Here’s a great Idea for Texas real estate investors: consider the use of a newer type of LLC, called the Series LLC.
Instead of using a traditional Texas LLC for real estate investing—which is subject to the Texas franchise tax—the Series LLC allows an investor to hold assets and liabilities within separate cells or “series” which effectively operate as sub-companies. The Series LLC is a terrific way for real estate investors to own multiple properties and businesses, allowing them to acquire multiple assets and sort them into separate cells.
The Finer Points of Series LLCs
Although, technically the series aren’t stand-alone legal entities, in essence, they behave as if they are. An individual series has the ability to do all the following:
- Initiate and defend lawsuits;
- Conduct business by entering into contracts;
- Purchase, sell, and hold title to property;
- Permit the granting of liens and security interests; and
- Exercise any power or privilege “as necessary or appropriate to the conduct, promotion, or attainment of the business, purposes, or activities of the series,” pursuant to Texas Business & Com. Code §101.605(5).
In addition, a Series LLC can obtain its own EIN and be treated separately for federal tax purposes. Plus, it can open its own bank account.
The statute here in Texas became effective in 2009 and provides that the liabilities of series are generally enforceable only against the assets of the series, not against the parent LLC, if:
- the owner maintains separate accounting records for each series and accounts for the assets of a series separately from the assets of any other series or the LLC generally;
- the operating or company agreement details liability limitations; and
- the certificate of formation gives notice of the limitations on liability.
A Series LLC has some of the same characteristics as a traditional LLC. They include the benefit of informal management, an effective liability shield, and pass-through taxation. However, as mentioned above, a Series LLC can also segregate and compartmentalize assets and liabilities within individual series. This feature of the Series LLC means greater protection and operational flexibility for real estate investors.
It’s this protection from exposure that truly makes a Series LLC unique in comparison to a traditional LLC. If there’s a judgment against a traditional LLC, all assets the LLC are subject to satisfaction of the judgment. But if you’re set up as a Series LLC, the liability is limited to that series and can’t move to other series or the company at large.
Formation of a Series LLC
The creation of a Series LLC requires specific wording to be included in the Certificate of Formation. While a business owner might be able to find a form on the Internet, this process is too complicated and too vital to depend on a free document. You should work with an experienced business law attorney to ensure that your company’s specific tax and business issues are addressed. Remember, we’re talking about protecting the assets of your business—anything you find online will not do the job!
Conversion of a Traditional LLC
You can convert an existing traditional LLC to a Series LLC by filing a Certificate of Amendment. However, because almost all the company documentation of the traditional company—such as the organizational minutes and company agreement—must to be replaced, there isn’t much cost savings, save for a lower filing fee. Talk to an experienced attorney because this might not be a wise choice in your situation—the existing traditional company should be free of debt, tax issues, contractual obligations, and pending or threatened litigation. Typically, it’s best to start anew with a Series LLC that’s unencumbered by these burdens.
The Series LLC offers some significant tax and business structure advantages, as well as reduced record keeping and some of the formalities required to maintain an LLC. It makes a great option for real estate investors.
Consider these ideas about Series LLCs and speak with Texas business attorney Pamela Hailey-Petty by contacting the Hailey-Petty Law Firm in Austin at (512) 910-8977 or email email@example.com. She can help you with any follow-up concerns you have and make sure your business plans are effective and comprehensive.