Any spy movie worth its salt has at least one scene near the end where some brilliant hacker spends a few minutes detailing all the shell companies and offshore accounts the bad guy uses to hide their money (and their trail of villainy).
As a result, many people tend to think holding companies are inherently unethical.
This isn’t the case.
In fact, using separate but related holding companies can be a legal, ethical, and strategic way to protect your assets. In Texas, this legal structure is known as a series LLC.
What is a series LLC?
At its core, a series LLC is simply a way to legally organize and protect your business interests and assets. But unlike other ownership structures, a series LLC keeps your assets related but not living in the same house.
One of the easiest ways to conceptualize series LLCs is to think about where you keep valuables at home. If you’re like most people, you probably have your most important documents and maybe some jewelry or money in a safe somewhere in your house. But you could also have valuable art on the walls, pricey watches in your dresser, expensive audiovisual equipment in your living room, and collectible merchandise on display in your office.
A traditional Limited Liability Company (LLC) is like the lock on your front door; it provides some level of protection, but once a thief has broken into your house, they likely won’t just take the valuables in your safe. They’ll also probably snatch your art, steal your TVs, and wear your watch as they list your collection of first-issue comic books on eBay.
But if you had a series LLC, it would be like having biometric security scanners on the door to every room in your house. Someone still might be able to break in, but what they can steal will be severely limited by what they can access.
By creating multiple LLCs that are connected to a parent company, series LLCs form a powerful protective structure around all your assets.
Not every jurisdiction recognizes series LLCs, so it’s important to talk with an experienced accountant and a skilled asset protection attorney to find the best solution for your company.
Jurisdictions and states that currently allow series LLCs include:
- Washington DC
- North Dakota
- Puerto Rico
- South Dakota
How does a series LLC work?
A series LLC gives business owners and real estate investors limited liability protection by first creating a parent company LLC to serve as the “house” for the rest of the business entities.
After the parent, or umbrella, company is formed, separate LLCs are created under it for as many additional subsidiaries (or series) as needed. These distinct business entities work like a firewall or stopgap to shield one company’s assets from the obligations of a connected sister organization.
Both the parent company and each series under it should be governed by an operating agreement. (Even if your state doesn’t require this, it’s a best business practice you should follow.)
The operating agreement for the parent company should include:
- Name of each company within the series
- Names of the members
- Organizational hierarchy
- Accounting details, rules for voting
- Org charts for subsidiaries
- What liability protections look like
What do subsidiary LLCs need?
Besides listing the name of the parent LLC, the subsidiary LLC operating agreements should include the same types of information. Each subsidiary should have its own bank account, but they can all have the same managers, members, and registered agents.
The laws governing series LLCs in Texas are still changing, and working with a qualified lawyer is the best way to ensure your company is using this complicated legal structure optimally.
We have two flavors of subsidiary series in Texas: Protected & Registered. The key distinction between a “ordinary” or “protected” series LLC and a “registered” series LLC is that the latter must be publicly registered with the Texas Secretary of State.
The advantages of a series LLC
Series LLCs aren’t always the best option, but they are an excellent choice for many startups and real estate investors.
The biggest advantages provided by a Series LLC are:
- Asset protection: Series LLCs compartmentalize your risk but reduce how many assets someone suing you can go after. You can even add an anonymous trust that prevents your holdings from being listed publicly.
- Simplified tax returns: Series LLCs can save you money on business taxes while ensuring you only have to file one tax return for all your companies. You’ll still have to pay taxes for each subsidiary, but you won’t have to file multiple returns. You need to discuss your tax strategy with your CPA or Tax Attorney.
- Scalability: Once your parent LLC is formed, you can add as many series as you need to over time without going through the hassle and expense of creating an entirely new entity.
How a series LLC can help protect your real estate assets
The series LLC structure is popular among real estate investors because it minimizes liability obligations between properties, simplifies overall management burdens, and can be cheaper to set up than separate LLCs for each asset.
Here’s an example:
Your real estate investment firm, Properties R Us, owns five properties: three residential rental properties in three different parts of your state, a mixed-use building in a densely populated downtown area, and a standalone retail building that’s subdivided between four businesses.
Let’s look at three different ways you could organize these assets.
Option #1: Bundle all the properties together under the Properties R Us LLC
You will have one EIN and one tax return, but all your assets are connected.
If someone sues you after falling down the stairs at the downtown mixed-use building, their attorneys can come after profits, even ownership, of your other properties if the downtown property doesn’t generate enough revenue or have enough insurance to cover their costs. You could lose everything based on something that happens with one asset.
Option #2: Create separate LLCs with separate names for each asset
Under the same scenario as above, the individual who slipped into your mixed-use building could wipe out any profit from that property, but they couldn’t access any of the value of the residential or retail properties. The disadvantage is that you face the cost of incorporating multiple LLCs and the added paperwork of filing multiple tax returns under multiple EINs.
Option #3: Establish a series LLC with one parent company and five LLCs under it
Series LLCs combine the administrative ease of a single company with the asset protection of multiple LLCs. In the right situations, it’s the best of both worlds without any of the disadvantages.
Speak with a Texas asset protection attorney to get started
If you want to form a series LLC or have any other questions about what asset protection measures your business should be using, contact our experienced team today.