The Texas Series LLC: A Great Tool For Investors
May 27, 2011 | By Kevin Vela
I’ve had several clients ask me recently about Texas Series LLCs. What are they? What are the advantages of them? How can they be formed? Hopefully I can answer a few of those questions below. Of course, I always recommend to clients and prospective clients that they consult with an attorney prior to forming an entity, but here is a brief overview.
The Texas Series LLC is rapidly becoming a preferred vehicle for real estate investors, and series LLCs make a lot of sense for several classes of investors. The beauty of series LLCs is that they allow the individual forming them to create several distinct entities and receive all of the benefits of multiple Limited Liability Companies, with only one filing.
The 81st legislature codified series LLCs in 2009 by adding Subchapter M, Sections 101.601 – 101.621 to the Texas Business Organizations Code. In essence, a Texas Series LLC is a type of limited liability company that provides liability protection and tax advantages across a series of LLCs, each which is protected from the liabilities arising from the other LLCs within the same series. This is analogous to a big corporation with several subsidiary entities underneath it, but with the ease and flexibility of a limited liability company. Each LLC within the series can have its own name, organizational structure, and assets legally separate from the others. All under one filing.
Imagine that you are a real estate investor with several distinct property investments across Texas. As you probably already know, it’s best to keep the properties distinct, so that liabilities arising from one property will not affect the others. Oftentimes, it’s expensive in terms of dollars and time to create distinct entities to own each piece of property. You have attorney’s fees, filing fees, and potentially registered agent fees. Under a series LLC, multiple LLCs can be accomplished in a much simpler fashion. Let’s call your company Champion Real Estate Investments I and assume that it is a series LLC. This company will own a piece of raw land in Frisco. When you are ready to buy an apartment building in Garland, you can put that asset into Champion Real Estate Investments II, and keep the liability associated with the apartment building in Garland separate from the raw land in Frisco. That way, in the event that a creditor or judgment holder wants to go after the apartment building, the raw land will be out of reach. Generally, we advise our clients to setup the parent LLC (here, Champion Real Estate I) as a management/parent company, and then to put each new asset into a series company. Note, by using assumed names, you can easily change the names of the series entities.
Now, you cannot just intend to do this and receive the benefits without first clearing a few hurdles. Your initial step would be to make sure that your certificate of formation and LLC operating agreement properly identify your LLC as a series LLC. Secondly, you will want to make sure that you keep all records, financial records, contracts, bank accounts, etc., for your series LLCs separate from each other. This adds a little bit to the accounting and maintenance costs, but that’s a small price to pay for the ability to essentially add unlimited distinct companies under your parent LLC. The key question that comes up is “do I have to maintain separate bank accounts for each entity.” The quick answer is yes, this is best. A close examination of the law, however, simply requires that “the records of a series [must be] maintained in a manner so that the assets of the series can be reasonably identified by specific listing, category, type, quantity, or computational or allocational formula or procedure…” This would infer that so long as your Quickbooks records are clean, you do not necessarily need separate bank accounts for each asset. That said, we always recommend separate bank accounts for each LLC within the series, and at a minimum, that you consult with your attorney and CPA before using a single bank account for multiple series LLCs.
Finally, you can convert existing LLCs into series LLCs by amending your Secretary of State filings and company agreements. This needs to be done correctly, so make sure that you consult with an attorney prior to doing so.
In conclusion, Series LLCs were almost tailor made for real estate investors, and we have been advising most of our real estate clients (and some other investors) over the past twelve months to use them. They are a powerful and efficient asset protection tool and one that I expect to see gain widespread adoption in the near future.