How to Use Series LLCs for Real Estate Investments
Using a series LLC for real estate investments is a good way to insulate yourself from liability. You’ll need to create one “parent” or “master” LLC and then a chain (or series) of subordinate LLCs within the parent. This strategy involves using individual LLCs to hold each property, and then a parent LLC to hold the group of series LLCs that, in turn, hold the properties. It’s important to note that not all states recognize series LLCs. Texas, however, does.
Choose your state
First, you must select the state where you want to form your parent series LLC. Your attorney can help you pick out a state with favorable laws to ensure profitability. You do not need to choose the state in which the real estate physically resides. You can choose any state in the U.S. for your parent series company.
Form your LLCs
After you’ve decided on a state for your parent series company, you’ll want to form an individual LLC for each property you hold. The process to form a series LLC in Texas is as follows:
- Name your LLC – Choose a unique name for your business and include “LLC” at the end of the name.
- Appoint a registered agent – This individual will receive legal documents on behalf of your LLC.
- File a certificate of formation or articles of organization with the Secretary of State – This document officially creates your LLC in the state of your choosing. Keep in mind that to form a series LLC you must include specific language that will notify the public of your asset protection in accordance with the provisions of the Texas Business Organizations Code. Flores, PLLC is here to guide you through the process.
- Create an operating or company agreement – This document will outline the master LLC’s management structure, ownership, and operating procedures, and that of each series. Each series can have different members, membership rights and/or managers.
- Obtain an EIN – Acquire an Employer Identification Number from the IRS for tax purposes. While the IRS has issued little guidance on the federal treatment of series LLCs, it is recommended that you keep separate books and records to maintain the liability protection and, in some instances, apply for a separate Employer Identification Number for each series.
Transfer properties to a series within your series LLCs
Since liability for each series will be limited to the assets of that specific series, it is recommended, in most instances, that each series hold one property.
- Deed transfer – If you own free and clear title to your properties, you can transfer ownership of each property to a series. Each series must be identified with its own name that should include the parent LLC’s name and a specific name for the corresponding series. For example, “123 Road, a series of Real Estate Investors, LLC.”
- Title insurance – Update your title insurance policy to reflect the chain LLC’s ownership.
- Financing – If you have a mortgage and you require approval to transfer the property to a series LLC, you may need to check with your lender to obtain approval.
- Ownership of subordinate LLCs – Your master LLC will hold all of the series in the chain, which, in turn, will hold the individual properties.
Why use a series LLC for real estate investment?
This legal strategy is preferred among seasoned real estate investors in the United States. While you can hold all your properties in one LLC, forming a series LLC can provide significant benefits. These include:
- Liability protection – If you hold all of your assets in one LLC, and that entity is sued, it can subject all of the LLC assets to legal liability. Separating properties into different subordinate LLCs or series can help limit liability to a specific property and shield the rest of your assets within the chain, in addition to the ordinary benefits of shielding your personal assets from liability.
- Privacy – In many cases, LLCs can provide more privacy than holding property in your own name.
- Tax benefits – LLCs offer some tax benefits that you should consider
- Flexibility – LLCs allow for considerable flexibility in ownership and management structures.
Talk to a Texas Business Attorney Today
Flores, PLLC, represents the interests of Texas residents who are attempting to establish a real estate business. Call our Texas business and corporate lawyers today to schedule an appointment, and we can begin discussing your next moves right away.
