Texas Series LLC and Why You Need One

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Texas Series LLC and Why You Need One

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What is a Series LLC in Texas and Why Might You Need One?

A Texas series LLC, like all series LLCs, contains one master (or parent) LLC with smaller series LLCs (or cells) beneath it. These subsidiaries are all linked to the master LLC, but remain independent of one another. All subsidiaries receive liability protection through the parent LLC and may provide some tax incentives and cost savings as well. If you're a business owner in Texas wondering, "What is a series LLC and is it the choice for me?" we've got all the information you need — including a step-by-step how-to on starting your Texas series LLC, benefits, drawbacks, and more — to make the best decision for your business.

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Series LLC Explained

Is a Series LLC Allowed in Texas?

Since 2009, Texas has recognized series LLCs as legal business entities. If you're a business owner in the Lonestar State looking to start a series LLC, you're in luck. Series LLCs are a very special designation, and they aren't permitted in all states across the U.S.

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It's important to note that each state approaches series LLCs differently, so you must research your state to understand the requirements and regulations surrounding series LLCs in your location. When in doubt, contact your state's business formation body, whether it's the Secretary of State or another branch of state government.

In the state of Texas, each series or cell within the series LLC is permitted to borrow money, own property and other assets, use differing management structures, and have divergent business purposes. This provides substantial flexibility to business owners, but it also requires a lot of planning and maintenance.

How to Form a Series LLC in Texas

If you're ready to form your Texas series LLC, we've laid out the steps for you below. The process begins much like the standard formation process for traditional LLCs.

  • File Articles of Organization: In Texas, this paperwork is called a Certificate of Formation, and it's the same paperwork you'd fill out for a standard LLC. You'll need the names and addresses of all LLC members for the master LLC and all of the series/cells, plus the management structure for the organization.
  • Choose Business Names: You'll need to choose multiple names to cover your master LLC and your sub-series or cells. Naming rules are largely the same as they are with all Texas LLCs (they must not already be in use in the state of Texas and they must include "LLC" or "Limited Liability Company"), but there's one notable difference — if you aren't using the parent LLC name in the series or cell name, you'll need to file an Assumed Name Certificate, which is essentially a DBA ("doing business as").
  • Name a Registered Agent: Your Registered Agent will receive all legal documents on behalf of your business. You can serve as your own Registered Agent, but it's recommended you appoint someone else, or use a Registered Agent service like the one we offer at Incfile (free for the first year after formation). For a Texas series LLC, you do not need a separate registered agent for each cell — you can use the same one for the master and series cells.

You'll include this information when you file your Certificate of Formation using Form 205, and then you'll pay the formation fee of $300.

From this point, there are a few additional considerations and steps you'll need to take specific to the series LLC, such as converting an existing LLC to a series, updating any paperwork from a previous LLC, and opening bank accounts.

Update Your Business Paperwork

Let's say you already have a Texas LLC, but you're thinking a series LLC would work better for your business needs. Can you easily convert an existing standard LLC to a series LLC in Texas?

You can, but you'll need to make updates to your original Certificate of Formation before you're officially recognized as a Texas series LLC.

As long as your business is still current and in good standing, you can simply make an amendment to your Certificate of Formation. However, even that simple change can have consequences if you don't get it right, so it's recommended you seek out the advice of an attorney or work with a trusted formation service.

There may be other updates to make as well. Texas law mandates that the governing documents for a series LLC must lay out the management structure, members, and business interests of each cell independently of those in the parent LLC, so you'll need to add all of that to your Certificate of Formation. And while Texas does not require an LLC to file an official operating agreement, it's a good business practice, and if you have one for an existing LLC, you'll want to make sure it's revised to indicate your shift to a series LLC.

Separate Your Finances

We talk a lot about the importance of separating your personal and business finances to avoid legal troubles and make it easier to file taxes, find funding, get loans, or open a business bank account.

Keeping finances separated is even more important in a series LLC, where each cell operates financially independently of one another. There may even be situations when the finances of one cell are sensitive and should be protected from the members of the other cells. This can be a sticky situation to navigate if you don't have your finances clearly delineated and separated.

Here's what you need to do to ensure a separation between each cell's finances:

  • Open a business bank account for each individual cell within the series.
  • Maintain separate documents outlining the specific assets belonging to each cell.
  • If you use a bookkeeper or accounting service across all cells, make sure they're keeping separate records and files for each.

Thankfully, you don't need to file separate tax returns for each cell within the series LCC, but keeping individual records for each cell will make things far easier come tax time.

Is Forming a Texas Series LLC Right for Me?

You're now left wondering whether forming a Texas series LLC is the best choice for you and your business, given all the exciting benefits. There's no easy answer, but take a close look at the pros and cons below, and you'll be able to make a well-informed decision.

Benefits of Series LLCs

Many of the benefits of a standard LLC translate over to a series LLC, but a series LLC also comes with its own specific — and very persuasive — benefits. Here are some of the top rewards of choosing a series LLC:

Liability protection: Just like a traditional LLC, you'll get the same coverage when it comes to liability. But even better — you get protection for all of your subsidiary businesses in one shot, eliminating the need to file separate LLCs.

Single tax filing: While it's critical to maintain separate finances for each cell in your master series, you'll only need to file one tax return. Keep in mind that having a series LLC can complicate the standard tax filing, so you'll likely want to consult a CPA or tax professional.

Debt protection: If you have an LLC with multiple business lines or numerous DBAs, you risk jeopardizing the business if something goes sideways with one of the branches. In a series LLC, the individual cells are off the hook for the other cells' debts or legal obligations.

Cost and time savings: While series LLCs can be complicated, they do come with some advantages, starting with cost. Like standard LLCs, you only have to pay one fee to file your Certificate of Formation. Compare the costs below:

Texas Series LLC vs Standard LLC

Drawbacks of Series LLCs

Like all things, filing a series LLC does come with some risks and hassles. Be aware of them before you decide to file so you understand what you're getting into. These include:

  • Operating restrictions: Since series LLCs aren't approved in all states, an operating restriction could really throw a wrench in your plans to expand. If you want to do business in a state that doesn't recognize series LLCs, you might face trouble. Some states may accept a foreign qualification — a designation that allows you to conduct business in another state — but others may not.
  • Financial stress: While there are definitely cost savings associated with a series LLC, maintaining all of those separate bank accounts, asset lists, etc., can be a big hassle. The needs of each cell, such as bank accounts, credit cards, and the fees that come along with them, could become a major headache.
  • Tax complications: It's great that you only have to file a single tax return for your series LLC, but it might also mean you have to pay the Texas Franchise Tax. This tax is only levied on businesses that surpass the $1.23 million earning threshold. So, you might avoid paying this tax if you file each LLC individually, but if you keep all your cells under one master LLC, there's a chance you could hit this earning threshold.
  • The great unknown: Series LLCs are still relatively new and can be extremely complex. The rules and regulations vary greatly between states, and the legal ramifications are, in some cases, muddy. Fortunately, the Texas series LLC has been around since 2009, so they've had some time to work out the kinks and clarify some of the regulations and legalities.

The bottom line is this: Texas recognizes the series LLC, and this type of limited liability company can be an excellent choice for business owners torn between forming individual LLCs for multiple businesses or using different assumed business names for different business lines.

Ultimately, a series LLC gives you the protection of a standard LLC, but it covers all of your series cells as well. It may also provide cost savings to your business and streamline your operations. However, it's not right for every business or every business owner, so it's critical you dig into the research to determine if it can work for your needs.

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