When owning multiple businesses or investing in multiple real estate properties, it is important to do so under a legal business structure that protects your personal assets from your business liabilities and/or investment endeavors. Traditionally, the best practice has been to form a limited liability company (LLC) for each separate business that you own.
But, as your businesses multiply, grow, and expand you might find it increasingly difficult to keep from illegally commingling the finances of one business with those of another. The answer to this problem has traditionally been to create more LLCs, which means more franchise taxes, more paperwork, and a lot of other headaches.
This complexity alone leads a lot of business owners to ignore the problem entirely, housing several full-fledged businesses within one LLC. But, leaving everything under one legal roof, invites creditors and lawsuits, with the assets of each of your businesses at risk to the debts and liabilities of every other one.
However, there is a way to grow each of your businesses within its own separate bubble and with the assets of each business walled off from the debts and liabilities of each other. The way to do this is with a series LLC.
A series LLC is a type of LLC that is allowed, under state law and by language contained in its Certificate of Formation, to create an unlimited number of "series" or cells underneath the framework of one master LLC. Each series has the same characteristics as a traditional LLC but is held and managed under the master LLC (the series LLC).
A series LLC allows you to compartmentalize the assets and liabilities of each of your businesses or investments intelligently and efficiently, saving you both time and money.
With a series LLC, you pay one filing fee (currently $300 in Texas) for the ability to create one master LLC with an unlimited number of series underneath.
What’s more, as long as you treat each series as an independent business, with separate records and finances, each series will be walled off from the debts and liabilities of another.
Similarly, the master LLC will be insulated against the debts and liabilities of the underlying series and vice versa. The only other way to achieve this is by forming multiple entity structures, with all of the additional associated costs and maintenance requirements.
For example, when a traditional LLC is sued, all assets belonging to that LLC are exposed to the judgment. However, when a series LLC is sued, only the assets of the specific series from which the lawsuit arises will be exposed to satisfy that judgment.
In other words, with a series LLC, liability is contained within the specific series that was sued and will not affect any other series, the master LLC, or its owners, as long as you have kept up with the recordkeeping requirements.
One drawback to the series LLC is that the wall of separation that protects one series from the debts and liabilities of another only exists if you stay up-to-date with the required maintenance requirements and recordkeeping formalities for each entity.
This should not be hard to do, but you may be required to prove that you are in compliance each time a lawsuit is brought against a series. This can be burdensome and intrusive, especially since you will likely be required to disclose your company's finances.
What's more, since the series LLC is a fairly new entity type, there is not as much developed case law as there is for other entity structures, like the traditional LLC. Because of this, the outcome of potential ligation is less predictable than with other well-established entity structures.
A series LLC is less attractive to those who desire more predictably with regard to potential litigation and who are not concerned with the additional costs associated with forming multiple entities to segregate liability.
On the other hand, if you are looking for a way to segregate liability for multiple businesses or investments, but can't justify or afford the cost of filing and maintaining multiple entities, the series LLC may be well suited to your needs.
Series LLCs are commonly used by real estate investors who would traditionally have to create multiple individual LLCs for different properties, with all of the additional associated costs and headaches.
Texas is one of the few states that will allow you to form a series LLC. For more information or help with forming a series LLC in Texas, contact us to arrange a free consultation.