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The Delaware Series LLC for Real Estate Investors

Following up to our previous article titled, “3 Reasons a Series LLC Should be a Real Estate Investor’s Best Friend“, we now focus on benefits of a Delaware Series LLC.

The Delaware 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.  For example, you could have a master LLC that owns different subsidiaries which in turn own small groups of real estate.  The subsidiaries would shield both the master and other subsidiaries from liability.  Thus, a real estate investor can reduce the exposure to the assets that any one subsidiary owns.

The series LLC makes the entire process a bit simpler by using a series in lieu of a subsidiary for each group of properties.  Rather than multiple entities, you have just one.

The series LLC was first offered in Delaware, and is also now available in about nine other states.  A Delaware LLC can be registered in other states as a foreign entity, theoretically making it available in all states.

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:

  • Each series should have its own operating agreement.
  • A separate bank account must be maintained for each series.
  • Make sure each series is adequately capitalized and/or insured.
  • All obligations should be signed in the name of the series.
  • Any loans or business between series should be properly documented.
  • Keep the assets and operations of each series separate from the other series.
  • Make sure every contract the series signs states that liability is limited to that series.
  • Each series should file a “dba” in each state and/or county where it owns property, for example, “ABC, LLC – Series II”
  • 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.

Seems like a lot of work, but you’d have to do the same things whether you used individual subsidiary 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” (an 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 a little more in price to setup than a regular LLC, but you can save a bunch in the long run.

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, so that each series can choose whether to be single-member LLC, multi-member LLC, S corp, etc.

  1. Comment by James Burns
    September 19th at 9:42 am 

    The Series LLC was great before states like California decided to charge for each cell or series as though it was a separate LLC. Right now one with only 3 cells would cost you $2,400 per year to maintain and since they are taxed at the Gross Receipts rather than net, there could more taxes due.

  2. Comment by Marco Santarelli
    September 19th at 9:46 am 

    James – The Series LLC is “expensive” in California and Tennessee. Each series is taxed as a separate LLC by these states. The other states do not do that at this time.

  3. Comment by James Burns
    September 19th at 10:23 am 

    The California FTB states that any one of these acts is doing business in California and chargeable towards the LLC and any one of its series:

    A. You call an out of state property manager,
    B. You have a local bank account for the entity,
    C. You use a CA CPA to do the returns on the LLC.

    You could just about get over B & C, but A is a real killer and they might be able to monitor it but if they ever did, the penalties and fees would be enormous.

  4. Comment by Mark
    September 19th at 11:36 am 

    Is the Series LLC available in Colorado?

  5. Comment by Marco Santarelli
    September 19th at 12:00 pm 

    Only a few states have enacted statutes permitting the formation of a Series LLC:

    • Delaware
    • Illinois
    • Iowa
    • Nevada
    • Oklahoma
    • Tennessee
    • Utah

    Check with your state to see if they permit it today.

  6. Comment by Mahi Reddy
    September 19th at 5:14 pm 

    Do we need to have a Tax id for each series?

  7. Comment by Marco Santarelli
    September 19th at 6:02 pm 

    Check with your LLC’s State tax board. In California, for example, you would have too for each series.

  8. Comment by MRene
    September 20th at 10:19 am 

    Nice article & information. Thank you!

    CA & TN charge taxes on a “per LLC” basis currently. But what is the AVERAGE tax charge “Per Series LLC” in the states that don’t charge in this fashion? Also, what is the average charge to set up a series LLC?

  9. Comment by wai
    September 25th at 3:05 pm 

    So to get this right. If I opened up a “series LLC” in Nevada or Delaware, and lived in California, then I would be charged for each LLC in the series. Or I wouldn’t?

    If so, what happens if I have a physical address in Nevada?

  10. Comment by Marco Santarelli
    September 25th at 3:18 pm 

    Wai — If you “operate” your business in California then the FTB considers your business to “reside” here, and therefore they want you to register it and pay the required taxes. If your primary place of business is in Nevada then you probably fall under different guidelines. (Always check with your tax adviser.)

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