Series LLC’s 101: A Primer

Whoever said, “If it sounds too good to be true, it probably is,” wasn’t familiar with a Series LLC business structure.  Increasingly, especially among real estate investors, individuals and business entities around the nation are benefiting from this organizational framework.  For many investors, the primary appeal lies in simplicity, safety and flexibility.  Any nominal drawbacks can be readily addressed, or even proved to be advantageous, with the professional guidance of a asset protection specialist such as Royal Legal Solutions.  Take a few minutes to read the following overview to enhance your business or investment strategies.

DEFINITIONS:

“Series”: 

Another term could be, “child”, “project”, “subsidiary” or “company”.  Picture a honeycomb, as in a beehive, with one or an infinite number of independent “cells”.  For our purposes, the partitions between these “cells” aren’t made of wax, but of solid steel.  Properly constructed, one unit may or may not complement the overall functions of others.  Properly constructed, none rely on others in order to function.  Each is autonomous.

“LLC”:

Once “series” is affixed, another term could be, “parent”, “umbrella” or “the beehive”. Now the bees enjoy economy and efficiency, but the beekeepers and bears can only attack a single, isolated, “cell”, one at a time.  All the other “cells”, the entirety of the beehive, remain in tact.

“The Delaware Model”:   

Barely more than 20 years ago, the Delaware Legislature, lobbied by the mutual fund industry, developed the innovative means to reduce duplicative paperwork, transparency and liability in matters of taxation or litigation.  Presently, at least 16 states, Puerto Rico and D.C. have adopted some form of this legislation.

NOTE: With very rare exceptions, anyone can register a business of any type with any Secretary of State.  Regardless of residency, whether your legislature has adopted the Delaware Model, a variation thereof or none of the above … establishment of, investment in, an SLLC can be available to anyone.

ORIGINS:

There is a unique objective of an SLLC that can provide exceptional advantages compared to a traditional LLC or any other business structure.  As referenced above, back in 1996, Delaware created the vehicle by which a single entity can be managed independently as “one” or operated as an alliance of “many” at the same time.

Texas law is essentially a mirror-image of what many refer to as, “The Delaware Series LLC” … ‘same benefits and advantages, with no requirement for annual renewal fees or paperwork.

Even in states other than Delaware and Texas, there are the same two common denominators.  Existing in the best of both worlds, an SLLC is an LLC with internal departments and an unlimited number of LLC ‘s under one ownership.  There is no distinction as to whether any “member” (“owner”) is an individual, sole proprietor / DBA, corporation, non-profit, partnership, spouse or even human or external LLC.

Only a Few of the Advantages:  (Don’t try this at home.  Hire a professional.)

Barring any violation of law, government regulations or public policy, an SLLC Operating Agreement enjoys “maximum flexibility” and “freedom of contract”.  Members have extraordinary latitude in making their own rules and terms.

There is no pre-determined tax rate or business category. In general, membership may be able to elect to file and pay as sole proprietors, partners, corporate shareholders, non-profits or have the SLLC be the taxpayer of record.  Specifically, of course, the entity must be created in a way that is fully compliant while optimally beneficial.  Tax liability of the whole is limited to individual members’ respective risk, gain, compensation or stake as defined by the Operating Agreement.  “Double taxation” (on the SLLC and the membership) is most often avoided.

Contingent upon, the state’s, “shield laws”, members are generally protected from liability for the acts or debts of the SLLC.  This protection is extended to membership enrollments as few as one.  In the realm of real estate and real estate investment, each property can be treated as separate entities.  One deal gone south, one “slip and fall” lawsuit, should have no impact on the profits of other projects or the members thereof.

The economy of a Series Limited Liability Company is not “limited” to lower tax liability, or the savings in administrative manpower and paperwork.  One filing fee paid to the Texas Secretary of State will put you in business, no matter how many bees or honeycombs there are or may be subsequently added to the hive.  Unlike other states or business entities, to include Delaware, there are no “renewal fees” … annually or at any other time in the state of Texas.

CAVEATS: 

Presently, there are about 15,000 words, about 50 pages and over 600 subsections in the Texas state statutes which govern LLC’s and SLLC’s.  No one can quantify or apply all the associated rules and regulations now in place with federal, out-of-state and foreign agencies.  (e.g., Canada doesn’t even recognize such a legal entity, but Canadians can participate in U.S. SLLC’s.)

Yet consistently, after 2 decades, the innovative “The Delaware Model” (Series LLC) appears to be immune to significant litigation or legal challenges.  With only 5% of the world’s population, the U.S. is home to 80% of the planet’s lawyers.  Regardless, we’re still trying to find many legal cases in which Texas, Delaware or any states’ similar laws have even been contested. *** The only thing better than winning a lawsuit is never having one filed.

Yes, the fundamentals are simple, safe and flexible.  No, they aren’t “idiot-proof”.  Then again, any idiot can avoid any pitfalls:

  • Get a lawyer.  Not just any lawyer, but a specialist who has the credentials, experience and expertise in this very specialized field.  One whose practice is exclusive to the protection of client assets, pre-empting litigation and aggressively defending against any threats to the beehive.
  • As he or she will advise, do not misinterpret the simplicity or flexibility of an SLLC as a license to ignore sound business practice, your own due diligence, responsibilities or accountability.
  • A well-structured and detailed Operating Agreements is secondary only to a sound business plan, reasonable expectations and absolute trust in other members’ integrity.  More importantly, trust yourself and a legal expert.

***      References:

Glenn E. Alphonse, Jr. v. Arch Bay Holdings, L.L.C.; Specialized Loan Servicing, L.L.C.

GXG Management LLC v. Young Brothers and Co, Inc.

(And, by the way, Thomas Lupton wrote, Sivquila; Too Good to be True in 1580.)

 

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