For those unfamiliar with a Series LLC, think of it as one company with multiple subsidiaries. Each subsidiary operates as a separate entity with a unique name, bank account and separate books and records, separate liabilities, and possibly even different owners and or managers. However, unlike a traditional parent-subsidiary relationship where each subsidiary is a separate legal entity requiring its registration with the state, the Series LLC subsidiaries (hereinafter “Cells”) are formed without any additional registrations, i.e., articles of organization, fees, resident agent (Illinois and Wyoming are exceptions). Essentially you set up one LLC and have the ability to create multiple subsidiaries to hold your various properties without having to incur any additional state fees. The cost savings and flexibility of the Series LLC structure makes it attractive to buy and hold or flip real estate investors. Here are two examples:
Kevin establishes a Texas Series LLC (hereinafter “Parent LLC”) for his buy and hold investments. After creating the Parent LLC, Kevin creates eight Cells, one for each of his rentals. Each of the Cells is set up with Kevin as the manager and the Parent as the sole member. Once the setup is complete, and the properties are deeded into the Cells if anything happens with one of his properties, all of Kevin’s other assets are protected. Only the assets of the Cell where the issue developed are reachable by the Cell’s creditors. The profits will flow to Kevin through the Parent LLC.
Brenda plans to flip real estate in Texas, and like Kevin, she establishes the same structure. In Brenda’s situation, she will elect to treat the Parent LLC as a C-Corporation for federal tax purposes to avoid “Dealer Status.” Each flip will be held in a separate Cell; then, after closing, Brenda will dissolve the Cell.
Kevin and Brenda each benefit from the Series LLC because it provides asset protection for their investment activity while minimizing their overall expense to maintaining just the Parent LLC.
Where to Use a Series LLC
Unfortunately, not all states recognize the Series LLC. The biggest mistake an investor can make is attempting to use a Series LLC in a state not recognizing its unique form. For example, if Kevin placed his Florida rentals in different Cells, the moment tragedy strikes one of his properties, Kevin’s Parent LLC will come under attack. The Cell structure Kevin created for his properties will be ignored, and all of the investments will be put at risk. Currently, the following states recognize the Series LLC structure:
Alabama, California (California does not recognize the Cell as a separate entity except for Franchise tax purposes.), Delaware, Dist. of Columbia, Illinois, Iowa, Kansas, Missouri, Montana, Nevada, North Dakota (North Dakota allows series LLCs, but does not explicitly provide for a liability shield between the different series.), Oklahoma, Tennessee, Texas, Utah, Wisconsin (Wisconsin allows series LLCs, but does not explicitly provide for a liability shield between the different series.), and Wyoming.
Assets Unsuited for a Series LLC
Despite the attractiveness of the structure, its use is best limited to single-family investments. Commercial or multifamily investments should be placed in their LLC. These asset classes typically involve closing in the entity name, and lenders, unfamiliar with the Series LLC, may refuse to close. Similarly, when the asset is later sold, the buyer’s lender or title could balk, and your sale could be thwarted.
The Series LLC is an extremely flexible entity with many uses for real estate investors if adequately established and maintained. If you are entirely risk-averse, then creating individual LLCs for each property represents a more conservative approach, albeit for a higher cost. Ultimately the use of a Series LLC comes down to where and how you plan to invest.
By Clint Coons, Think Realty Magazine