Texans: Should You Form a Series LLC?

Those who earn passive income from real estate investments may or may not be aware of the Series LLC (limited liability company) business structure. A Series LLC is a special type of LLC that allows LLC members to create individual series for different assets, members, liabilities, obligations, and business purposes. There is not usually a limit on the number of series. 

What is an LLC?

To understand the purpose and advantages of a Series LLC, you must first understand the benefits of a normal LLC. An LLC is a type of company that provides limited liability for the member(s) while offering pass-through taxation. In other words, LLC members receive the benefits of a corporation (having their personal assets shielded from judgments against the company) while avoiding taxation at both the company and personal level (which comes with C-corporations). This hybrid structure appeals to many entrepreneurs—especially real estate investors. 

How Does a Series LLC Work?

Real estate investors often create regular LLCs as holding companies for their properties. If, say, a tenant of one of the properties gets injured and sues the property, the LLC itself would be the defendant—not the investor. Putting multiple properties under one LLCs means that a judgment against one of the properties could put the others at risk. You can eliminate that risk by creating series for each property. 

For example, let’s say you own a condo that you lease out to tenants. You also own a small commercial building with three tenants. To reduce the vulnerability of either one of those properties, you create one series which owns the residential property and another series for the commercial property. Series 1 is on the title of the residential property, and Series 2 is the legal owner of the commercial property. 

Another benefit of a Series LLC is that you only have to form one company, file one annual report, and open one bank account. If you were to place each property into a different LLC, you would have multiple filing fees and sets of financial documents to handle. A Series LLC is regarded as one entity under Texas law. 

Make Sure Your Series LLC is Set Up Correctly

Forming even a regular LLC requires a fair bit of work in the beginning. To get the most out of a Series LLC, you need to make sure your operating agreement and certificate of formation allows you to create multiple series for your assets. Doing this incorrectly could result in wasted time and money. 

Albright & Lumpkin offers strategic legal services in the areas of real estate and business formation (plus many more). We have offices in Houston and League City, and we love serving our clients with compassion and efficiency. Get your questions answered today!

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