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.