Avoiding Mineral Interest Expenses With An LLC

Mineral interests can become fragmented, difficult to trace, and expensive to transfer. Holding mineral interests in an LLC can solve all three problems.

The phrase “mineral interest” is used broadly to describe rights to gas, oil, and other minerals at or below the surface of land. Mineral interests are further divided into royalty interests, working interests, and overriding royalty interests. Royalty interest owners bear no cost of production. Royalty interest owners receive their share of production revenue before the working interest owners. Working interest owners incur all the cost of production and receive their share of the profit after royalty owners. Overriding royalty interest owners own a percentage share of production, free of all costs.

As mineral interests are inherited from one generation to the next, mineral interests become fragmented. A single mineral interest becomes many as it is divided among children, grandchildren, great grandchildren, etc. Sometimes, the mineral interest is forgotten, or errors occur and then the mineral interest is not passed on. Sometimes, there are no deeds to the mineral interest.

For many years, royalty payments were made even though proof of proper ownership was lacking. More and more, working interest owners are demanding proper ownership documentation. Cleaning up decades of documentation neglect is expensive. Our advice is to pay the cleanup cost once and use an LLC or other entity going forward.

A Colorado limited liability company (LLC) is a type of business entity usually managed by a manager elected by the LLC owners (members). The mineral interests are held by the LLC. While members may die, the LLC continues. Royalty or overriding royalty interests stay with the LLC. Payments from the working interest owner to the LLC continue uninterrupted and without transfer expense. Should an error occur in transferring a deceased member’s LLC interest, the cost to clean up that mistake is usually much less than dealing with the mineral interest, directly. As an added benefit, the LLC adds some protection from creditors.

Over the years, we have cleared up problems with mineral interests sometimes at significant expense to the client. Consider avoiding this problem or only dealing with the problem once by using an LLC.