A limited liability company (LLC) is a popular way for real estate investors and other entrepreneurs to file a business entity. The LLC offers owners more flexibility than other types of businesses entities. As its name implies, an LLC also affords owners limited liability that can protect them from incurred debt or lawsuits.
The Series LLC is a type of LLC that has been around since 1996, originally starting in Delaware. The Series LLC has become popular because more and more states are allowing these companies to operate. Similar to a corporate umbrella, a Series LLC has a “parent” LLC with one or more “child” LLCs that are filed beneath it.
How does the Series LLC stack up against the traditional LLC? Keep reading to find out!
I know that sounds weird. I'll explain.
Series LLCs allow a company to separate and “box” specific assets into various sub-LLCs to isolate them from each other. If a lawsuit is brought against one of the LLCs, the assets and earnings of the other LLCs are shielded from legal consequences.
Below the Series LLC, you have the series themselves. You'll have series A, series B, etc. The series are what I refer to as the "children," because they all come from the original Series LLC parent. In this way, the Series LLC looks like a family tree.
Let's say you have one Series LLC, a company you will form in the state of Texas. When you form a real estate LLC in Texas it will be recognized as a legitimate company inside of that state. However, unlike most LLCs, yours will outline special provisions in its operating agreement.
And it is through these special provisions that your LLC will have the ability to become a series and have "children". By children, I mean companies within a company. Separate, yet equal.
With a Series LLC, you're able to create as many "children" as you want. Each child is known as a series. This is a powerful advantage because each series is treated separately for liability purposes, just as if it were its own LLC.
As an investor, it's important that you do this from an asset protection point of view. As the saying goes, "never put all your eggs in one basket". I personally think the Series LLC is better than the regular LLC.
A traditional LLC and a series LLC follow the same formation regulations. Articles of formation, and any associated fees, must be filed with the appropriate government body. Most states also require an operating agreement. Both versions of the LLC protect owners from liabilities. Additionally, they do not limit the number of stakeholders or owners and permit non-US citizens to take part in the company.
Compared to a normal LLC, A Series LLC is:
And best of all, you'll be able to file each one of your series (no matter how many you have) on the same tax return. This means thousands of dollars a year in tax preparation savings for you.
How can a Series LLC reduce startup and ongoing administrative costs? For example, if you file for a traditional LLC in Kansas, the fee is $160. If you file for a series LLC, the master will cost $250 and each series will be an additional $100. If you want to protect three separate assets from debt and litigation, under a Series LLC, this will cost you $450. To get the same protection from a traditional LLC, you would need to file three separate LLC entities, for a total of $480.
Another great advantage of the Series LLC is that it receives one EIN Number (Tax ID), which is filed underneath the company name. (You won't have to use a new EIN number for each series you create.) This allows you to streamline your tax preparation so you don't have to file taxes for each individual company.
Series LLCs are not recognized by every state. Those that do recognize and permit the formation of a Series LLC may have varying laws that dictate how to do so.
Other states, like California, do not permit Series LLCs to be formed but do recognize those legally established in other states.
It comes down to risk tolerance.
Some people think if a series was subject to a lawsuit that it wouldn't be recognized in a state that doesn't formally have a law regarding the usage of series. And if a series isn't recognized in a lawsuit, you'll lose all your legal protection. This means someone's attorney will "go to town" on your assets.
Unfortunately, there haven't been many cases regarding the recognition of a series from state to state. But there are a lot of good reasons and precedent suggesting a Series LLC would be recognized in any state. For example, states already recognize LLCs formed in other states.
At the end of the day, a Series LLC is still an LLC.
You can always form a regular old-fashioned single-purpose LLC. However, these are more expensive than a Series LLC if you're looking to separate your assets.
If you know what the LLC costs, you may be wondering how are they more expensive? Well, you have to pay for the tax preparation for each one of those companies at the end of every year. Then you'll get a nice bill for those LLC fees too. You'll have to pay formation fees, operations fees, management fees, and registered agent fees for each LLC you create.
Those fees will cost you about $1000 every year.
In the end, all you can do is weigh your odds and consider the risk. How do you feel about the Series LLC versus the regular LLC? Let me know in the comments below, I'd love to hear your opinion as a fellow real estate investor.
A Series LLC is just like a parent, so it can have as many children as it wants (unlike a normal LLC). And this might surprise you, but just like in real life, these children don't cost any extra money to create. That's true before AND after they're born.
Whereas, if you want to put 10 properties in 10 normal LLCs, you'd have to pay state filing fees for each LLC you form.
Each series in a Series LLC is going to be treated for liability purposes as if it were its own LLC. You can take advantage of this by putting one property in each series/child.
This means if you ever have a lawsuit resulting in some type of action against a house belonging to series A, it won't affect the houses held in series B or C, etc.
I forgot to mention, do you like doing joint ventures? The Series LLC is perfect for doing joint ventures!
For example, series C could be a joint venture agreement with as many people as you would like without involving the other series. It'll have its own EIN number, tax return, and its own operating agreement to conduct the business of your JV agreement.
Royal Legal Solutions can provide professional guidance to help you make the most of your entrepreneurial dreams. Our staff understands the nuances of state laws throughout the United States and Canada. As experts, our experience can help you avoid accidentally violating the various regulations your company may encounter and maintain your limited liability.
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.
Ready to know more than your attorney? You'll get over two hours of instruction combined with five ebooks to teach you how to best structure your real estate investments.
Join thousands of real estate investors in all 50 states as they enjoy exclusive content, special promotions, and behind-the-scenes access to me and my guests. No spam, ever. Just great stuff!