Real Estate Investor: Is a Texas Series LLC the right choice for you?
This guide discusses the development of the Series LLC in Texas and its numerous benefits to real estate investors and property owners.
Development and Overview of the Series LLC in TexasThere are many choices when it comes to entity formation in Texas. Whether a corporation, partnership, limited liability partnership (LLP) or limited liability company (LLC) - the nature of the business is often the best determining factor in entity selection. For property owners and investors, prior to 2009, a traditional LLC was the entity of choice for most due to its relatively simple setup and limited ongoing administrative requirements.
Despite its relative ease, real estate property owners and investors utilizing an LLC for asset protection purposes found themselves faced with the decision of whether to (1) hold several properties within a single LLC (therefore undermining a significant portion of the liability shield benefits) or (2) forming one LLC for each individual property. While the second option was certainly the most prudent path for asset protection, this meant that property owners with numerous properties were faced with the daunting administrative burden of keeping up with many separate LLCs; not to mention the significant expense in filing fees and annual tax preparation.
The state of Texas, and its historically favorable business environment, solved this dilemma in 2009 with Texas Senate Bill 1442 by amending the Texas Business Organizations Code to include new Subchapter M: Series Limited Liability Company, and establishing the "series LLC" as a recognized legal entity under
This significant enactment provided the exact relief that a real estate investors were looking for. The series LLC is a limited liability company ("LLC") that is segregated into separate cells, called "series," for the purpose of holding assets separately in each of the individual series rather than combined in one entity.
Characteristics of a Series-Each series is entitled to have its own members, managers, and/ or membership interests, separate and apart from other series within the same LLC.
-Each series may have rights, powers, and duties with regard to specific property or obligations of the LLC that are separate from the rights, powers, and duties of other series.
-Each series may have its own allocation and distribution of profits and losses associated with the property it holds.
-Each series may have a business purpose or investment objective that differs from the business purpose or investment objective of other series, and can sue and be sued, contract, hold title to property, and grant liens and security interests in its assets, all on its own behalf.
-Each series is, by statute, insulated from the debts and liabilities of other series and those of the LLC itself. The debts, liabilities, and other obligations of a particular series are enforceable only against the assets of that series. In addition, the debts, liabilities, and obligations of the LLC may not be enforced against the assets of a series.
Growth of the Series LLCThe establishment of the Series LLC, while underutilized for several years following its creation, has recently grown in popularity as investors, attorneys, CPAs and other professionals in Texas become more familiar with the structure and comfortable with its implementation.
To date, over a dozen other states have adopted similar Series LLC statutes and the trend shows no sign of slowing. With all the benefits of this entity structure, it could one day become the "go-to" choice for real estate investors from coast to coast.