You have recently decided to invest, and you have an affinity for managing real estate, so you set out to purchase a few rental properties.
You wonder if you should create an entity for holding the properties. You have heard financial planners discuss a Series LLC, and you wonder what it is, and if one might benefit you.
What is a Series LLC?
A Series Limited Liability Company is at its core a limited liability company with one nuance; you can create series companies within the LLC without filing each separate series as its own company.
A Series LLC may establish one or more designated series of members, managers, membership interest, or assets that have separate rights, powers, or duties with respect to specified property or obligations of the LLC or profits and losses associated with specified property or obligations, or have a separate business purpose or investment objective.
—See Series of Members, Managers, Membership Interests, or Assets—Tex. Bus. Org. Code §101.601(a)
Basically, the Series LLC can be used to create separate companies under the LLC umbrella. So long as certain formalities are followed, these separate companies (or series) under the LLC are separate and apart from the parent LLC as it pertains to liability.
What are the Liability Protections?
Pursuant to Texas law, the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to a particular series shall be enforceable against the assets of that series only. These are not enforceable against the assets of the LLC generally or any other series.
Further, none of the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to the LLC generally or any other series shall be enforceable against the assets of a particular series.
This means that each series is treated as its own individual company, and any obligations of a particular series are not enforceable against any other series or the LLC, and vice versa.
How is a Series LLC Formed?
A Series LLC is created by filing a Certificate of Formation with the Texas Secretary of State. The Certificate of Formation must provide for the establishment of one or more designated series.
—See Series of Members, Managers, Membership Interests, or Assets—Tex. Bus. Org. Code §101.601(a)
Additionally, to ensure the liability protection discussed above, the Company Agreement must contain a specific statement to the effect of the limitations provided by state law, and the Certificate of Formation must contain a notice of the limitations provided by state law.
The Series LLC must also ensure that the records maintained for each series and the company account for the assets associated with each series separately from the other assets of the company or any other series. Basically, treat each series as if it were its own separate company, and ensure your records reflect that distinctness.
What about Assets?
Assets associated with a series may be held directly or indirectly, including being held in the name of the series, in the name of the LLC, through a nominee, or otherwise, so long as the records are maintained in a manner so that the assets can be reasonably identified.
—See Assets of Series—Tex. Bus. Org. Code §101.603
One of the key take-aways is that a Series LLC is a great vehicle for holding property so long as the records are detailed and optimized for liability protection.
What Else Should I Know?
If organized correctly, a series has the power and capacity, in the series’ own name to: (1) sue and be sued; (2) contract; (3) acquire, sell, and hold title to assets of the series, including real property, personal property, and intangible property; (4) grant liens and security interests in assets of the series; (5) eb a promoter, organizer, partner, owner, member, associate, or manager of an organization; and (6) exercise any power or privilege as necessary or appropriate to the conduct, promotion, or attainment of the business, purposes, or activities of the series.
—See General Powers of a Series—Tex. Bus. Org. Code §101.605
Essentially, when organized correctly, and the records are maintained correctly, each individual series is treated as if it were its own LLC separate and distinct from the others—without the necessity of paying a filing fee for each series. It should be noted, though, that while a series does have similar rights, powers, and duties to an LLC, it is not a separate domestic entity or organization.
—See Series Not a Separate Domestic Entity or Organization—Tex. Bus. Org. Code §101.622
A Series LLC can be a great asset management tool. If you are considering setting up a Series LLC for your properties, be sure to discuss it with your attorney and tax adviser first.
–Authored by Carrie A. Harris, Esq.,
Matthew Harris Law, PLLC – Business Law Division
1101 Broadway, Lubbock, Texas, 79401
Tel: (806) 702-4852 | Fax: (800) 985-9479