Handling royalties involving multiple owners

Folks, we have a shared mineral rights environment with the distribution going 50%, 25% and two at 12.5%.

One of the families members has been convinced by a lawyer, specializing in wills, that we should form a LLC for protection. The other family members/shareholders are of the opinion such is not necessary.

Does anyone out there do anything special when it comes to handling their royalty revenue?

The convinced family member can form an LLC and the rest can handle their own affairs and everyone is happy.

that is kind of where we are anyway. However, since we are all newbies to this area of commerce, we started wondering if some some sort of provisions should be made. So we tasked our leader with unenviable task of finding an honest lawyer with experience in real estate and/or oil/gas royalties and see what he says.

If your minerals are in Texas, consider forming an LP with an LLC as general partner as this would avoid any Texas franchise tax on the royalties. There are multiple advantages. Once deeds are filed into an entity, then there is no need to file additional documents in the deed records upon death or gift of the minerals. No funds will be placed into suspense upon the death of that owner. As minerals pass through generations, the interests can splinter into very tiny fractions and small owners have less bargaining power than a single large owner. However, you must have a good partnership agreement drawn up by a business attorney. You have to decide how and who will be responsible for management, accounting and preparing the federal tax returns and state filings (and returns if not in Texas). Your agreement should contain a right of first refusal within the family so that one person does not sell to unrelated outsiders. It needs to include the right to lease the minerals. Is there a good relationship within the family? Are you planning to pay outsiders to run your business and who will monitor them? Many of the larger families have created entities for long-term preservation and management of their assets. Some family members will be more interested than others and take on more of the burdens. It makes gifting to the next generation easier as small shares can be given on a regular basis without any need to file in the deed records.

An LLC allows one person to make decisions for the group. This benefits the group because you are unified as to your interests and therefore the oil companies cannot "divide and conquer" by having one person with one lease and the others with another lease. Your combine your interests have more negotiating power. In addition, your interests typically will become even more fractionated throughout time as some pass away and others inherit the interest. Thus, again, it makes the mineral interests more manageable.

Hope this helps.

Where there is an limited partnership, the general partner (usually an LLC for liability reasons), is the controlling entity for decision making. The limited partners are protected from liability as long as they do not act on behalp of the limited partnership in their capacity as limited partners. All of the members of the LLC have a voice in its operations. Most likely, whether you use only an LLC or an LLC as general partner, the LLC will be owned in teh same proportions as the shared minerals. The LLC itself is the "one person" making the decisions or it will have authorized one or more individuals or members to act on its behalf.

Wow, lots of information in a hurry. Your insights are much appreciated.

I am interested to know, does most royalty owners (particularly in Texas) undertake these approaches to managing their interests?

You do not need an LLC or an LP for the interest. To form either will only cost money and gain nothing. I have several mineral interest with partners but the interest itself is owned individually. When anything happens we just call each other

Communication is what you need with your family, not a business relationship

For my 2 cents worth, I cannot be convinced that a royalty owner needs much protection, if the lease form is of adequate quality.

If the lease form lacks, you might want to contact a tax attorney to explore the possibility of a family partnership, which could be structured to provide legal protection along with tax benefits. A decent firm would likely provide a cost free consultation. If only one party wanted to form a family partnership, that would be sufficient.

As for me, I house my working interests in a corporation and my personal royalty interests in my name.


Buddy Cotten

Lots of opinions all over the map :). I have our family interests in an LLC for the preservation of the total interest and avoidance of retitling at death or other untowards happening. Like some here have said, not much liability to the royalty owner, but with the LLC, there is one check received and to be accounted for, rather than 4 as you have now. Some are better than others at record-keeping, so the LLC is good for my family. An LLC in Texas does have a franchise tax due each May, but unless the income is substantial, there won't be any tax.

Folks -- might your opinions be different if there were 17 family member owners, most of whom were 70+ years-old... likely soon to be double the number of owners... and on and on. Later -- Buzz

Putting mineral interests in an LLC does not offer the mineral owner much in the way of protection from liability, as there is virtually no liability from owning mineral rights except to return overpayments. However, an LLC does offer certain tax/estate planning advantages, and an LLC can be very useful to streamline the management of mineral interests with several owners.

With mineral interests with 17 different owners, I would absolutely recommend putting them in an LLC and appointing a manager or managers to deal with the interests. You will have a much better bargaining position if all 17 owners negotiate as one entity rather than separately, and it will save everyone a lot of headaches when a single manager can sign leases/division orders/etc on behalf of everyone else.