Franchise Tax Treatment of Texas Series LLCs
March 26, 2012 | By Kevin Vela
(Disclaimer – I am not an accountant, much less a CPA. The info below is informational only and is intended to provoke further discussion in the rapidly evolving world of Texas Series LLCs. Please consult with your attorney and CPA prior to filing your Texas Franchise Taxes)
As I have written before, the Texas Series LLC is a great tool for real estate investors, and anyone who needs multiple Texas LLCs. But, since they are new, there are still gaps being filled in as they become more commonly used throughout the state.
I’ve answered a few questions about Texas Series LLCs in a previous post, but since we are in the middle of tax season, I’ve been getting calls from clients and CPAs who work for my clients concerning filing franchise taxes. How are the individual cells within a master series treated by the state? How many returns should the LLC file?
I did not know the answers, so I called the Comptroller’s office where one of the Franchise Tax experts was kind enough to answer my questions. Though this is not a comprehensive account of all franchise tax considerations, here are a few conclusions. (The thoughts below are my own, based on my research and a conversation with a rep from the Comptroller’s office. I can not, and do not, purport to be the final word on anything below.)
File A Single Return
The cells within a series will most likely be treated as a combined group and will be rolled up to the master (or parent) LLC. Thus, the Series LLC will only file 1 return. This is irrespective of ownership.
Cells within a Series LLC can have different members and ownership structures. So Series A could be owned 51/49 between Joe and John, while Series B could be owned 52/24/24 between Joe, Suzy and Randy. Even though, Series A and Series B would be rolled up to the parent and will file a single Texas Franchise Tax report. This could create all kinds of havoc when it comes time to send out K1s, so check with your CPA and/or attorney before setting up cells with different owners.
Now, the question that remains to be answered is what happens when Series C is owned 33/33/33 between Joe, Mary and Valerie? The business in Series C may meet the unitary business test, but would likely not be an affiliated group as defined by the Comptroller. I recognize that this simply begs another question, but I want to highlight the importance of talking to a CPA or tax attorney before getting too fancy with your Series ownership structures.
Cells will be totaled
(Assuming an affiliated group…) Since the cells will be rolled up into the parent, all of the cells will be totaled for purposes of determining Franchise Taxes due, much like separate LLCs owned by the same taxpayer. Thus, using the current Franchise Tax threshold of $1,030,000 (it went up from $1M with the 2012 CPI adjustment), if each of 5 cells within a Texas Series LLC had $250k in revenues, the parent LLC would be considered to have $1.25M in revenue and thus be subject to a Franchise Tax payment as the taxpaying entity.
This is no different than a single person owning 5 separate LLCs with similar business purposes, as those would be rolled into a combined group return, so the tax effect is unchanged.
In my mind, this adds a deterrent when considering Series LLCs for clients who plan to have different ownership structures within each cell, as the burden from the reporting and allocations may outweigh the benefit of Series LLCs. But every case is different.
To summarize, Series LLCs are fantastic tools for the individual investor or small business owner, and can work for small privately owned companies who want to replicate ownership structure over and over again. But for the investor who plans to add multiple members with different ownership structures, a Texas Series LLC may not be the right fit. Again, please consult with your tax and legal advisers before filing a Texas Series LLC, or filing your Franchise taxes on any of your entities.