For those of you wondering, a Series LLC is a regular LLC with a twist – it can have an unlimited number of subsidiaries (called Cells), and each subsidiary is treated as a separate structure where liability is concerned – if you set the structure up and run it properly. So far eight states have Series LLC legislation on the books (Delaware, Illinois, Iowa, Oklahoma, Nevada, Tennessee, Texas and Utah). But even if you don’t live or own property in one of those states, you can still use a Series LLC by qualifying it to do business in the state(s) where you want to operate.
I think this is perhaps the ideal structure for real estate investors (and anyone else) who wants to keep their assets safe without spending all the profit on legal structures.
Here are my 3 favorite reasons to use a Series LLC with real estate:
- Protection: It’s written into the legislation in each of the 8 Series LLC states. Do it right, and you have liability protection between each cell. So – if you’ve got a big portfolio, you can drop one or more properties into each cell and receive protection. Creditors on Cell 1 can’t come after the property in Cell 3, and so on. Under each state’s legislation, “doing it right” means properly documenting the creation of each cell. That means Resolutions at the main LLC level, establishing the Series Cell. It also means each Cell needs to have its own Operating Agreement, designating its own Managers and Members. Each cell needs to keep separate accounting records, get its own Tax ID number from the IRS, and maintain a separate bank account.
Something I’ve had a lot of people ask me is if they can establish 1 bank account for the main LLC, and then just show the transfers to the various accounts on the books. My feeling is no – that will be treated as comingling and will likely cause your liability protection to collapse. I tell my clients that operating a Series LLC is the same amount of work as operating a multitude of separate LLCs with one big exception…
- Cost: Your reward for all that extra bookkeeping is a single structure fee, and a single resident agent fee. If your LLC is located in Nevada, you pay the state fees of $325 plus one resident agent fee, no matter how many subsidiaries you have.
If you are operating in another state, the same would apply. Yes, you’d have two sets of fees (resident agent + annual filing fees), but contrast that to the costs of operating multiple LLCs. In a state like Massachusetts, for example, each LLC will cost you $500 plus resident agent fees per year.
- Ease and Speed of Creation: Once you have the main LLC set up, creating subsidiaries is simple. It’s an internal process. No lawyers, no formation agents… just some documentation and 5 minutes on the IRS website to get a Tax ID number. Your cost is zero ($0) if you do it yourself, and you’re done in less than an hour. If you want 1-hour service for a new LLC in Nevada or Delaware, you’ll pay $1,000 on top of all other fees, plus attorney or service-provider fees, which you can bet will be increased for such a fast turnaround.
These 3 reasons really just scratch the surface of the Series LLC’s possibilities. Be sure to consult with a competent tax advisor who's knowledgeable with the Series LLC.
