- A Series LLC may be a useful structure for certain real estate investors.
- It can provide numerous individual and separate liability entities for a relatively low price.
- But you have to follow specific rules when setting up the Series LLC to get adequate protection.
We represent a lot of real estate investors who are in the process of purchasing property. It’s a big part of what we do. And that often includes helping our clients figure out the best ownership structure for their purchase. Usually that advice ends with us telling them to set up a limited partnership or (less often) a limited liability company.
But sometimes that’s not the best advice. There is at least one new(ish) structure – a Series LLC – that can really be a benefit to certain investors – especially those that are purchasing a number of rental homes. But to set up that structure, you have to make sure you follow the specific rules that allow for its formation.
So that’s what we are going to talk about this week. What is an LLC? How do you form it? And is it right for you?
What are the Basics of a Series LLC?
A Series LLC is exactly what it sounds like: a series of limited liability companies that are connected back to the parent limited liability company. This allows for assets and operations to be broken up across various series that work as individual LLCs, but still connect to the parent LLC.
With just one filing, therefore, an owner can set up an entity that can potentially house multiple single purpose entities. That obviously has the benefit of ease, saving time, and money.
But there are specific requirements that are required when setting up a Series LLC.
What are the Requirements of Setting Up a Series LLC?
To set up a Series LLC, you must first file a standard certificate of formation with the Secretary of State. There is, however, required extra language needed on the form in order to explain how the Series LLC is formed and how its liability works. This language is extremely important to include. If it is not done, each series may not be treated as a separate LLC with separate liability.
Then, once you have the initial LLC filed with the SOS, you do not need to file a certificate of formation with each subsequent series. You simply file an assumed name certificate with the Secretary of State for each series.
It is imperative that once you have a series underneath a parent LLC, you must keep all management, recordkeeping, and funds between the two completely separate. You must not commingle any funds between the series, or you may lose their separate liability status.
What are the Benefits of a Series LLC?
As you can see, there are a number of rules and policies you have to follow when setting up a Series LLC. So why do it? What’s the benefit?
The two main benefits to creating a Series LLC are cost and protection. The cost for filing a Series LLC rather than a set of normal LLCs is drastically different because the series only requires a Assumed Name Certificate for each series rather than filing a separate Certificate of Formation with the SOS with each series. And as long as you do this correctly, each series will be treated as a separate entity with its own liability. Thus providing separate protection at a relatively low cost.
As mentioned above, the ideal use of a Series LLC in real estate is for a company that wants to purchase numerous single family home rentals. For a relatively low price, the owner can set up multiple single purpose entities all rising up through the initial LLC.
Filing for a Series LLC can be inexpensive and prove to be much more viable in protecting assets. However, it is vital to follow the guidelines put in place by the State of Texas when filing to avoid any legal trouble that could result in seizure.