Formation for Series Limited Liability Companies in Texas is much the same as the Formation of a regular LLC. However, in order to form your Series correctly, there are a couple additional steps that we’ll cover specifically.
- Select the appropriate Series LLC naming structure that you will be using.
- Draft your Operating Agreement
- File your Articles of Organization with Required Language
- Obtain your EIN and open your accounts
- Create Your First Series
1. Select the appropriate Series LLC naming structure that you will be using.
Your Series LLC naming structure will be an important factor for the continuation of your business. The “parent” or main LLC that you will be forming will have its name in each of the Series, along with an individual identifier used to distinguish that particular series. Common dichotomies for this usually follow the principal of “Nate’s Series LLC, Series A” or “…”Series 1”, but for Real Estate investment purposes, some business owners choose to use the individual addresses for each property as the “series” name.
2. Draft your Operating Agreement
Your operating agreement is the contract between the members and the Series LLC formation. In essence, it is a list of obligations and promises that the members and managers make to the business about how the business will be run. I often advise my clients to think of the operating agreement like a contract, and that if they were to fail to follow the operating agreement, they would be in breach of that contract and could be held liable.
Farm and Ranch Investors use Series LLCs as “holding pens” for each of their farms or ranches.
Proper adherence to whatever operating agreement you use is absolutely crucial to maintaining the limited liability status that your Series LLC will afford you. This is why most attorneys will advise against just using an operating agreement from your friend or even from some form site on the internet—You need to fully understand the obligations you are undertaking and the promises you are making if you are going to run your business correctly and within the applicable law.
The operating agreement will also specifically authorize Series creation, and contain the documents for each additional Series that you create. Often called, “Designation of Series”, these attachments to your operating agreement will actually be contained within your original operating agreement as amendments. Each new series will have its own “Designation of Series” that is attached to the operating agreement and spells out any special provisions for the Series itself, if different than the original agreement.
Your operating agreement will spell out the processes and guidelines for taking certain actions, how many of the members must vote on changes to the business, and the procedure for distributions of profit, or when distributions of funds are prohibited. The guidelines in the operating agreement exist to protect the business from owners that may put the Series LLC at risk, and exist as a check on the membership.
3. File your Articles of Organization with Required Language
Filing your Articles of Organization is actually fairly simple: using the Secretary of State’s website, you will inform the SoS of Texas that you are forming a Series LLC and give them the required information: the name of the company, the names and address of the members and managers, the name and address of the registered agent, the business the Series LLC will be conducting, etc. Once the form is filed, it is usually about 10 days before the Certificate of Good Standing is sent back to the person who filed the Articles of Organization.
Articles of Organization for a Series LLC must also contain specific language provided by statute:
Series Authorized: Pursuant to the provisions of the Texas Business Organizations Code, subchapter M of chapter 101, sections 101.601 through 101.622, the Company has the power and is authorized to establish one or more designated series of members, managers, membership interests, or assets that—
1. have separate rights, powers, or duties with respect to specified property or obligations of the Company or profits and losses associated with specified property or obligations or
2. have separate business purposes or investment objectives.
Notice of Limitation on Liability: Pursuant to the provisions of the Texas Business Organizations Code, section 101.602, notice is hereby given that—
1. the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to a particular series shall be enforceable against the assets of that series only and shall not be enforceable against the assets of the Company generally or any other series, and
2. none of the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to the Company generally or any other series shall be enforced against the assets of a particular series.
4. Obtain your EIN and open your accounts
The next step in formation of your Series LLC is to obtain an Employer Identification Number. The EIN is like the social security number for your business and will be essential in the conduct of business and opening bank accounts. This number is obtained from the IRS using an online process where you will receive your EIN the same day.
5. Create Your First Series
Creating your series for your LLC goes back to what we talked about under the section on operating agreements—You will need to draft your “Designation of Series” document to officially name your series, and set out the governing rules of the particular series, and attach that as an amendment to your operating agreement.
Additionally, some attorneys suggest filing with the Secretary of State of Texas an “Assumed Name” certificate under your original LLC with the full name of the Series. This allows for the Series to have some official recognition in the marketplace.
Forming a Series LLC is altogether a straightforward process, but can have many pitfalls if you are not familiar with the common issues facing Series LLC owners in Texas. This is the foundation of your business and you don’t want to find out there’s a problem five years down the road. Texas Business Formation Attorney Nathaniel Gilbert assists real estate investors in starting and running their Series LLCs in an efficient and effective manner, setting them up for success for years to come. To learn more about Series LLCs and Business Law in Texas, Click Here. To contact Nate directly, Click Here.
