Key Takeaways

  • Series LLC in Texas allows multiple independent business units under one LLC, offering asset protection and tax advantages.
  • Formation & Conversion: Requires specific language in the Certificate of Formation or an amendment for conversion.
  • Asset Protection: Each series is legally separate, shielding assets from liabilities of other series.
  • Recordkeeping: Proper documentation is critical for maintaining liability protection.
  • State & Federal Considerations: Series LLCs have unique tax treatment, and some states do not recognize them.
  • Registered Agent & Fees: A single filing fee covers the entire series LLC, but ongoing compliance is necessary.
  • Use Cases: Particularly beneficial for real estate investors and businesses with multiple operational units.

The Texas Series LLC

  • A series LLC Texas is a variant of a traditional limited liability company (LLC) that has been authorized for use in this state. The difference between a standard LLC and series LLC is that the language used in the company agreement and certificate of formation for series LLC allows for the creations of sub LLCs, also called series, within the main company.
  • Standard LLCs have been very popular in Texas, particularly among real estate investors. The reason LLCs are so popular in this state is that the franchise tax has applied to limited partnerships since 2007. The franchise tax in Texas only applies when the gross receipts of a business are more than $1.1 million. When a business entity reaches the $1.1 million limit, they can file for a new LLC in certain circumstances. However, if this income threshold is not reached, the business can simply file a no tax due report with the State of Texas.
  • Many investors now choose to form LLCs instead of limited partnerships because forming an LLC is significantly more affordable and much less complex. The majority of new filings with the Texas Secretary of State are for LLCs.
  • A series LLC allows real estate investors to maintain multiple businesses and properties with ease and allows the investor to organize their properties into separate series.
  • You should not institute a series company until it is necessary to do so. Until that point, a standard LLC should suffice. However, there are no disadvantages to choosing a series LLC over a standard LLC, even if you don't currently have a need for a series company.
  • Series LLCs first became available in Texas in 2009 but have been offered in Delaware since 1996. There are currently thirteen states that allow for series LLCs. The statutes for series LLCs in Nevada and Texas are very similar.

Pros and Cons of a Texas Series LLC

A Texas Series LLC presents unique advantages and some potential drawbacks, making it important to evaluate whether it aligns with your business needs.

Pros:

  • Liability Protection: Each series operates independently, protecting its assets from liabilities of other series.
  • Cost-Efficient: Only one filing fee is required for multiple series, reducing administrative costs.
  • Simplified Management: A single registered agent and operating agreement can govern all series.
  • Tax Benefits: Series LLCs may allow for tax efficiencies depending on business structure and use.
  • Ideal for Real Estate Investors: Property owners can separate investments without creating multiple LLCs.

Cons:

  • Uncertain Legal Recognition: Some states do not recognize Series LLCs, creating potential legal challenges.
  • Recordkeeping Burden: Each series must maintain distinct records to ensure liability protection.
  • Complex Taxation: Federal tax treatment remains ambiguous, and tax liabilities may differ based on the business model.
  • Financing Challenges: Lenders may hesitate to provide funding due to the structure's complexity.

What is a Series Company?

  • As outlined by Texas law, the governing documents of a series LLC will establish managers, members, and membership interests that will be completely separate from the main LLC. These groups established in the series LLC governing documents will also have distinct liabilities, obligations, and rights.
  • Essentially, a series LLC will be under the parent LLC's umbrella but will operate independently. When describing the parent LLC, you would use the term series LLC. When referring to a cell or sub LLC, the term to use is series. Every series will have the same abilities as a standard LLC.
  • The biggest benefit of series LLCs is that they allow for the creation of multiple independent entities with a single filing, and each of these entities will have the advantages of a normal LLC. Every series that is created can:
    • Enter contracts.
    • Sue a company or person or be sued.
    • Own the title to assets.
    • Provide asset interests or liens.
  • Basically, a series LLC Texas is a type of LLC that provides tax benefits and legal protections to multiple LLCs while also shielding each individual LLC from the liabilities of the rest of the series. In terms of chapter 101 and tile 1 of the Texas Business Organization Code, an individual series is not considered a distinct domestic entity.
  • LLCs within the larger series are allowed to have unique names, assets, and structures, even though only one filing will be used. However, even though the series acts as a stand-alone entity, they technically are not.
  • If it decides to do so, a series can apply for its own federal tax identification number so that it can be treated individually for the purpose of federal taxes. Series are not required to have their own bank account, but they have the ability to open their own account. Series should have their own name which they operate under.
  • Because series act as an individual entity in many respects, it can seem pointless to declare that they are not standalone entities. The Texas Comptroller, however, will treat a series LLC as an individual entity. When you form a series LLC, you will register with the Secretary of State as a single entity and will only need to pay one fee. You will also need to pay an annual fee to a registered agent for your series LLC Texas.

Form a New Texas Series LLC or Convert an Existing LLC

To create a new series LLC you must include specific language in the Certificate of Formation. This document also allows you to notify the public of your asset protection. For these reasons, avoid using templates and internet forms. They typically don't include the level of detail needed to establish a series LLC. Filing a Certificate of Amendment can convert a traditional LLC to a series entity. While this carries a lower filing fee than creating a new company, you'll need to replace your organizational agreement and other company documents. You should not convert an LLC that is burdened with lawsuits, debts or other pending obligations. In this case, it is advised to start a new business entity. 

Costs and Fees for a Texas Series LLC

Understanding the costs associated with forming and maintaining a Texas Series LLC is crucial for planning.

  • Filing Fee: The initial filing fee for a Series LLC in Texas is $300.
  • Registered Agent Fee: Annual costs for a registered agent service range from $50–$300.
  • Annual Franchise Tax: Businesses earning over $1.1 million must file and pay the Texas franchise tax.
  • Amendment Fee: If converting an LLC to a Series LLC, an amendment filing fee applies (approximately $150).

Insulation of Each Series

  • In a series LLC, each business or property is protected from the legal and financial liabilities of the others and of the LLC as a whole. A property holding does not necessarily need to be a separate series if it is an asset of the overall LLC.
  • If a property held by one series is sold for less than the amount owed to the lender, and the series is then subject to a judgment, that judgment would not be enforceable against the assets held by other series within the LLC. This is not the case with a traditional LLC, in which all assets are held together, and thus, are more vulnerable.

Series LLCs and Creditor Protection

A Texas Series LLC provides strong protection against creditors, but maintaining compliance is crucial.

  • If structured properly, creditors can only pursue assets within an individual series, not the entire LLC.
  • Best Practices for Asset Protection:
    • Maintain separate bank accounts for each series.
    • Use clear contractual language when entering agreements.
    • Keep accurate and distinct records of assets and liabilities for each series.

Recordkeeping

  • For a successful series LLC, good recordkeeping is essential. Without separate records for the assets of each series account, the insulation from liability provided by a series LLC is no longer valid. This includes the ability to identify the separate series record by a specific:
    • Categorization system
    • Listing
    • Procedure.
  • The assets for each series must be kept distinct, as do the assets for the overall LLC.
  • However, this does not require a separate account for each system. A simple coding system to distinguish the assets and liabilities for each series within a single account would suffice. Separate accounts are recommended if some holdings are subject to different management procedures or tax treatment.
  • Records should be saved to prove in a court of law that funds were not commingled in case litigation arises.

Tax Treatment of a Texas Series LLC

Texas does not impose a state-level income tax, but federal tax treatment of Series LLCs is still evolving.

  • The IRS may classify each series as a separate entity for tax purposes.
  • Series LLCs can be taxed as disregarded entities, partnerships, or corporations, depending on elections made.
  • Each series should consult a tax professional to determine the best tax classification.

Series Assets

Investors should avoid holding radically different businesses within the same LLC. This can create a situation in which one series is much more vulnerable to legal action and liability than the others. Within a series LLC, avoid establishing a series with a very different debt structure or a substantially different tax treatment than the LLC's other businesses.

Frequently Asked Questions

  1. Is a Texas Series LLC a good choice for real estate investors?
    Yes, a Series LLC is especially useful for real estate investors, as it allows for asset separation while reducing administrative costs.
  2. How is a Texas Series LLC taxed?
    Each series may be taxed separately at the federal level, depending on IRS classification, but Texas does not impose a state-level income tax.
  3. Can a Texas Series LLC operate in other states?
    Not all states recognize Series LLCs, so operating outside of Texas could lead to legal uncertainties.
  4. Does a Texas Series LLC require separate EINs for each series?
    It depends—some series may use the parent LLC’s EIN, while others may need their own for tax and banking purposes.
  5. How much does it cost to set up a Series LLC in Texas?
    The state filing fee is $300, but other costs like a registered agent fee and possible franchise taxes may apply.

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