Traditional limited liability companies, or LLCs, have long been an effective way for property investors to protect their real estate assets. In 1996, investors began using a new type of LLC called a series LLC. This type of LLC separates assets into different sub-LLCs or series, so it can be an excellent option for investors seeking extra protection for a large multi-property portfolio. But is it the right structure for you? We compare LLCs and series LLCs to help you choose the right option for protecting your real estate empire.
Key Takeaways
- Series LLCs may protect your properties better, as most lawsuits will be against one series, not the entire LLC.
- A series LLC can be more cost effective to set up and comply with tax obligations.
- Maintaining a series LLC is easier, as it bundles all your assets.
- You cannot create a series LLC in some states, and state laws around series LLCs can vary, leading to legal inconsistencies.
- Since series LLCs are new, there’s some uncertainty around their treatment by courts.
Series LLCs May Reduce Liability and Exposure
Since an LLC bundles all its assets together, all the assets are vulnerable if someone files a lawsuit against you. If someone files a suit against a series LLC, in most states, only the assets within the sued series are liable. You can create as many series as you want under the parent series LLC. Each one has its own assets, operations, and members.
However, you must complete the transfer correctly to take advantage of a series LLC’s protective qualities. A series LLC can own property without a series designation if no specific cell gets named in the title transfer. Property that’s not held within a child series is available as an asset for any suit made against the series LLC. It’s also important to note that series LLCs in North Dakota do not separate the liability of each series as series LLCs in other states do.
Setting Up a Series LLC Can Be More Cost-Effective
Another benefit of a series LLC is the money it could save you long before you end up in court. Setting up a series LLC can also be more affordable than setting up separate traditional LLCs to protect your properties. Every new traditional LLC that you file costs the standard fee. Many investors file for separate traditional LLCs for each investment property in their portfolio.
If you have several properties, it’s usually cheaper to file for a series LLC. While the master series LLC usually costs more than a traditional LLC, in some states this fee covers as many different series as you want. In other states, you’ll pay a small amount for each additional series, but you can still be ahead if you have several properties. In these states, the more properties you have, the more cost-effective setting up a series LLC can be.
A Series LLC May Lower Your Tax Burden
If you have separate traditional LLCs for separate properties, each one has its own EIN number and individual tax obligations. A series LLC has just one EIN number no matter how many series you attach to it. That means you can report all your series on a single federal tax return. By streamlining your tax preparation, a series LLC can save you time and money.
This may change in the future, according to Forbes. It notes that the IRS has issued guidance suggesting each series in a series LLC deserves to get treated as a separate entity. If that guidance gets adopted, you’ll need to start filing a tax return for each series within your series LLC. State tax laws also vary. For example, in California, you already need to pay a separate state franchise tax for every series in your series LLC. You should ensure you know the law in your state to meet your tax obligations.
A Series LLC Streamlines Your Maintenance
Maintaining several standard LLCs to protect different properties can be a hassle. A series LLC streamlines the process of creating annual reports and meeting other maintenance obligations, as it bundles all your properties under a single umbrella business structure. If you’re time-poor or simply loathe paperwork, a series LLC can be a great option.
Series LLCs Are Only Available in Some States
Forbes notes that the following states let you set up series LLCs:
- Alabama.
- Arkansas.
- Delaware.
- Illinois.
- Indiana.
- Iowa.
- Kansas.
- Missouri.
- Montana.
- Nevada.
- North Dakota.
- Oklahoma.
- Puerto Rico.
- Tennessee.
- Texas.
- Utah.
- Virginia.
- Washington, D.C.
- Wyoming.
Each state has its own laws around series LLCs. While you cannot create a series LLC in California, this state recognizes series LLCs created in other states. If you live in a location that doesn’t permit series LLCs, traditional LLCs are your only option.
As state laws vary and some states don’t recognize series LLCs at all, there can be legal inconsistencies with these business structures. For example, in some states, you can declare bankruptcy on one series without it impacting the other series, while in other states, a bankruptcy filing would impact the whole series LLC. There may also be different reporting and filing requirements in different states. These inconsistencies can be especially challenging if you have properties in different states.
It’s Unclear How Courts Will Treat Series LLCs
As series LLCs are a relatively new type of business structure, it’s still uncertain how courts will treat cases involving them. That means people who use series LLCs assume some degree of risk until legal precedent proves that they can shield assets in different series as intended. It’s up to you to decide whether the benefits of series LLCs outweigh this risk.
If you want to set up a new LLC, transition to a new structure, or simply learn more about your asset protection options, schedule a consultation with the team at Anderson Advisors. We’re experts in real estate asset protection, so we can answer any questions you have and help you feel confident you’ve got the right strategy in place to protect your multi-property portfolio.
