There are very distinct differences between LLCs and Corporations. Transferability of interests, voting rights, and taxation are just a few. Anyone can form an entity in Texas in a few minutes. However, to have that entity stand up to scrutiny and provide the protection available, a number of requirements must be met.
- You must have a company agreement specific to your business that would hold up under attack.
- You must have annual meetings and minutes from these meetings.
- You must not use a name that is trademarked EVEN IF it is available for use in your state.
In addition, you must NEVER co-mingle assets in your entity with personal assets.
Texas is one of a few states which offer a “Series LLC”. A Series LLC is an umbrella LLC that may have one or more series underneath it. The benefit of this structure is the ability to add properties or new businesses with the creation of a new series, instead of a brand-new LLC.
What is a Texas Series LLC?
1. Series Are Similar to Corporation Subsidiaries. Texas law allows for the formation
of a “Series LLC.” It is similar to a parent corporation that owns one or more subsidiary,
corporations. The Master LLC is formed with the filing of a Certificate of Formation in the
Texas Secretary of State’s office and paying a $308 filing fee. The Master LLC can then create a subsidiary series LLC by performing two simple steps: (1) preparing a supplemental addendum to the company Operating Agreement and formally naming the subsidiary series, and (2) filing an Assumed Name Certificate with the Texas Secretary of State identifying the subsidiary series LLC as owned by the Master LLC.
Once created, each subsidiary: a. Operates as its own profit/loss center;
b. May have different owners;
c. May have different management;
d. Voting may be different for each subsidiary; and
e. The assets of each subsidiary Series are protected from the losses and
liabilities of the other subsidiaries.
2. Savings. For investors owning more than one investment property, a Series LLC
will offer significant savings over the use of individual LLCs for each property because the
investor will not pay the $308 filing fee each time a series LLC is created. The only fee incurred in making the subsidiary is $25 for filing the Assumed Name Certificate.
3. Liability Protection. The asset held by each subsidiary is protected from third-party
claimants against every other subsidiary. This means a slip-and-fall victim injured on
property owned by one series (let’s say, “Subsidiary A”) cannot make a claim against any other
series (i.e., “Subsidiary B”) for injuries sustained on the premises of Subsidiary A.
4. To optimize asset protection between subsidiaries, the investor must do the
following:
a. Keep the assets and financial records of each subsidiary separate and distinct
from every other subsidiary. This means maintaining separate books of account for each
subsidiary. While the Master LLC may maintain a single bank account, an
accounting system must be employed that accurately tracks the income and expenses of
each subsidiary series; i.e., setting up separate “companies” in your QuickBooks (or other
accounting) program.
b. Each investment property should be owned only by one subsidiary; there
should no co-ownership of a property by two subsidiaries.
c. File the proper Assumed Name Certificate with the Texas Secretary of State
that indicates its own relationship to the Master LLC.
d. All contracts, deeds, notes, etc., should be signed in the name of the
subsidiary series, not the Master Series.
5. Taxation Issues. (A) Franchise Tax. The Texas Comptroller of Public Accounts requires that the Master LLC file only one franchise tax report under a single taxpayer identification number. This means that the income of all subsidiaries must be combined under a single franchise tax report filed by the Master LLC.
(B) The IRS treats the Master LLC and its subsidiary series as separate entities.
This will not change the way an average LLC reports its income, expenses, and allocations
for federal tax purposes. The bottom–line is that net income will flow through to the
owner(s) of the Master LLC.
6. Governance. The entire Series (the Master LLC and each subsidiary series) will be
governed by the terms of the Operating Agreement of the Master LLC, but may be modified pursuant to any distribution or internal management rules that may be adopted each time a subsidiary series is created.
For more information call 512-464-1110, email david@360Networth.com, or book a call.
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