A series LLC can provide improved liability protection for owners of multiple rental properties in Texas. Attorneys Philip Hundl and Kari Lutringer talk about the advantages and disadvantages of series LLCs in this video. Call or text 800-929-1725 for an appointment. Appointments can be online, by phone or in person.
Summary of the Series LLC Video
[Philip Hundl] Hi, I’m Philip Hundl. I’m here with Kari Lutringer. We’re attorneys at Wadler Perches Hundl and Kerlick. Kari’s practice focuses on many areas, but one is corporate formation or entity formation.
We’ve had several other WPHK Office Hour videos, and we talked about business entities with Kari including corporations, limited partnerships, partnerships, and LLCs. We also talked about the initial considerations that people should think about for an LLC. Now I’m going to throw a wrinkle into this. Sometimes clients will come in and they have a scenario of owning multiple rental properties, maybe 20 to 30 rental houses. They ask if they need to form 20 or 30 separate LLCs to get the benefits of operating as an LLC. Kari, you’ve got an answer for that.
[Kari Lutringer]. Yeah, so the answer for that is no, you don’t have to. Some people do choose to form multiple entities to hold different properties. The great thing about a series LLC is it’s really spot on if you’ve got multiple properties that you want protect. It’s a fairly recent creation, but it might be a good entity choice for a real estate investor.
What’s Different About a Series LLC?
So the way I like to think about a series LLC is that you are creating a single LLC. So that means one certificate of formation is filed with the Secretary of State, and one filing fee is paid. The filing fee can be a fairly significant amount of money, if you’re talking about forming multiple LLCs.
The certificate of formation of a series LLC is a little bit different from the common LLC because there are some additional provisions that are included. These provisions essentially say this LLC is going to allow me to create different “series”. I like to think of a series as kind of a separate mini LLC underneath the main series LLC.
So the benefit of that is it allows you to take separate properties, and put separate properties into the different series. I like to visualize a series LLC also as just having different silos. So each property’s in a different silo, and each silo is protected from the activities of the other silos.
What’s an Example of How a Series LLC Might be Used?
So let’s say for instance, you are a landlord and you’ve got five different rental properties. Instead of creating five different LLCs, having to manage five different sets of books, have five different sets of certificates of formation, five different filing fees, you create a series LLC with five different series. Each series will hold a separate property.
If you have a liability associated with one property, it won’t affect your other properties. So let’s say for instance one of your tenants gets hurt, and a court finds you negligent and issues a judgment, that judgment is only going to affect that one property. All of the other four properties in your LLC are protected.
Contrast that to a traditional LLC structure where you’ve got a single LLC with five properties in it. If there’s one liability that attaches to that LLC, due to one property, all of your properties, all five properties are at risk. So it’s not the most ideal structure to use if you’ve got multiple properties.
You Need to Maintain a Management Separation Between Each Property
A series LLC is really a great solution to that problem because it allows you to simplify the structure a bit, but also maintain a separation between the liabilities and obligations of each separate property. You do have to maintain separate books and records for each property.
You don’t necessarily have to have a separate bank account. Having separate bank accounts might be ideal, but it’s not really feasible for a lot of folks. So what you really do need to be able to do is track all of your income and expenses and attribute them to each separate property within the series.
[Philip Hundl] I think within maybe QuickBooks, there’s the sub accounts. I call them sub accounts, maybe they’re called something else, but sub accounts for each one of these mini LLCs. To go back to what you had talked about, if someone was successful in getting a judgment against one of the mini LLCs, that judgment would not affect any of the other mini LLCs within this series LLC.
[Kari Lutringer] That’s right. Assuming that you’re properly separating income and expenses in keeping the different series separate in terms of maintaining separate documentation and a few other requirements, then yes. That’s the effect of it. Basically all of your other properties, all of your other series are insulated from the liability that’s associated with that silo or series.
Not Maintaining Management Separation Exposes Your Properties to Needless Potential Liability
[Philip Hundl] But in contrast, as you kind of mentioned, if someone’s successful and gets a judgment against an LLC, all the property within that LLC would be potentially subject to that judgment, right?
[Kari Lutringer] That’s right.
[Philip Hundl] If you create a series LLC and you have two or three properties within that mini LLC or series, you’ve defeated the purpose. If someone were to get a judgment against that mini LLC, all those properties within the mini LLC would be susceptible to that judgment right?
[Kari Lutringer] That’s right.
[Philip Hundl] So it’s just a way to create a little bit more insulation or protection. The concept of silos or mini silos is a way to think about protection for each property in each series LLC.
Insurance Coverage Is Still Important
One thing that I know we always bring up with clients is that business or entity formation can be a form of liability protection. Typically insurance is also a very good form of liability protection. We don’t sell insurance, but that’s something that everyone should keep in mind. Make sure that the type of insurance that you get is the type of insurance that you need. The devil’s in the details with insurance coverage. So make sure that you ask a lot of questions about insurance coverage.
Preparing to Form a Series LLC for Your Rental Properties
Regarding series LLCs, normally there are a lot of deeds that need to be prepared. It’s extremely important to make sure that property gets correctly transferred or conveyed into those mini LLCs. So one thing that is helpful for the attorneys, I know, is getting the the legal descriptions of each property from clients if they have legal descriptions.
[Kari Lutringer] Right, sure.
[Philip Hundl] So that’s information that clients need to gather up and bring in when they’re going to meet with you.
[Kari Lutringer] Yeah, exactly. Philip, as you pointed out, there is an administrative component to this in terms of the documents that are going to need to be prepared. So it doesn’t stop at just creating the series LLC. If you want to take advantage of liability protection you actually have to deed the properties into the individual series, create an assumed name for each series, make sure that you’ve got series agreements, which are kind of like mini company agreements for each series. And then, you need to make sure that you close the loop to make sure that all of your properties are transferred into the LLC in order to take advantage of the liability protection that a series LLC will offer.
Ownership Can Vary from One Mini LLC to Another
[Philip Hundl] Now, and correct me if I’m wrong, I think this is my understanding of series LLCs, but the actual ownership in a series LLC or can vary from mini LLC to mini LLC, right?
[Kari Lutringer] Right.
[Philip Hundl] Okay, so that is another factor, if you’re thinking about succession planning. I’m going to say the founders or original owners have children or other business associates that they want to give interests to. There are ways to do that right?
[Kari Lutringer] Yeah, that’s right. Philip, as you point out, each individual series can have different ownership. It also can have different management, so you can have a different set of managers for one property or one series than you have for the others.
It gets to be kind of convoluted at times if you decide to change up the management and ownership among the individual series. But it’s definitely something that can provide a lot of flexibility and might make sense in certain scenarios.
Your Attorney Can Help You Develop the Correct Framework for Your Series LLC
[Philip Hundl] I know when this is explained to clients sometimes they’re overwhelmed. They say it’s so complicated. I want something very simple. However, you can’t have something very simple that gives you all these you advantages. So there’s a little bit of complexity to it.
But what we’ve seen is if you put some thought into preparing the framework from the very beginning, and you implement the correct framework for your business, then it’s fairly easy to manage. You have to start out organized and with the right framework.
So Kari, very helpful. We hear a lot about series LLC. This is very helpful. Hope that was very helpful for everyone out there. So stay tuned for our next WPHK Office Hours. Thanks.
Get Started Forming a Series LLC for Your Texas Rental Properties
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Wadler, Perches, Hundl & Kerlick has offices in Wharton County, Fort Bend County and Matagorda County. We have clients from all over Texas.