Forming a series LLC in Texas

[Theresa Nguyen]

Who would you recommend as a real estate attorney to form a series LLC in Texas? I heard Texas has very good laws.

Also, all attorneys would say I must name the LLC myself, they cannot name it for me. What are some tips for naming an LLC that would limit my liability?

[Kevin Brown]

I just formed a Series LLC in Texas for the purpose of buy and hold real estate for rentals. So, let me give you the lowdown on this:

1. The Texas code specifies that each series of a Series LLC can have its own assets and liabilities, can sue and be sued, can have separate managers and members, etc. The one thing you have to remember is that you have be very specific in QuickBooks or whatever accounting program you use about which assets, liabilities, income, and expenses belong to which series. If you don't do that a court could decide that you have co-mingled your assets and thereby pierce the veil of limited liability. From what I understand you DO NOT have to have separate checking accounts as long as you make memos and create separate categories within your accounting system.

2. Each property will have to have its own liability insurance. A master liability insurance policy for the entire LLC will not cover the individual series. So, factor that added expense into your cash flow projections.

3. When you create a contract to purchase, create a deed of trust for mortgage, and get title insurance (and get the title) it all has to be under the specific series. So, for me it is XXXXXX, LLC - Series A. DO NOT put any of it under XXXXXX, LLC specifically.

4. An extended point on that is that you need to create the series prior to buying a property. So, if you are looking for your next deal go ahead and create the new series under your founding document guidelines, document corporate notes for doing so, and assign yourself (or multiple people) as members. That way you aren't rushing to create one when you want to go under contract. You know that can go quickly and you don't want to have to take the time to document the creation of the series when you are in the process of negotiating.

5. The Master LLC files one tax return. The individual series CAN have their own EIN if you want, but unless you are electing to have them taxed differently (like S Corp) then it's not worth it. Keep it all under the Master. In addition, the Master LLC will file one Texas Franchise Tax. You don't have to do one for each series.

6. The cash flow from the series is basically cash flow for the Master. It just adds to owner equity of the Master. UNLESS you have different members for the different series. In that case you will have to separate owner equity of the individual members in your accounting program in which cash flow will increase the correct accounts. I'm not setup this way so I don't know how that works in QuickBooks. Mine is a single member LLC.

I know there are things I'm forgetting. However, the number one thing you must think about in everything you do is what kind of "idea" will a judge have when one of your series gets sued. Have you done everything in your power in your accounting system so that a reasonable person would be able to tell that each series has completely different assets and liabilities from the other series?

A quick note on the separate checking accounts. My Master LLC is basically the investment arm of the company. It receives investment from my personal checking account and then uses that money to purchase assets for the series. I have a property management company that sets up a checking account for each property. They pay mortgage, taxes, and insurance from that account. The Master LLC only provides funds for investment and receives cash flow from the excess income. So, the accounting for the Master LLC is technically separate from the accounting for the series by way of the management checking account. I am going to put emergency funds in the property management account so that if I have a large expense on the property I don't have to put more money in from the Master. Doing that regularly could look like co-mingling of cash and that they are essentially the same company.

A good way to think of a series LLC is a grapefruit cut in half. You have one whole fruit that contains all those little triangles of fruit. Each of those triangles is separated by a "cell" wall in which they are separate, yet still part of the whole. Or the Holy Trinity: Father, Son, and Holy Spirit. All separate "things" acting individually, but all parts of the whole.

Please let me know if you have specific questions.

Kevin