Texas Series LLC: Everything You Need to Know
A Texas series LLC is a type of limited liability company where investors can own multiple properties and businesses under a single entity. 3 min read
A Texas series LLC is a type of limited liability company where investors can own multiple properties and businesses under a single entity. LLCs have long been a popular business structure in Texas, especially since partnerships are now subject to Texas franchise tax. LLCs are also easier to manage and maintain and are less expensive to form. In fact, the Texas Secretary of State office indicates that most new filings for business entity formation are for LLCs, especially among real estate investors.
The series LLC, first used in Delaware in 1996, became an option for Texas entrepreneurs in 2009. Like other business entities in the state, LLCs are governed by Title 2, Chapter 101 of Business Organizations Code. In addition to introducing the series LLC in 2009, Texas made other improvements to cement its reputation as a good place for LLCs to do business.
Benefits of Simplicity and Economy
Lawyers and other professionals and investors often wonder how many properties they can legally hold in a single LLC. While traditional LLCs can only accommodate one or two businesses, a series LLC can serve as a holding company for up to 25 properties or businesses. Although there is no legal limit to the number of properties an LLC can hold, experts recommend expanding to a second company to protect more than 25 holdings.
You can form a series LLC even if you have only one business or property, especially if you are eventually planning to invest in real estate or create additional businesses. A traditional LLC is suitable for:
- A single investment holding
- A business entity
- A management company.
Series LLC Formation and Conversion
You must include specific language in the Certificate of Formation to create a series LLC. 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:
- Pending obligations.
In this case, it is advised to start a new business entity.
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.
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
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.
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.
If you need help with establishing a series LLC in Texas, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.