More Tips on a Series LLC #TaxPlanning

Here are some additional tips on Series LLCs that you may want to consider.

1. I copied the exact language of the statute in my formation document:

XYZ, LLC is a Series LLC within the meaning of Subchapter M, Sections 101.61 et seq, Texas Business Organizations Code.

Refer to the attatched addendum, which is incorporated herein by reference as if set forth in full, for detail notice of the series and the separate rights, powers, or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations. The attached addendum also includes the names of the series.

The debts, liabilities and obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series, whether now existing or hereafter established, shall be enforceable against the assets of that series only, and not against the assets of XYZ, LLC generally or any other series thereof, and none of the debts, liabilities, or obligations and expenses incurred, contracted for, or otherwise existing with respect to XYZ, LLC generally or any other series thereof shall be enforceable against the assets of the particular series in question. 

2. I also included a supplemental provision making clear the limitation of creditors to reach the assets of the series LLCs:

Supplemental Provisions/Information

Form 205 Certificate of Formation

Limited Liability Company

XYZ, LLC

 This Supplemental Provision/Information statement is included in Form 205 by reference as if set forth in full.

XYZ, LLC is a Series LLC within the meaning of Subchapter M, Sections 101.61 et seq, Texas Business Organizations Code which provides:

Sec. 101.601.  SERIES OF MEMBERS, MANAGERS, MEMBERSHIP INTERESTS, OR ASSETS.  (a)  A company agreement may establish or provide for the establishment of one or more designated series of members, managers, membership interests, or assets that:

(1)  has separate rights, powers, or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations; or

(2)  has a separate business purpose or investment objective.

(b)  A series established in accordance with Subsection (a) may carry on any business, purpose, or activity, whether or not for profit, that is not prohibited by Section 2.003.

The Series limitations are as follows:

Sec. 101.602.  ENFORCEABILITY OF OBLIGATIONS AND EXPENSES OF SERIES AGAINST ASSETS.  (a)  Notwithstanding any other provision of this chapter or any other law, but subject to Subsection (b) and any other provision of this subchapter:

(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 limited liability 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 limited liability company generally or any other series shall be enforceable against the assets of a particular series.

The Series LLC will comply with the following subsection (b) of Sec. 101.602:

(b)  Subsection (a) applies only if:

(1)  the records maintained for that particular series account for the assets associated with that series separately from the other assets of the company or any other series;

(2)  the company agreement contains a statement to the effect of the limitations provided in Subsection (a); and

(3)  the company's certificate of formation contains a notice of the limitations provided in Subsection (a).

The names of the Series LLC are:

123 Series, a Separate Series of XYZ, LLC

456 Series, a Separate Series of XYZ, LLC

789 Series, a Separate Series of XYZ, LLC

1A Series, a Separate Series of XYZ, LLC

2B Series, a Separate Series of XYZ, LLC

3C, a Separate Series of XYZ, LLC

3. As you can see above, my convention was to name the series LLCs after the addresses of each property involved. You can of course use another convention to designate the names of series LLCs, just be consistent in your application of that convention. 

4. The best explanation I've found when explaining the Series LLC to bankers (and I suspect the #IRS too) is that the mothership derives its power of existence from the State. The individual series get their authority from the mothership. Thus, its best to name each series LLC in your formation document. Don't rely on exclusively on the statutory authority.

5. I designated each series LLC as a disregarded entity. My plan for the mothership return is to include a separate form 8825, under the tax ID issued for the series LLC, with the income and expenses related to that series LLC. 

I also included a statement on the mothership return setting forth the name of each series LLC, its Tax ID number and that its income was included in mothership's return. My thought was to make it as easy as possible for the #IRS to follow the logic. 

6. I also included this similar disclosure in the mothership's Company Agreement, as well as each series LLC. The more often this disclosure appears the easier it will be to point it to those creditors who may be trying to attack its validity.

The mothership's Certificate of Formation was accepted by the Texas Secretary  of  state without comment. We were able to get the bank accounts for each series LLC after a little explanation and by picking a bank with whom the client had a prior relationship and also had some experience in this area. This was a large regional bank with decisions made at the local level and not at an out of state location. This was a plus. The next test will be when (or if) the #IRS raises any issues with the method of formation or tax structure. I will keep you posted. 

#AustinTaxHelp #IRSPlanning #Tax Planning #SeriesLLC