In Texas, the Series LLC can provide an advantageous vehicle for asset protection, particularly for long-term real estate investors. Recent changes in the law give more flexibility for this structure than ever before.

At 1st Estate Planning, we know how to take advantage of the protections offered by the formation of Series LLCs while complying with all requirements and reducing unnecessary complexity and expense. We would be happy to discuss Series LLC asset protection as a potential part of your estate planning strategy.

The Disadvantages of Traditional LLCs

Property owners transfer ownership of real property to limited liability companies (“LLCs”) to minimize their personal liability arising from the property. But if an LLC holds two or more properties, liability from one property impacts all the other properties held by that same entity. Forming a separate LLC to protect each property solves that problem. However, there are costs and administrative burdens—additional (perhaps multiple) filing fees, tax ID numbers, tax returns and management expenses—associated with properly forming, qualifying, and maintaining each separate LLC. By contrast, a Parent LLC can set up all of this one time, manage a diverse portfolio of assets in separate Series LLCs, and each of them will be as independent from the other as the company deems best. Thus, the Series LLC does the same job more efficiently and more cost effectively.

The Formation, Structure, and Operation of a Parent and Series LLCs

Series LLCs are formed by creating a single LLC that serves as the “Parent” LLC (sometimes called the “Master” or “Umbrella” LLC). In turn, the Parent LLC uses internal processes to form sub-LLCs known as “Series.” The parent LLC manages the affairs of each Series LLC and of the Parent Company itself as its own business. This means Articles of Formation are filed only for the creation of the Parent LLC. No such filing is necessary for the creation of Series LLCs. Similarly, although each Series LLC can own distinct assets, incur separate liabilities, and have different managers and members, the Parent LLC may be able to file only one federal income tax return each year that takes into account all the income of the Parent LLC itself as well as the income from all the Series LLCs.

The Parent LLC can create an unlimited number of Series. Each Series operates as an independent sub-company, with a unique name, and it owns separate assets, including real property and operating accounts. Every Series also can have different owners and managers, or the same owners and managers with different ownership percentages, rights, duties, and obligations.

Protection Offered by a Series LLC

Here is a simple example of how Series LLCs offer asset protection…

You have two apartment complexes and both of them are owned by a traditional LLC. One property is called the City Apartments, and the other is called the Country Apartments. Unfortunately, someone was injured at the City Apartments. The injured party sues and obtains a judgment against the LLC itself. This means they can recover damages from any of the LLC’s assets. So, the liabilities of the City Apartments now imperil the wellbeing of the Country Apartments. If they are serious enough, they may cause the loss of both properties and the LLC itself.

Now imagine a slightly different example. You have the same two apartment complexes but each of them is held in its own Series LLC. There’s a City Apartments Series and a Country Apartments Series. Because assets owned by one Series are protected from the liabilities of every other Series the City Apartment’s liabilities only impact the City Apartments. The Country Apartments are not exposed to the City Apartment’s problems, and they continue to operate normally.

Proper Formation is Critical

To accomplish the asset protection goals, a Series LLC and each Series company under that LLC must be structured and maintained properly. Failure to observe correct procedures in the formation of the Parent LLC or a Series LLC could negate the asset protection value of the Parent and/or the Series LLC.

Work with an Estate Planning Team with Experience Customizing Series LLCs for Asset Protection

A Series LLC, on its own, can be a valuable tool to protect assets, but it also is important to consider how the entity would fit into your overall estate planning and asset protection strategies. The team at 1st Estate Planning can analyze your situation and help you determine whether a Series LLC is a proper option for you.

Then we can help you through the process of forming and maintaining your entity and its various components so that you gain the full benefit of asset protection. Contact us for a confidential consultation today to learn more.