LLC and Series LLC Basics: Creating Your Own Business
You have decided to start your own business or properly form a company that already exists, now what?At the most basic level, the Secretary of the State of Texas requires registration with its office and requires payment of a filing fee.
However, before you file you must decide what corporate structure is best suited for your needs. Currently in Texas, as in most states, the Limited Liability Company (“LLC”) has become the preferred entity structure for a multitude of reasons. Generally, an LLC offers limited personal liability, straightforward entity creation, minimal upfront costs, and relaxed corporate requirements. An LLC also gives you the ability to choose how your LLC is taxed; either as a Single-Member LLC, Multiple-Member LLC, C-Corporation, or S-Corporation.
While setting up a Single-Member LLC is rather simple, once you move beyond registration, the requirements become increasingly complex. Failure to meet any registration or ongoing requirements will lead to your entity losing its characterization and, very likely, make you personally liable.
The conversation becomes more complex as Texas legislation now allows the creation of a Series LLC. Real estate investors have been the most aggressive in adopting this structure due to its benefits, but it can be used in many different industries.
The basic characteristics of the Series LLC can be somewhat confusing, so I will use a real estate investment example to explain:
I form and register a Series LLC with the Secretary of State. That entity can then purchase various properties, as a Traditional LLC would, but in a Series LLC every property will be treated as its own LLC. So if I, as a real estate investor, buy ten homes to flip and properly create a Series LLC, I can then treat each home as its own LLC. With that I get the same liability protection as if every home is a separate LLC.
I am often asked “Why not just create ten different LLCs, what is the difference?” Simply put…money and time. A Series LLC must be filed only once and all taxation is done as a single LLC, not ten, while providing the limited liability of ten different LLCs. This added flexibility and protection does come at a small cost, it must be initially structured and filed correctly, and the accounting and tracing requirements must be followed.
This is further complicated by a number of matters. If you have more than one member, your next step should be to execute an Operating Agreement within the company. Routinely, I have clients seek our counsel in dissolving or modifying a company and have no agreement within the company, or they have a template agreement they either downloaded from the internet or were provided from an online registration company. In essence, the agreement or lack thereof provides little structure and leaves the parties with no way to properly resolve a dispute. The inevitable path is to the courthouse and mounting attorney’s fees, all of which could have been avoided with minimal work in the beginning.
Even if you are confident you can properly determine the entity type, tax structure, and registration, seeking an experienced attorney in business law can make the process expedited and properly protect you and your business. When it comes to business formation, the old adage “spend a nickel to save a dime” has never been more true.
If you have any questions concerning your business formation, I encourage you to contact our office for an initial consultation to determine the appropriate path.