A Series LLC may be best explained by a comparison to the alternative. Many form an LLC in order to protect personal assets from a legal claim relating to their real estate investment, business activites or business liabilities. Additional liability protection may be gained by properly forming and maintaining a separate LLC to hold each property or business entity. By forming a separate LLC to own and hold each legally titled separate property or business entity, only the assets owned by a specific LLC would be subject to claims or lawsuits arising against that LLC. However there are costs and administrative burdens associated with properly forming, qualifying and maintaining each separate LLC. Another option may be to form multiple series or “cells”. Although each cell of a Series LLC can own distinct assets, incur separate liabilities, and have different managers and members, a Series LLC may be able to pay a single set of annual state fees and may be able to file one income tax return each year. In addition to the administrative streamlining, the key value is that liability incurred by one unit or series does not cross over and jeopardize assets titled in or allocated to other subsidiary units or series of the same Series LLC.
So, for example, several people decide to form a series LLC to own an oil and gas company, for instance. The parent company could own minerals, the first formed series could own a drilling rig to drill for other parties; the second formed series could own a workover rig to service existing oil wells and be owned by five people; the third formed series could own a Seven-Eleven drive-in store with eight owners and so on. The owners and managers of the Parent and each subsequently formed series can, but do not need to be, the same owners; there can different owners for each series. This allows for great flexibility in raising funds to capitalize each series and the business it operates.
In Texas the procedure for adding and deleting series is uncomplicated and no formation fee for a new LLC is required. Additional series can be formed or dissolved by simply amending the Series’ “limited liability company agreement for the Master Agreement” (equivalent to an operating agreement for other LLCs). A new, separate series operating agreement concerning the newly created series is agreed to by the owners and managers of the new series and such agreement is subject to the “Master” Agreement” of the originally formed parent Series LLC. The new series has to file an Assumed Name Certificate with the Texas Secretary of State and in each county in which the new entity will do business. Nothing else is needed to form a new series within the parent Series LLC.
In order to make sure the newly formed series is given the legal status of a series LLC the following should be observed:
1. A separate bank account should be maintained for each series.
2. Separate accounting books and records must be maintained for each series.
3. All contracts, deeds, notes, etc. should be signed in the name of the series. Again, use something like “Acme LLC, Blackacre Series only”. (where Acme LLC is the “parent or original series LLC)
4. Any loans between series should be properly documented.
5. Any transactions between series should be conducted in an arms’-length manner at fair market prices using appraisals.
6. Have each series file a fictitious business assumed name certificate in each county where it owns property. Each series should have its own name and the filing should emphasize the ownership of that series, for example, “Acme LLC, Blackacre Series only”. This is to put creditors on notice.
7. Keep the assets and operations of each series separate from the other series. Each asset should be owned solely by one series. In other words, two or more series should not be co-owners of the same property.
8. Make sure each series is adequately capitalized.
9. Obtain a separate Federal Identification number for tax purposes for the new series.