What is a Limited Liability Company?
A limited liability company (LLC) is a distinct type of entity that has characteristics of a corporation and a partnership or sole proprietorship. For example, LLC’s offer:
- Pass-through taxation
- Limited Liability for members
- Management flexibility
- Anonymity of members
Forming a Limited Liability Company
In Texas, an LLC is formed by filing a “Certificate of Formation” with the Secretary of State’s office and paying the associated fee. Among other things, the Certificate of Formation contains the name of the LLC being formed; the purpose for which the LLC is being formed; the name and address of each initial member; and the name and physical street address of the Registered Agent. The Registered Agent will be served with all lawsuits and will also receive all official mail issued by the State of anyone wishing to put the LLC and its members on legal notice. For a Texas Series LLC, the Certificate of Formation must also contain a notice of the limitation on liabilities as required by statute.
In addition to the Certificate of Formation, the LLC will need an Operating Agreement. However, this will not need to be filed with the Secretary of State. The Operating Agreement details the rights and obligations of the LLC’s members and managers and expressly establishes how the LLC will be governed. Without an Operating Agreement, the operation of the LLC will be governed by the Texas statutes.
The Series Limited Liability Company Alternative
A series LLC is simply an LLC that allows members to compartmentalize individual assets and liabilities by placing them in a “series.” According to the Texas Business Organizations Code, a company agreement may establish or provide for the establishment of one or more designated series of members, managers, membership interests or assets that have separate rights, powers, or duties with respect to specified property or obligations of the LLC, or profits and losses associated with specified property or obligations, or has a separate business purpose or objective. Texas Business Organizations Code §101.601.
This means that the members can hold assets and liabilities within separate “series.” Each series is empowered by the Texas statutes to own property, enter into contracts, and pursue and defend lawsuits. Essentially, each series operates as its own company and the assets of each series, and the LLC generally are protected from the liability of another. For example, assume that Series LLC. “A” has three series identified as “A1,” “A2,” and “A3.” Assume that each series contains only one rental property and that an individual was injured on the property owned by “A1” and files suit against “A1” to recover for damages sustained. In this hypothetical, the assets and liabilities of “A1” are separate and distinct from those of the LLC and series “A2” and “A3.” Thus, the individual may only collect any damages that may be awarded against “A1” from the assets of that series, even though “A1” is part of a larger organization with additional assets.
In addition to the benefits that compartmentalization affords the LLC, each series may also obtain its own EIN and be treated separately for tax purposes and have its own bank accounts, although these actions are not required under the statute.
Choosing between a Traditional L.L.C. and a Series L.L.C.
A traditional Texas LLC is a great way for managers to protect assets and achieve a certain amount of anonymity while offering limited liability, pass-through taxation, and flexible management options. With these benefits in mind, it is not hard to see why LLCs are the favored business structure among invested and business professionals.
The Series LLC offers all of the benefits of the Traditional LLC with the added benefit of compartmentalization of the assets and liabilities of each series, a characteristic that could only be duplicated by forming multiple Traditional LLCs. To illustrate, to achieve the same asset protection afforded to the Series L.L.C. in the example above, three separate Traditional LLCs would need to be formed and paid for.
The Texas Series LLC essentially allows for the creation of multiple companies at the cost of one filing fee. Moreover, the Series LLC can be operated exactly as a Traditional LLC until the need to form a series arises. With these benefits taken into consideration, it is no wonder why business filings for Texas Series LLCs are on the rise.
Our Attorneys are here to guide you every step of the way
At The Farah Law Firm, our Business Formation and Registered Agent services are perfect for the business professional or the individual looking to begin a start-up. Contact one of our experienced attorneys for a consultation to ensure that you choose the business structure and organizational documents that best suit your needs and goals.