We are considering establishing a family LLC or LP to manage various royalty and working interest in Texas and a couple of other states. Initially there will be 5 individuals and two trusts as owners. They primary reason is to streamline management of these interests and to ease family succession. Any thoughts from people that have gone through this process would be appreciated. Of note is that everyone gets along with each other.
1 Like
Using an LLC or LP is a practical solution for many families and can work very well over time. One major consideration is decision making power. In an LP, the limited partners must remain passive and cannot act directly on behalf of the partnership or they may lose their limited liability. Most use an LLC as general partner and then the LLC grants power to individuals to act as an officer of LLC, in its capacity as general partner. Most likely, one or two people will be doing the work on behalf of all the owners which raises issues of compensation, unless you hire professional managers. You should consult with your CPA and attorneys to see if there are limitations in any states or federal tax considerations to LP owning working interests as that is earned income. You need a detailed LP or LLC agreement, including provisions such as whether owners can sell freely or there is a right of first refusal by other owners and whether all income is distributed (or some reinvested) and how frequently distributions are made (such as quarterly or annually).
1 Like
@E_W_WILLIS, there are a lot of things to think about especially when dealing with multiple states and multiple entities. LLCs and LPs generally work pretty well and provide some convenience and organization, but the trade off is an increase in overhead fees and record keeping. Keep in mind that the new entity may need to be registered and maintain a registered agent in each state where it does business. The fees for these are usually nominal, but can add up for multiple states and fees may be higher when you have to register as a “foreign” entity, that is, not in your home state or the home state of the new LLC or LP.
The new entity may also require a separate bank account which is likely to be treated as a business account with associated fees and minimum balances. With trusts being members you will have to figure out who needs access to each account.
The new entity may also have to file taxes and/or annual reports in each state it does business in. Some states have different deadline dates for LLC or LP taxes which differ from the usual April 15th. There is also a federal return for each entity and often K-1s to distribute to each individual or member entity.
Minerals owned by individuals may have to be re-deeded and re-recorded as owned by the new entity. The new entity articles of configuration will have to allow trusts as members and your trusts will have to allow being part of a LLC or LP and the trustees will have to be allowed to enter in to such agreements. The trusts may have to be modified to do this.
Certainly it is best to work with an attorney and an accountant familiar with your needs and your holdings. If your holdings are already all in trusts, you may not need a new LLC or LP to avoid probate. These are just a few things that can come up, and make something that sounds easy actually somewhat complex.
1 Like
A Family LLC can be very helpful. We have several clients that have used this to make it easier in negotiating with oil companies as well as collecting the revenue. We direct our clients to an Oil and Gas attorney we use to create the LLC how the family wants it and then have the deeds drafted and recorded. Definitely consult with an attorney and CPA on what they think would be best for your family.
Depending on your revenue amount, LPs can qualify as a passive entity for Texas Franchise tax purposes. LLCs cannot qualify as a passive entity. Passive entities are often exempt from Texas Franchise tax.
I set up a single-member LLC for tax and estate planning purposes. It is a pass-through for federal income tax purposes. Because it is single-member entity, we don’t have some of the valid issues elsewhere raised. We did it in order to simplify generational issues such as inheritance and cumbersome notifications to operators and county filings. But bear in mind that there are costs associated with organizing the entity, deeds transferring ownership and related fees, new division orders and ACH payments for electronic payments, etc. It just takes time and new record-keeping. It works well for us as the only thing we basically have to do now is notify a county clerk of an address change for the LLC and an operator if it makes physical payments. Good luck.
1 Like
There is a big difference in the tax considerations of an LLC vs an LP, so consult a professional. Most States do not require a foreign entity filing for mineral and royalty activities/ownership, but check the filing requirements of each State.
Great strategy! After being in this business for 45 years, I have so many many families divide up diverse mineral interests without the consideration of management costs. There is upfront cost consideration and some revenue delays due to the transfers to the entity, but that quickly translates to efficiencies of scale. You may even be able to afford to use products such as MineralWare for revenue accounting, activity monitoring, and research that greatly simplify mineral management. I suggest developing a psuedo Family Office strategy for dashboards, reporting and communications so it is easy for all to participate. There are some great tech stack combinations that can allow you great efficiencies without having to be a techie, but there will be a little larger upfront cost. Good luck.
1 Like
There is the possibility to create bylaws that regulate to whom the interests in such companies can be passed down to future generations. Can be costly to create but is attractive for some families.
Notice: Informational only. No attorney-client relationship is formed by this post. I am an Oklahoma-licensed attorney, but this is not legal advice. Do not share confidential facts in this public space.
How will you value the individuals membership in the LLC if he/she wishes to sell?
Thanks to all that have made comments. They have been very helpful. Lots of things to consider. Will be meeting soon with lawyer to draw up documents.
Try to cover every contingency in the contract. What if someone dies, what is someone sells, what if someone wants out, what if someone disagrees with a decision. Contracts or for when people aren’t getting along.
Also, consider language for what constitutes being a member (regarding bloodlines only, adoption or not, who can inherit, adoption and age, etc. A good attorney should have boilerplate language that will get you started and then you can narrow down your concerns.
1 Like