As a real estate investor, you know you need asset protection for yourself. It would be best if you also had asset protection for partners. You need that layer of protection to insulate yourself against any potential liability exposure caused by your partner's actions.
You may trust your partner completely. But when it comes to business, you've got to plan and limit your liability.
There are several entity structures to protect business partners, but in this article, we'll focus on the Series LLC and Delaware Statutory Trust (DST).
A series LLC provides asset protection for partners and you via its novel design. The articles of formation allow a Parent trustee with an unlimited number of series entities.
Each of the series can have individual:
Each series should have an individual name, bank account, bookkeeping, and records. For each series, you can have different partners and other managers. Also, each series entity's rights, responsibilities, and ownership are unique.
In other words, each one of the LLC's entities can act independently of others in the series. That segmented design provides asset protection to you and your partners.
The crucial component of a series LLC is the liability protection it provides for you and your partners. Each series owns the assets in it, and those holdings are shielded from the other entities within the same series.
You can use your LLC to set up a shell company and trusts.
If you use a shell company, you will break your company up into an asset holding company which isolates your assets into individual entities. For instance, the asset holding company would split each property into its series if you have multiple properties.
The second component would be an operations company that handles your company's daily operations. You can shield your asset-holding company from lawsuits; even if you get sued, the operations company holds nothing of value.
If you use a trust, you hide your assets completely. That works because you name an anonymous trust as the owner of the holding company LLC. Anonymous trusts do not need to list their holding publicly, so your assets are virtually invisible to people who would sue you.
You can do this efficiently because you don't have to pay to set up new entities within a series.
All in all, a series LLC provides assets protection for partners and yourself by providing the following:
You can probably save on taxes with a series LLC.
A series LLC is represented in its home state. If your LLC is in a state with no sales tax, you won't have to pay sales tax. For a real estate investor, rent payments between series aren't taxed by the state.
Usually, no matter the number of entities, you'll only file one tax return. Typically, your operating or parent company is the only company you must put on your tax form. You're still paying taxes on the other entities in the series. For filing purposes, you only report as one single entity.
The Delaware Statutory Trust (DST) protects partners by compartmentalizing assets, providing anonymity, and defending wealth from lawsuits.
The DST is similar in structure to a series LLC. Both asset protection vehicles separate assets into individual series. Each major asset can be placed inside its own company. For instance, if you own three properties, you'll have the parent DST with three series beneath it.
With a DST, you have an asset sorted into a separate series. Suppose you and a partner own a property in one of those series and get sued. The damage is limited and contained to that one series.
The legal action does not affect any other properties in your DST.
The DST can help real estate investors avoid California's franchise tax. In most cases, other investors outside of California would be better served using a series LLC.
But California investors are better off using a DST because LLCs and other corporations must pay $800 per entity annual franchise tax.
A DST does not incur that franchise tax because it is classified as an estate planning tool.
You'll buy more properties as you grow your real estate investment portfolio. Each property adds another layer of liability, so it's essential to protect yourself against potential lawsuits and other risks. You might partner with others as you get more properties, and you'll want even more asset protection.
Asset protection for partners and yourself is secured using an asset protection vehicle. A series LLC or a Delaware Statutory Trust (DST) are among the best ways to protect you and your partner.
Both an LLC and DST provide similar protections through anonymity, asset isolation, and asset protection.
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Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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