Forming a Series LLC in Texas
Let’s say you are starting up a new business or want to start buying up investment properties and you are considering forming a Limited Liability Company (LLC). Perhaps in your initial research, you come across the term “Series LLC” and wonder if this is the right entity for your business or investments.
A Refresher on the Limited Liability Company (LLC)
An LLC is a perfect combination of the best aspects of a partnership and a corporation. Partnerships are extremely flexible but do not limit liability among the partners, there is usually a general partner who is liable for all of the company’s liabilities. Corporations provide limited liability to its shareholders but are much more regulated and require much more paperwork. An LLC provides limited liability to each member while maintaining a more simple and flexible management structure. Forming an LLC is also relatively simple and very cost effective.
What is a Series LLC? What are the Advantages?
A series LLC is a unique form of limited liability company in which the operating company agreement specifically allows for the segregation of assets and operations into their own independent series under one parent LLC. A series LLC can provide liability protection and tax advantages to each series, and each series is protected from any liabilities that may arise from the other series within the parent LLC. Each series can have its own name, its own organizational structure, buy, sell and hold title to property, and “exercise any power of privilege as necessary or appropriate to the conduct, promotion, or attainment of the business…” BOC Sec. 101.605(6).
The biggest advantage to a series LLC is separating liability between the series. For example, if you are planning to hold several investment properties, it would benefit you to hold each property in its own series under the LLC. This way, for example, if a creditor wants to go after Property A that is sitting in Series A, the other properties that are sitting in the other series will be out of reach. A series LLC is also an ideal choice if your LLC will be conducting multiple lines of business, i.e. owning and operating multiple restaurants or salons.
Forming a Series LLC
There are a few steps to take into consideration when forming a series LLC. You would first need to ensure that your certificate of formation and operating agreement properly identify your LLC as a Series LLC. A Series LLC, like a regular LLC, is formed under one filing with the Texas Secretary of State. Once your formation documents are correctly prepared, you will want to make sure that you keep all records, contracts, bank accounts, etc. separate for each series. According to the Texas Business Organizations Code, all records must be maintained “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.” BOC Sec. 101.603(b).
Converting an Existing LLC into a Series LLC
Converting an existing LLC into a series LLC is a relatively simple process. You can do this by amending your current filing with the Secretary of State and amending your company operating agreement. As stated above, it is important to properly and correctly identify your LLC as a Series LLC when amending your documents, so it is recommended that you consult with an experienced attorney to assist you with setting up your new Series LLC or with converting an existing regular LLC to a Series LLC.
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