Texas Series LLC Operating Agreement
A well-drafted Operating Agreement is vital for a Texas Series LLC to define governance, asset protection, and—critically—tax allocations among the master LLC and its individual series. Including clear tax-related provisions ensures each series maintains its liability shield while complying with federal and state tax requirements.
Relevant Code & Tax References
- Texas Business Organizations Code §101.601 (Operating Agreement Authorization)
- Texas Tax Code §171.001(7) (Definition of “Taxable Entity”)
- IRC §704(b)—governs partners’ distributive shares of profits and losses under U.S. partnership tax rules
- IRC §7701(a)(2)—defines “partnership” for tax purposes, which includes multi-member LLCs treated as partnerships by default
Key Forms & Filings
- IRS Form 1065 (U.S. Return of Partnership Income)
- Schedule K-1 (Form 1065)—reports each series’ share of tax items
- Texas Comptroller Form 05-158—master LLC’s combined franchise-tax report
Detailed Example
“LoneStar Master LLC” drafts its Operating Agreement with two series: Series A (real estate) and Series B (consulting services). Tax clauses include:
- Profits & Losses: Allocated based on each series’ separate capital contributions (e.g., Series A $100,000 vs. Series B $50,000) in accordance with IRC §704(b)
- Tax Distributions: Quarterly cash distributions sized to cover each series’ estimated income-tax liability at the highest applicable rate (e.g., 37% federal + 4.5% Texas)
- Tax Matters Member: Appoints Series A manager as the “Partnership Representative” per IRC §6223 to handle IRS audits
Step-by-Step Guide to Drafting Tax Clauses
- Define Each Series as a “Separate Member”
- Clearly state that while a single master LLC holds the interest, each registered series is treated as a separate “member” for internal purposes.
- Allocate Profits & Losses
- Reference IRC §704(b) and specify that allocations will follow partners’ capital accounts unless a special allocation is agreed.
- Provide for Tax Distributions
- Include a clause requiring periodic distributions to cover each series’ anticipated federal and state tax liabilities (citing estimated combined rate).
- Appoint a Tax Matters Member
- Per IRC §6223, designate one series manager as the “Partnership Representative” responsible for IRS notices and audits.
- Address State-Level Filings
- Require the master LLC to file a single Form 05-158 annually, disclosing combined revenues of all series under Texas Tax Code §171.101.
- Record-Keeping & Reporting
- Mandate separate books and records for each series, and require annual delivery of Schedule K-1 copies to each series’ manager.
- Amendment Procedures
- Outline how tax-related amendments (e.g., changing allocation methods) require unanimous consent of all series managers.
Conclusion
Incorporating precise tax provisions in your Texas Series LLC Operating Agreement ensures compliance with IRC partnership rules and Texas franchise-tax requirements, protects each series’ liability shield, and provides clarity on allocations and distributions.
Schedule a Consultation
For expert drafting of your Series LLC Operating Agreement, schedule a meeting with our CPA, Anshul Goyal:
https://calendly.com/anshulcpa/
Disclaimer
This blog provides general guidance on drafting tax clauses for a Texas Series LLC Operating Agreement and does not constitute legal or accounting advice. Always verify requirements under Texas law and IRS regulations. For tailored agreement drafting and tax planning, consult Anshul Goyal, CPA EA FCA—a licensed CPA in the United States and Enrolled Agent with IRS practice rights—who specializes in entity structuring and partnership-tax compliance.
About Our CPA
Anshul Goyal, CPA EA FCA, has over 12 years’ experience drafting sophisticated Operating Agreements and advising Series LLCs on federal and state tax strategies. He helps businesses structure allocations, distributions, and compliance mechanisms to optimize tax outcomes.
Top 5 FAQs
1. Do I need separate EINs for each series?
No—use the master LLC’s EIN; each series files under the master’s partnership return (Form 1065).
2. Can allocations differ from ownership percentages?
Yes—special allocations are permitted under IRC §704(b) if evidenced by sufficient capital-account adjustments.
3. How often should tax distributions occur?
Quarterly is common, but you can specify monthly or semi-annual distributions based on cash flow.
4. Who handles IRS audits?
The designated “Partnership Representative” under IRC §6223 manages all audit communications.
5. Is an Operating Agreement required in Texas?
While not mandatory by statute, a written Operating Agreement is highly recommended to memorialize governance and tax provisions.