Forming a series LLC in Texas

23 Replies

Who would you recommend as a real estate attorney to form a series LLC in Texas? I heard Texas has very good laws.

Also, all attorneys would say I must name the LLC myself, they cannot name it for me. What are some tips for naming an LLC that would limit my liability?

Hi Theresa,

I think you may be looking for complexity where it isn't required here. First, the primary purpose of an LLC is to limit your liability where your property is located, so filing in Texas would still require you to file a foreign LLC here in Ohio. Further, there are extra expenses in some states, and I believe Texas is a franchise tax state like California. Also, if Texas treats Series LLCs like California does, you would be looking at franchise taxes/fees on each individual LLC within your Series. You'll also be required to pay an annual registered agent fee in Texas.

Personally, I would suggest creating an LLC in Ohio for each property. The setup fees are low in Ohio, you'll save on annual fees and taxes, and you won't have to worry about unnecessary complexity come tax time.

As far as naming, it can be as simple as using the address of the property.

Originally posted by @Samuel R. Harden :

Hi Theresa,

I think you may be looking for complexity where it isn't required here. First, the primary purpose of an LLC is to limit your liability where your property is located, so filing in Texas would still require you to file a foreign LLC here in Ohio. Further, there are extra expenses in some states, and I believe Texas is a franchise tax state like California. Also, if Texas treats Series LLCs like California does, you would be looking at franchise taxes/fees on each individual LLC within your Series. You'll also be required to pay an annual registered agent fee in Texas.

Personally, I would suggest creating an LLC in Ohio for each property. The setup fees are low in Ohio, you'll save on annual fees and taxes, and you won't have to worry about unnecessary complexity come tax time.

As far as naming, it can be as simple as using the address of the property.

The reason I thought of this complexity is that my husband is a high income earner and we don't want my REI projects to mix with his assets. Would forming a regular LLC be adequate protection for someone like us?

Originally posted by @Theresa Nguyen :

The reason I thought of this complexity is that my husband is a high income earner and we don't want my REI projects to mix with his assets. Would forming a regular LLC be adequate protection for someone like us?

@Theresa Nguyen, your purpose in forming an LLC is primarily for asset protection (liability), not tax purposes. (FYI, if you don't have someone else setting this up for you, make sure you get an EIN and keep business funds in a separate bank account. Also, have the property deeded in the LLC's name.)

For tax purposes, it is just a flow through entity, meaning it will show on your individual tax return. So on the tax end, if you're worried about your husband's high income, you will want your accountant to do an analysis of whether you should file Married Filed Jointly or Married Filed Separately, but the location/type of LLC will not make a difference regarding your husband's income.   

A bonus in Ohio is that you will currently get a Small Business Tax Deduction on your state taxes, for up to 75% of the first $250,000 in business income you report on your Ohio personal income tax. (This is scheduled to change for tax year 2016 to 100% of the first $125,000 for MFS filers or 100% of the first $250,000 for MFJ filers.)

@Samuel R. Harden great to know about that tax info in Ohio!

Would a series LLC offer greater asset protection than a single LLC? My primary concern as I mentioned is my husband's high income. I want these REI projects to be my own so that I can protect his assets. If somebody wanted to sue me, I don't want anyone coming after him, too.

@Theresa Nguyen, I'm one of the attorneys that are skeptical of Series LLCs, but I believe a Series LLC offers less protection than separate LLCs. That said, it would be perfectly valid for another attorney to disagree with that position. The primary benefit I see is potentially saving on filing fees when you have a number of LLCs. You have one LLC that you file and the rest are basically just a piece of paper you keep in your desk, instead of filing each LLC with a secretary of state.

Because of this lack of filing documentation and the newness of the structure, it is hard to say how individual states will interpret the liability protection among the different LLCs within a Series. So while a Series LLC will typically protect you individually from liability, a lawsuit against one LLC in the series may potentially result in an enforceable judgment against the other properties in the series. The flip side of this is simply registering each LLC separately with the State. Under this method, the LLC protects you individually from liability, and having separate LLCs means that each property will not be liable for any issues at the other properties.

Regardless of LLC type, don't forget that there are ways someone can "pierce the veil" to attach liability to the owner of the LLC. The most common way this happens is some type of deliberate action or gross negligence.

Sorry if this is all too brief (or too long), but it's hard to put this whole discussion in a reply box. The most important pieces though are that: (a) You should definitely have an LLC, especially with concerns for your husband's assets and any jointly owned assets. You could go the umbrella insurance route, but that would still leave you open to personal judgment in the case of an extreme situation. (b) If you do have an LLC that holds real estate, you should file it in the state where the property is located. (c) You'll more than likely have to give a personal signature on any loans, but make sure the property is deeded to the LLC. (d) I know BP is a little critical about attorneys suggesting you need attorney help, but I would suggest having an attorney set this all up for you. They should handle your LLC registration, EIN application, and prepare an Operating Declaration for you for one fee.

I just formed a Series LLC in Texas for the purpose of buy and hold real estate for rentals. So, let me give you the lowdown on this:

1. The Texas code specifies that each series of a Series LLC can have its own assets and liabilities, can sue and be sued, can have separate managers and members, etc. The one thing you have to remember is that you have be very specific in QuickBooks or whatever accounting program you use about which assets, liabilities, income, and expenses belong to which series. If you don't do that a court could decide that you have co-mingled your assets and thereby pierce the veil of limited liability. From what I understand you DO NOT have to have separate checking accounts as long as you make memos and create separate categories within your accounting system.

2. Each property will have to have its own liability insurance. A master liability insurance policy for the entire LLC will not cover the individual series. So, factor that added expense into your cash flow projections.

3. When you create a contract to purchase, create a deed of trust for mortgage, and get title insurance (and get the title) it all has to be under the specific series. So, for me it is XXXXXX, LLC - Series A. DO NOT put any of it under XXXXXX, LLC specifically.

4. An extended point on that is that you need to create the series prior to buying a property. So, if you are looking for your next deal go ahead and create the new series under your founding document guidelines, document corporate notes for doing so, and assign yourself (or multiple people) as members. That way you aren't rushing to create one when you want to go under contract. You know that can go quickly and you don't want to have to take the time to document the creation of the series when you are in the process of negotiating.

5. The Master LLC files one tax return. The individual series CAN have their own EIN if you want, but unless you are electing to have them taxed differently (like S Corp) then it's not worth it. Keep it all under the Master. In addition, the Master LLC will file one Texas Franchise Tax. You don't have to do one for each series.

6. The cash flow from the series is basically cash flow for the Master. It just adds to owner equity of the Master. UNLESS you have different members for the different series. In that case you will have to separate owner equity of the individual members in your accounting program in which cash flow will increase the correct accounts. I'm not setup this way so I don't know how that works in QuickBooks. Mine is a single member LLC.

I know there are things I'm forgetting. However, the number one thing you must think about in everything you do is what kind of "idea" will a judge have when one of your series gets sued. Have you done everything in your power in your accounting system so that a reasonable person would be able to tell that each series has completely different assets and liabilities from the other series?

A quick note on the separate checking accounts. My Master LLC is basically the investment arm of the company. It receives investment from my personal checking account and then uses that money to purchase assets for the series. I have a property management company that sets up a checking account for each property. They pay mortgage, taxes, and insurance from that account. The Master LLC only provides funds for investment and receives cash flow from the excess income. So, the accounting for the Master LLC is technically separate from the accounting for the series by way of the management checking account. I am going to put emergency funds in the property management account so that if I have a large expense on the property I don't have to put more money in from the Master. Doing that regularly could look like co-mingling of cash and that they are essentially the same company.

A good way to think of a series LLC is a grapefruit cut in half. You have one whole fruit that contains all those little triangles of fruit. Each of those triangles is separated by a "cell" wall in which they are separate, yet still part of the whole. Or the Holy Trinity: Father, Son, and Holy Spirit. All separate "things" acting individually, but all parts of the whole.

Please let me know if you have specific questions.

Kevin

Updated over 3 years ago

I’ve had my Series LLC for two years now. Unless you really need it for some reason it’s more of a pain in the butt. Accounting is really the big thing. Since all series are supposed to act as separate businesses you can’t mix funds. I’m about to condense mind to just an LLC.

Texas does have a franchise tax, however it applies only when an entity has gross receipts (not assets or net income) of $1,100,000. If one is reaching that limit they can simply file for another LLC in certain cases. If the income limit is not met, a simple no tax due report is file which takes about two minutes/year on the State's website.

@Anna Tang You can file the Series LLC by yourself but you need to know the specific wording that needs to be in your certificate of formation and your operating agreement to identify it as a Series LLC versus a traditional.  Most people don't know what that wording is so that is why many people recommend using an attorney.

http://www.sos.state.tx.us/corp/formationfaqs.shtml#LLC

@Kevin Brown Thanks for updating your original post. I am in the process of setting up an LLC and was looking to go the series LLC route. I have a consultation with Jim Reed, PC next week to discuss my options. I didn't think the series LLC would be much more accounting since separate books for each series isn't necessary. Did having the property management company with separate checking accounts make things complicated?

I read that there is no specific language to form a series LLC as opposed to a standard LLC, is that true?

Also and more importantly, when you are creating a sub series - do you need to register it with the state or is this purely internal bookkeeping?

Thanks,

Devin

@Devin Squeri I believe you only have to file for the parent or series llc. My cpa (who’s in Houston) has recommended I don’t do series llc as it complicates taxes. You’ll want probably 10 plus properties before you go this route

Originally posted by @Devin Squeri :

I read that there is no specific language to form a series LLC as opposed to a standard LLC, is that true?

Also and more importantly, when you are creating a sub series - do you need to register it with the state or is this purely internal bookkeeping?

Thanks,

Devin

There is specific language required in the state of Texas. I am not sure about other states. In Texas, you need to use Texas Form 205 which is the basic filing document for an LLC but use the "Supplemental Provisions / Information" area to add in verbiage that you will be operating the LLC as a master LLC with series under it. Link to Texas Series LLC provisions

From what I have read, there is not requirement (in Texas) to create a series as long as you are treating it as a separate entity, ergo having its own financial statements, bank account, and assets/liabilities. There can be separate ownership but like Kevin said above, I haven't done this so I am unaware of how to do this. If you are going to use a different name than the master LLC with a series designation behind it, you will need to file that name with the state for $25 using Texas Form 503.

In short, I agree with Kevin. Series LLCs are not necessary for about 70% of investing in real estate. If you have large assets that you are holding for extended periods of time (i.e. groups of notes, rental properties), you should probably use them but if you are wholesaling, flipping, or the like you could easily use a standard LLC.


MY ADVICE (I am not an attorney or tax professional): Set up your LLC with the series verbiage of your choice so you have the option to create series under your master LLC but only do so when you fall into the categories mentioned above.

Originally posted by @Kevin Brown :

Don't do a series. It's a pain in the butt. Just do a regular LLC and don't be a slum lord and have an umbrella policy

Did you mean one regular LLC per property, or one regular LLC with all the properties you would have in each series on the series LLC ?

Originally posted by @Martin Rubio :
Originally posted by @Kevin Brown:

Don't do a series. It's a pain in the butt. Just do a regular LLC and don't be a slum lord and have an umbrella policy

Did you mean one regular LLC per property, or one regular LLC with all the properties you would have in each series on the series LLC ?

I would just do one LLC for all residential properties. Maybe until like 20 or so properties and then do a different one. Then if you do commercial do one LLC for each commercial property separately. I'm not a lawyer just trying to use some common sense.

Originally posted by @Kevin Brown :
Originally posted by @Martin Rubio:
Originally posted by @Kevin Brown:

Don't do a series. It's a pain in the butt. Just do a regular LLC and don't be a slum lord and have an umbrella policy

Did you mean one regular LLC per property, or one regular LLC with all the properties you would have in each series on the series LLC ?

I would just do one LLC for all residential properties. Maybe until like 20 or so properties and then do a different one. Then if you do commercial do one LLC for each commercial property separately. I'm not a lawyer just trying to use some common sense.

Thank you, great insight    ;)    :)

I live in CT which does not have a series LLC, and it was voted down this past year. Have been considering using a series LLC from another state but am not sure if it offers the same protections being a foreign entity and what will it do to my costs etc. I already job cost expenses in Quick Books for each property. CT is very expensive w its fees for each LLC, if I could get around it all the better.

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