If you’re looking to incorporate your business, you have some critical decisions to make. Whether you form a Limited Liability Company (LLC), S Corporation or some other kind of company can have long-term effects on the financial health and stability of your business. So it’s important that you consider carefully before you take those final steps toward incorporation.
However, if you’re trying to decide what kind of company you want to run — and reside in select states, like Texas — you might want to look into whether a series LLC is the right choice for your business. Perhaps you’re not familiar with how a series LLC in Texas (or anywhere else) works. If that’s the case, then sit tight as we delve into a crash course on why a series LLC is worth a look if you’re forming an LLC in Texas.
What Is a Series LLC?
Under Texas law, a series LLC is defined as an LLC that “provides in its governing documents for the establishment of a series of members, managers, membership interests, or assets that have separate rights, obligations and liabilities and business purposes from the general LLC.”
Each individual series retains all the rights of a regular LLC, including liability protection that keeps the series separate from each another. Just like other LLCs, they can enter into contracts, hold titles, grant liens or even sue another company and be sued in return. But since all the series within a series LLC are linked, they are not individually considered separate entities, at least under the Texas Business Organizations Code.
Within the United States, series LLCs are only a legal option across 16 states, the District of Columbia and Puerto Rico. If you think that a series LLC — sometimes known as an SLLC — is a good fit for your business, reach out to your attorney or tax advisor for more information. Next, we’ll get into how you can form a series LLC of your own.
Forming a Series LLC in Texas
Since we’re focusing our example on Texas, we’ll talk about the creation process of a series LLC in that state. As we mentioned above, you should always consult your legal representation or tax team for further guidance. However, just as a bit of background, the minimum effort you need to receive any of the benefits of a series LLC is to include the language required by section 101.602(a)(1)-(2) of the Texas Business Organizations Code in your certificate of formation and company agreement. Also, keep the assets of each series separate in your records.
Real estate companies are one common user of the series LLC model, since it allows one master LLC to manage a series of related LLCs under one umbrella while keeping the assets of each distinct from one another. Property managers or investors in Texas (and other states where the series LLC is allowed) can use it to manage each property separately and help protect the entire operation against losses from a single investment.
If your Texas-based business operates in other states as well, you may run into some issues crossing state lines. After all, only some states recognize a series LLC as a legitimate form of incorporation. Be sure to contact the filing official in any states where you are considering doing business to determine their stance on series LLCs and what filing requirements you need to satisfy to be recognized.
The Case For and Against
Depending on your business needs and your long-term plans, a series LLC could be a smart way to incorporate your business. But it also carries some risks that you need to take into account before you invest your time and money into the decision to run a series LLC. Here is a glimpse of both sides of this debate.
- One big family: When you organize your business into a series LLC, you’re essentially creating an interconnected web of LLCs that all operate under one single umbrella. Each one has its own members, bank accounts, debt, etc., but they’re all unified into one consolidated entity.
- Less risk and liability: If you have your business unified into a series LLC, you are able to minimize your liability and legal risk, since it is shared throughout all your businesses. For example, one series within your series LLC could get sued, while the rest of the series remains protected from any legal ramifications.
- Debt protection: Similarly, you are able to enjoy a bit of debt protection because of your business structure. Because all of your series are connected, you can manage the movement of revenue and debt repayment with more options of how to tackle it.
- Less paperwork: No one likes having to deal with all the red tape involved in setting up their business. But when you set yours up as a series LLC, you can take advantage of some consolidation: Instead of going through the same steps for multiple LLCs, you only have to endure the cost and paperwork for one series LLC.
- State limitations: We’ve touched on it above, but a series LLC could be a bad idea if you intend on operating your business across multiple states. Remember, you’ll have to comply with the laws of any states where you do business, which could complicate matters since some states prohibit series LLCs.
- Less protection in certain locations: In keeping with the perils of operating across state lines, your series LLC could fall into some hot water if it gets sued or suffers losses. Because series LLC laws vary from one state to the next, you could be exposed more in one state than you realize, leading to increased liability that could affect your bottom line.
- Complicated finances: Despite the benefits of a series LLC, you’ll also find yourself with a more complex task when it comes to accounting and financial management. Juggling the bank accounts for each company — and keeping them all 100% separate and independent — can drive up your costs or create an administrative nightmare if you’re not prepared.
- Unproven territory: A series LLC might seem like a great idea for your business, but don’t forget that this particular form of business is still relatively new. That means that the law is still undecided about them in many cases (hence the fact that they are nonexistent in most states). Just tread carefully and consult your team first.
A Serious Decision
A series LLC might not be the best option for every company — and they’re not available in every state. But at least the above can enlighten you a bit more on what they are and why they could be beneficial for businesses in certain states, like Texas. At Incfile, we know one of the best ways to guide your business down the right path is by establishing a knowledge base.
That’s why we provide a website full of valuable resources you can use to sharpen your business acumen. After all, we want your company to make a strong start, which includes incorporating with the right legal entity for your business and location. To learn even more about how our services can make starting or managing your business easier, just visit our website to get started today.