The Series LLC for Real Estate Investors
The series LLC is a form of a limited liability company that provides liability protection across multiple “series", each of which is theoretically protected from liabilities arising from the other series. It is similar to a parent/subsidiary structure, such as GM and it’s various brands.
The series LLC was first offered in Delaware, and is also now available in about eight other states. A Delaware LLC can be registered in other states as a foreign entity, theoretically making it available in all states (see discussion below).
In theory, each series is a self-contained “cell" that is like a single member LLC. According to the statute, 6 Delaware Code Section 18-215,
“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 such series only, and not against the assets of the company generally or any other series thereof,"
The major advantage to the real estate investor is having the ability to have protection for each property yet only having to file one tax return. Thus, each series could own one property and insulate itself from the other series for liability purposes. However, in order to have protection, at a MINIMUM, you must follow certain rules:
- A separate bank account must be maintained for each series.
- All obligations should be signed in the name of the series.
- Any loans or business between series should be properly documented.
- Each series should file a “dba" in each state and/or county where it owns property, for example, “ABC, LLC – Series II"
- Keep the assets and operations of each series separate from the other series.
- Each asset should be owned solely by one series. In other words, two or more series should not be co-owners of the same property.
- Make sure each series is adequately capitalized and/or insured
- Make sure every contract the series signs states that liability is limited to that series
- Each series should have its own operating agreement
Seems like a lot of work, but you’d have to do the same things whether you used individual LLCs or a series LLC. You would save money with the annual fees for each separate series (except in California and Tennessee, where the pinheads have ruled that each series is subject to separate franchise tax returns).
The Series LLC could be a convenient vehicle for a “checkbook IRA" (LLC owned by your IRA). Instead of having to pay a lawyer for each LLC, you could form a series LLC then have each asset owned by a separate series. The series LLC is about 4x the price of a regular LLC to setup with a lawyer, but you save a bundle in the long run.
The only issue of concern is how another state might view the series LLC. In order words, will a Colorado court, for example, apply Delaware law or Colorado law when it comes to creditors. Being that Colorado has no series LLC statute, they would presumably follow Delaware. But, more liberal states like California may rule the other way. FYI, most of my colleauges seem to think that DE law would be applied in most cases. I’m only about 99.5% sure.
As far as tax treatment, the IRS has (sort of) clarified the tax treatment of each series, using the “check-the-box" rules for LLCs. Some states, like California and Tennessee, have ruled that each series is a separate entity for franchise tax returns. Other states have been silent on the issue, leaving open the unanswered question – what does each series need to do in a non-statutory state to be recognized as a separate series? Presumably, a filing as a DBA for each series, disclosing the name of the master LLC and the series name. This obviously gives up some of the privacy afforded by using separate master and subsidiary LLCs.
Time will tell whether the series LLC catches on, but for now it looks like it may be an effective tool for protecting assets in a much more simplified, condensed manner than having multiple layers of entities.