Series LLCs are a relatively new form of legal entity in the United States, and they have been gaining popularity since their inception.
Many business owners in Texas may not be sure what a series LLC is, what the benefits of this type of company are or how they can set one up.
A series LLC in Texas is a business structure with many levels of liability protection, which means it can protect the owner from any legal actions taken by creditors.
It provides "series members," who are people or entities with some ownership interest in the LLC.
This blog post will explain what you need to know about what this type of company does and how you can set one up according to Texas law.
What is a Texas Series LLC?
A series limited liability company represents a business entity made up of one or more "series."
The Series is separate and distinct from one another, meaning that the assets and liabilities of each Series are isolated from the other.
This structure can be especially beneficial for those conducting business in multiple states, as it allows them to operate in each state using a separate series that is considered a stand-alone legal entity under the laws of that state.
The Series LLC refers to the parent LLC - a subsidiary form of business ownership where the parent company owns or holds legal title to all property and assets in each LLC.
The Texas series LLC affords its members maximum flexibility in that they can create an unlimited number of "series" within a single entity, with separate governing documents, membership interests/units, managers (which may be the same or different individuals for each Series), and bank accounts.
The members of a Texas series LLC have the added benefit of limited personal liability concerning the liabilities and obligations of any particular series while still enjoying all the other benefits that come with being a member of an LLC.
The laws that govern LLCs, limited partnerships, corporations, and other business entities are outlined in Texas Business Organizations Code which is also available online.
The formation of a Texas series LLC is governed by Sec. 101.633 of the Texas Business Organizations Code.
The process begins with filing the certificate of formation with the Secretary of State. The document must include information about each Series, such as its name and registered agent.
The Advantages of Series LLC in Texas
Series LLC structure offers many benefits to LLC owners, many of which are similar to a traditional LLC.
These benefits include asset protection, tax savings, and flexibility.
One of the key advantages is that each Series can be structured to have its own tax ID number, a separate bank account, or a credit card for each LLC subsidiary.
This allows for greater overall control over assets while maintaining separate legal entities. Series LLC in Texas also offers tax benefits since it is considered a pass-through entity for tax purposes.
This means that the profits and losses of each Series are passed through to the individual members, thus avoiding double taxation.
The Texas Comptroller (the state's chief tax collector) treats Series LLCs as a single legal entity, which means that the owner of a series LLC is responsible for filing one income tax return and paying taxes on the sole entity's profits.
Series LLCs also provide a high degree of asset protection because each Series can be treated as its own separate legal entity, limiting the owners' liability in case of lawsuits or other financial problems.
Series LLCs are popular for holding different asset types, such as real estate or intellectual property.
This can be helpful if you have a related group of assets that you don't want to blend with the rest of your business operations because they're regulated in some way (for example, securities), and taxed differently than other parts of your business (for example, if you own lots of rental properties but also operate a retail store), or subject to some other special treatment.
Series LLCs can help mitigate the risk that something will go wrong with one asset and affect all others because they're separate legal entities.
The Downsides of Series LLC in Texas
Even a series LLC has some downsides, although they are typically much less than those of a traditional LLC.
First, separate record-keeping is required for each Series within the LLC.
This can be burdensome if your business is large and has multiple Series. Second, each Series must have separate bank accounts.
This can also be cumbersome and expensive if you have multiple Series.
Finally, each Series has its separate assets, which can be confusing if you're tracking down multiple assets.
For these reasons, it's important to weigh the pros and cons of forming a series LLC in Texas before deciding.
The assets and liabilities of a sub-series should be kept distinct from those of other sub-series and the company as a whole.
The accounting, record-keeping, and bank accounts of multiple LLCs shouldn't be mixed together.
If they fail to maintain things separately, they may risk one child LLC jeopardizing the financial position of the others.
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Taxes and Series LLCs in Texas
Each sub-series within a series LLC is given a Texas taxpayer identification number used to file one franchise tax report.
The master LLC is also responsible for paying the Texas franchise tax on its income.
The federal government treats a series LLC as a combined group of single entities for federal income tax purposes.
A master limited liability company or series LLC is a legal entity that allows business owners to aggregate multiple businesses under one corporate umbrella.
This can provide some tax advantages and simplify bookkeeping for small business owners.
In Texas, the state franchise tax applies to all business entities, including master LLCs.
When filing the annual report, the parent LLC does that on behalf of all of the entities in the Series LLC.
Business owners should keep a few things in mind when forming a series LLC in Texas.
First, the master LLC pays the Texas franchise tax on its income.
This means that each sub-series within the LLC will be taxed individually at the local level.
Second, the federal government treats a series LLC as a combined group of single entities for federal income tax purposes.
This can be beneficial, as it allows business owners to file one consolidated return and pay taxes only once at the corporate level.
The Formation of Series LLC in Texas
The formation of a series LLC in Texas doesn't differ from the formation process for a traditional Texas LLC.
As with most business entities, the first step is to file the Certificate of Formation with the Texas Secretary of State.
This document provides the name of the LLC, its business purpose, and other publicly available information. It also states whether or not this company will be operating as a series LLC in Texas.
The filing fee for the Certificate of Formation is $300. Only the master LLC pays this fee.
One of the most important aspects of opening an LLC in Texas is finding a reputable registered agent.
This is the individual or company that will accept legal documents on behalf of the LLC.
In Texas, a registered agent can be either an in-state resident or a business entity authorized to do business in the state.
Once the Certificate of Formation has been filed and the registered agent has been chosen, it's time to create your Series.
One important note: to form a series LLC in Texas, you must have an assumed name certificate for each company under the series umbrella.
This document proves that your company is operating under a registered trade name – in other words, its assumed name. Make sure to follow the naming guidelines for Texas entities.
The next step is to draft a series LLC Operating Agreement (company agreement) which details how all assets are managed within each Series.
All members of that Series must sign this agreement.
While not required, it's generally recommended to include a provision in the Operating Agreement stating what happens when one Series fails or fails to transact business.
The security interests are attached according to each business purpose and designation within the company.
Series LLC laws stipulate that a security interest can be granted to a lender to secure a loan, which is an attractive feature for businesses.
FAQs
Does Each Series in a Series LLC Need Its Own EIN?
Yes. When applying for the EIN with the Internal Revenue Service, you should use the EIN for each Series.
Make sure to use the name of each child LLC along with the name of the master LLC.
For example, if the master LLC is called "Texas Series LLC" and has three series under its control, one of which is called Texas Business Series LLC, the child should use EIN Entry "Texas Business Series LLC, an individual protected series of Texas Series LLC.
How Do I Change My LLC to Series in Texas LLC?
You can convert your traditional LLC to a series LLC but keep in mind that this process can be complicated.
Your current LLC must be clear of any liabilities, unfulfilled tax obligations, or other legal obstacles before it can begin the process of conversion.
If that's the case, you need to amend any provisions in the existing Certificate of Formation, operating agreement, and other internal documents that reflect the change.
The Certificate of Amendment must then be filed with the SOS, followed by all the other documents and filing fees you would otherwise need to establish a series LLC.
Can a Series LLC Be a Single-Member Business?
Yes. This business structure is particularly popular with real estate investors. If you are the only member of your Series LLC, it is a single-member company.
You can register as an individual or business entity and own all of the assets in one Series though they may be different property types such as real estate and vehicles.
However, note that you must have multiple Series LLCs if you plan to operate many businesses under a single name through this business structure.
You are not allowed to run more than one business under the same name through a single-member LLC in Texas that is considered an alter ego of all other companies.
Does Each Series LLC Need Its Own Bank Account?
Yes, each Series LLC needs its own bank account because banks and the IRS will treat sub-series separately for federal tax purposes.
Each child series must keep financial statements on its own, too.
This is a necessary step to protect other sub-series from the liabilities of other sub-series.
It will also make the accounting and auditing process much smoother.
If you're looking to form a series LLC in Texas, contact an experienced LLC formation attorney for some business advice.
Does Each Series LLC Need Its Own Operating Agreement?
Yes, each series LLC needs its own operating agreement. This is because the members of each Series LLC are separate from the members of any other series LLC.
Additionally, the assets and liabilities of each Series LLC are separate from the assets and liabilities of any other series LLC.
This protects the members of individual Series LLC in case something happens to one or more Series LLCs.
Does the IRS Recognize Series LLC?
The IRS doesn't treat child LLCs under the umbrella of one master LLC as separate entities.
Child LLCs don't file separate tax returns, and the income, losses, deductions, and credits of the child LLCs are combined on the return of the master LLC.
Strictly speaking, this means that the IRS doesn't recognize a series LLC.
This doesn't mean that series LLCs don't have any benefits; it just means that you need to be aware of how they're treated for tax purposes.
Does Texas series LLC file one annual report?
Yes, a Texas series LLC files one annual report.
The annual report must be filed with the Secretary of State's office on or before May 15th of each year and must include information about the previous year's activities for all Series in the LLC.
If you fail to file the annual report, you may be subject to penalties.
Texas Series LLC Formation: What You Need to Know
The decision to form a series LLC should not be taken lightly.
Part of the process includes understanding and weighing your options.
If you're considering starting a series LLC in Texas, we encourage you to seek legal advice from an attorney before making the final decision.
The best way for any business owner to make decisions is by consulting with their lawyer and accountant on what in their professional opinion makes the most sense.
