a business to open a bank account. Since each cell is not an individual legal entity, it can be difficult obtaining and maintaining separate EINs for each cell.
One last consideration before forming a series LLC is that the IRS has yet to effect the rules for how to tax a series LLC and the cells within. The proposed regulations from 2010 provide that each individual cell will be taxed and treated as a separate entity. These regulations have not yet moved forward with implementation but is a glimpse of what may come in the future for series LLCs. While these regulations do not necessarily make the series LLC unattractive for Texas small businesses, they may make the maintenance of a large number of cells unwieldy for the small business owner.
Finally, there are two company formalities to ensure your series LLC is formed correctly. The company agreement and certificate of formation of the series LLC must contain a statement that the debts, liabilities, and other obligations of a separate cell will only be enforceable against the assets of that cell. Also state that the liabilities and obligations of the parent LLC itself may not be enforced against the assets of a separate cell.
Creating a Series LLC
Choose a Name for Your LLC: Your series LLC’s name must be distinguishable from the names of other business entities already on file with the Texas Secretary of State. It must include “Limited Liability Company,” “LLC,” or “L.L.C.” You will also need to follow certain rules for your Texas series LLC naming conventions. Generally, each series of the LLC will need to have the same naming convention based on the parent LLC.
Reserve Your Business Name (optional): If you’ve decided on a business name but aren’t ready to form your LLC, you can reserve the name for a period of 120 days by filing a “Name Reservation” form with the Texas Secretary of State.
Appoint a Registered Agent: Texas requires that you nominate a registered agent for your series LLC. This person or business entity agrees to accept legal papers on your LLC’s behalf should it be sued.
Prepare a Certificate of Formation: This is a legal document needed to form your LLC. It includes the LLC’s name, its purpose, information on how it will be managed, its registered agent’s name and address, and the name and address of at least one organizer.
Draft an LLC Operating Agreement: Though not required by the state, having an operating agreement will set the rules for your LLC and help protect your limited liability status. The parent, or master LLC, should have its own operating agreement along with each series. For a series LLC, the agreement should clearly define the rights, powers, and duties of each series, and the classes of members, if more than one. It should also explain how a new series may be created or an existing one dissolved.
File the Certificate of Formation: File the Certificate of Formation with the Secretary of State and pay the required fee. This can be done online, by mail, or in person. It normally takes 2-3 business days for online and in-person filings, and 7-10 business days for mailed filings.
Obtain an EIN from the IRS: Most LLCs are required to get an EIN from the IRS. This is also known as an Employer Identification Number and is used to identify your business for tax purposes. Even if you don’t plan on having employees, LLCs are usually required to obtain an EIN.
Maintaining a Series LLC
File Annual Reports: Texas requires all LLCs, including series LLCs, to file an annual report with the Secretary of State, known as the Franchise Tax Public Information Report. The due date is May 15 each year. Texas series LLC taxes are considered as a whole, meaning you generally will file a unified tax report to the State.
Pay Your Texas State Taxes: Depending on the nature of your business, you may be required to pay certain taxes. For example, Texas imposes a franchise tax on most LLCs.
Obtain Necessary Business Licenses and Permits: Depending on the nature of your business, you may need certain licenses or permits to operate legally. Check with the Texas Department of Licensing and Regulation (TDLR) to see what licenses and permits you might need.
Renewals and Updates: Keep all business records up to date and renew all licenses and permits as required.
Separation of Assets: To maintain the limited liability features of a series LLC, you must keep assets of each series separate and distinct from those of the other series. This is one of the key factors courts look at in deciding whether to respect the separateness of each series.
A series limited liability company is the latest and most interesting business structures for Texas small businesses. It allows the flexibility needed for small businesses to compete in the modern marketplace, provides the members protection with limited liability, and allows an unlimited number of compartmentalized cells within. For more information on Texas Series LLCs and how to structure your Texas small business fill out the contact form at the bottom of the page or call Reidel Law Firm at 832-510-3292.
