Texas Series LLCs
This guide is intended to discuss what a series LLC entails, how they protect your assets, and why you should use one. Series LLCs are most frequently used by real estate investors but can be used by other business owners to effectively shield assets from creditors or predators.
What is a "Series" LLC?
Texas series LLCs are authorized by Chapter 101 of the Texas Business Organizations Code. In short, a series LLC allows an individual to hold assets and liabilities within separate groups or series which effectively operate as subcompanies. Think of your LLC as an umbrella in which an LLC is formed and assets are transferred into different series of subcompanies. By statute, a series LLC is authorized to "exercise any power or privilege as necessary or appropriate to the conduct, promotion, or attainment of the business, purposes, or activities of the series." Tex. Bus. & Com. Code Sec. 101.605(5). Moreover, a series LLC can do anything that a traditional LLC can do including the ability to enter into contracts; buy, sell, and hold title to property; grant liens and security interests; and file and defend lawsuits. The State of Texas treats a series LLC as a single entity that pays one filing fee and registers as one entity with the Texas Secretary of State. Additionaly, it files one franchise tax report as a single entity, not as a combined group, under its Texas taxpayer identification number.How Does a Series LLC Differ From a Traditional LLC?
The distinction between the two is EXPOSURE TO LIABILITY. If a traditional LLC is sued and a judgment is obtained, ALL assets of the LLC are available for purposes of satisfying the judgment. A series LLC can effectively contain your liability to assets held within that series and does not allow for recovery against the assets that another series holds. As an example, assume you have 3 rental properties, Property A, Property B, and Property C. In the traditional LLC model, Properties A, B, and C are held within one combined LLC. Further let's assume that all three properties have renters who each pay you a monthly rental amount. Assume the tenants in Property A are injured on the premises and sue your traditional LLC as a whole. If a judgment can be obtained, Properties B and C can potentially be used to satisfy the judgment obtained by the tenants of Property A. This means that your LLC may be forced to sell Properties B and C to cover the outstanding judgment obtained by the tenants in Property A. If a series LLC structure was utilized, you can effectively protect Properties B and C from the judgment obtained by the tenants of Property A. The only assets available to satisfy the judgment are those assets held in the series that owns Property A. Property B and Property C are effectively "shielded" from the liability associated with Property A.How Many Different Series May Be Contained In One LLC?
There is no legal authority as to how many different series can be contained within one LLC. Theoretically, the number could be infinite. Out of prudence, you may want to arbitrarily limit the number. You could begin with Series A owing one property and continuing until Series Z, with each series owning one property. Again, the number can be whatever you so choose but do not overdo it.Can I Convert My Traditional LLC To A Series LLC?
The short answer is yes you can. The longer answer is that it will not provide you much cost savings since all of the company documentation will have to amended. Additionally, your traditional LLC should have no baggage such as debts, tax liabilities, contractual obligations, and pending or threatened litigation. You may be better off starting a completely new series LLC. Your attorney can provide you with your option(s) and advise you as to the best course of action.How Are My Assets Protected?
As previously mentioned, the assets of each series are insulated from the assets of other series and the LLC as a whole. It is imperative that you properly document the transfer of assets to each individual series. Transferring a rental property to John Doe, LLC transfers the property to the LLC as a whole and not an individual series. Failure to properly document asset transfers exposes the LLC as a whole to liability for all assets. This means that your traditional LLC holds its properties in a collective "pool" that can be used to satisfy judgments against any individual property. Your attorney can help you properly document the transfer to ensure that the assets are being placed in a series and not the LLC at large.How Difficult Are Series LLCs To Maintain?
Keeping good record of all transactions within a series is of paramount importance. Series insulation can only be maintained so long as "records maintained for that particular series account for the assets associated with that series separated from the other assets of the company or any other series." Tex. Bus. & Org. Code Sec. 101.601(b)(1). Stated differently, records must be kept "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. . ." Tex. Bus. & Org. Code Sec. 101.603(b). This means that you should NEVER commingle assets and liabilities between different series. In practice, this means that each series of your LLC should have its own separate bank account to hold all cash inflows and pay out all expenditures in connection with that property. While this is an increased burden on the investor's part, the benefits far outweigh the costs. Each series of the LLC is not required to obtain a separate Employer Identification Number (EIN) from the IRS but can if it so chooses. Alternatively, well-documented coding systems for company assets would most likely satisfy the statutory reasonableness requirement.What Assets Can My Series LLC Hold?
In theory, the series LLC can hold any and all assets and businesses. However, caution should be used if the assets are substantially different; create a higher level of liability or potential for legal action than businesses in other series; and have different tax treatment or debt structure. Even though there is no restriction on what business are contained within one series LLC, one would be prudent to avoid holding different types of businesses within one series LLC.How Do I Conduct Business Under A Series LLC?
Each individual series should file an assumed name certificate in order to properly utilize the protections afforded by a series LLC. For example, an assumed name certificate should be filed for each series in the LLC to properly protect the assets inside of that series (i.e., "ABC, LLC d/b/a Series A"). If you are dealing with rental properties, your assumed name can be something along the lines of "ABC, LLC d/b/a 1000 Main Street". When you are collecting rent checks from your tenants, the best practice would be to have payment made to Series A (or 1000 Main Street) for separation of asset purposes.Conclusion
If you own multiple business/properties, you should seriously consider creating a Texas series LLC. The burdens are low, benefits are high, and the asset protection unprecedented. You should consult with a qualified asset protection atttorney who can properly advise you and give you all of your options.
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