Cover Your Assets – Investment Planning with the Texas Series LLC

 

by Jen Green, Burch Law

Since 2009, Texas has offered a wonderful tool for investors, particularly those with multiple assets: the Texas Series LLC. With the traditional LLC, which already offered a fair amount of shielding from personal liability, investors enjoyed the benefits of pass-through taxation and informal management structures. With the Series LLC, the investor continues to enjoy those benefits and also gains the benefit of an additional level of shielding. For example, if you owned 10 pieces of real property, placed in Series 1 through 10 of your “RE LLC”, and someone won a judgment against Series 4, they could only collect that judgment from Series 4, not from any of the other series or from RE LLC. RE LLC could for the most part place its assets beyond judgment creditors’ reach, in that it would not enter into contracts or business dealings with other parties, being primarily the holding company for the various Series. And if those Series contained rental properties, for example, you might want to make your property management company a different LLC altogether, perhaps a traditional stand-alone LLC just for the purpose of managing those entities, keeping the assets’ ownership and management activities related to them separate.

You might think that the Series LLC sounds too complex or time-consuming to deal with, but Texas has made it a fairly user-friendly vehicle. Forming a Series LLC is straightforward (easier, in my opinion, than amending a traditional LLC to a series LLC). In filing your Certificate of Formation with the Texas Secretary of State, there is some additional language you need to add to your Certificate filing, which is set forth in the governing statute, that puts people on notice that your LLC is a Series LLC. In effect, it puts people on notice that they are going to have to work extra hard if they want to come after your assets, potentially eliminating frivolous lawsuits and nuisance “slip and fall” type suits in the bud. And you don’t have to already have multiple assets when you form the Series LLC: it will function as a traditional LLC just fine until you are ready to make the leap and start adding series of assets.

One thing to remember when forming your LLC, whether traditional or Series, Texas requires that the LLC file a Public Information Report and pay a relatively paltry franchise tax each year. Yet despite the tiny cost of this tax relative to the sizable protection your LLC could provide your assets, it always surprises me how many LLCs go into “forfeiture” status for failure to pay the franchise tax. But it is not just the LLC which is forfeit, it is also your protection from personal liability for debts, liabilities, and judgments of or against the LLC. Make a recurring calendar entry to remind yourself about this if you have to; you don’t want your shrewd foresight in forming the LLC to go for naught.

The additional duties involved in operating a Series LLC as opposed to a traditional LLC are basically:

  • Titling your properties or investments in the name of the individual Series and deeding them back out in the name of that Series; and
  • Keeping records of revenues, expenses and activities related to each Series separate for record-keeping purposes. This is very important! If you comingle these items for the various Series, you have lost the Series’ extra layer of liability protection. Think of it in terms of Texas community property law: when spouses comingle their separate property, they convert it to community property. Similarly, when Series LLC operators comingle transactions of their separate Series under a single record-keeping designation, they convert the series to a traditional LLC, where the pool of commingled assets can be reached more easily by creditors. Commingling Series’ transactions makes it easy to pierce the corporate veil and defeats the purpose of creating a Series LLC in the first place.

The Series LLC is treated as a single legal entity; technically, the individual Series which it comprises are not separate legal entities, even though they can largely behave as such in their business dealings. You can even obtain separate EIN numbers for each Series if you wish, though in most circumstances that would simply add unnecessary complexity. You also do not need separate bank accounts for each Series; one bank account for the entire LLC will do, so long as you notate transactions for the specific series to which they belong. For instance: January rental payment received-Series 1-$1600; HVAC repairs-Series 3-$2000, etc.

For ease of transaction tracking and record-keeping, you may want to limit the number of Series held within a single LLC to a dozen or less. You will also want to keep in separate LLCS investments with very different tax or debt structures or liability issues or exposure (for example, as mentioned previously, keep management/activity separate from assets). For instance, if you own several residential rental properties, several commercial rental properties, and several parcels of land for development, you might keep each of those asset bundles in three separate Series LLCs.

Texas is a very business-friendly environment compared to most other U.S. states, and the Series LLC is another tool Texas offers to help make your business and investment activities a little easier. If you have questions about how the Series LLC can work for you, give us a call. We can help you make the Texas Series LLC and its extra layer of liability protection happen!