Real Estate and the New Series LLC

A national trend is emerging. Today, more LLCs than corporations are being formed in America.

Necessity is said to be the mother of invention. Due to the simplicity, protection and flexibility of the Limited Liability Company (‘LLC’), some states are beginning to adopt the new LLC ‘series’ form. Delaware, Nevada, Oklahoma, Iowa and now Illinois have embraced the new ‘Series’ LLC, starting with the concept of ‘cell’ captive insurance companies used offshore 10 years ago. It may be well-suited for certain commercial and investment properties — such as high-income real estate, aircraft leasing, container assets such as tankers and cargo ships, franchise businesses (ie, many fast-food outlets), shipping and delivery vessels, and commercial Companies with operating divisions that need to increase their liability shield to protect one division better than another.

The concept makes sense.

For property owners, using multiple LLCs is a conservative and safe route. However, instead of registering a traditional LLC, creating a new ‘Series LLC’ may be a smarter route for real estate investors. The concept is simple. It is based on the cell captive insurance company model used in other countries.

Although an LLC is formed as part of a ‘mother ship’, each separate cell within it (called a series) can be considered separately, and each can hold its own assets and operate as a separate business entity. The idea behind the law is that as long as the guidelines are followed, the liability of one cell does not infect another.

So now, instead of using land trusts or multiple traditional LLCs, a less expensive option may be to hold or maintain multiple leases in one series LLC and roll it out – with a different business name for each cell in it, ie ‘Valley Properties LLC Series I or Series II or Series III’. or ‘Valley Properties LLC Series A or Series B or Series C’ for example. This simplifies the formation and reduces legal and tax costs, because there is only one registration with the government and one unified tax return is prepared. To keep the paper clean, each series separates itself from the others in all business and rental transactions – lease and rental agreements, deposits, bank accounts, etc. ‘Mother Ship’ LLC or any other successor. Of course, it will need to register as a ‘foreign’ company in any state where it holds property – but only once.

Working out the numbers.

Real estate investors ‘do the numbers’ every day. Finding an investment property, maintaining it, promoting and insuring the property, attracting stable tenants, maximizing tax benefits and managing cash flow are all part of how to build an income-generating real estate portfolio. To save costs, instead of paying for multiple ‘traditional’ LLCs, consolidating into one ‘Series’ LLC can provide significant cost savings.

Let’s look at an example. If an investor owns 20 properties and uses the new series LLC, though the franchise tax savings are applied in multiple entity formation costs and tax preparation can be beneficial. The difference is better spent finding more profitable rental properties and marketing to new paying customers, don’t you think?

What else should be considered?

o An Illinois-style land trust (sometimes called a ‘real estate privacy trust’) is effective at protecting privacy and avoiding probate, but it is not a liability shield. It’s just a ‘privacy mask’. Some real estate investors have used multiple real estate trusts built around LLCs in the past to avoid franchise tax payments, but now that the series LLC has arrived, this practice will disappear like an 8-track tape and a beta video system. With a series LLC, you can have privacy and protection in one entity.

o Using a Series LLC doesn’t make sense if there are many unrelated parties – because the process can be a burden to your accountant. Above all, simplicity is what lies behind the new Series LLC. Real estate investors want to use the S Series LLC as a preferred form of ownership, especially if the LLC members are sole proprietors, spouses, perhaps a family trust or a family limited partnership.

o After your Series LLC is registered and the members have signed the Operating Agreement, make sure you sign a separate ‘Series Agreement’ for each cell you choose to use. To reinforce the quality of each series or “cell”, all future transactions must reflect the name of that series. As long as the income and expenses are prepared separately (perhaps using Quicken® or QuickBooks®) and a single consolidated tax return is prepared, multiple properties under the same ‘mothership’ umbrella (Sub-Sub-Series One, Series Two, etc.) will cover each series. It makes it easy to track income, expenses, tenants, payments, property taxes and profits.

Where should I form my Series LLC? So far, seven (7) states have accepted the Series LLC. However, four (4) other states have passed legislation that limits creditors of LLCs to the ‘sole legal remedy’ known as a ‘charge-off’ (legal right on distribution). However, out of all 50 states, only Nevada has done both. Once your new LLC is formed, if you intend to use it in another state, simply register it as a ‘foreign’ (out-of-state) company with that state’s registry office. Once registered for business, we can show you a smart way to protect your liability risks and legally manage your tax costs so that you can have more savings in your retirement accounts for the future.

Then, in your trading transactions, be sure that each series is clearly distinguished from the others. Treat it like a separate business. Consider using brokers, different lenders, and possibly different banks, just to make sure each series is different. Lease agreements and all other paperwork should reflect the series design to make it clear that the lessee is not doing business with the LLC ‘mother ship’ but as a separate series business entity.

Looking at the ‘big picture’.

Forming an LLC to hold investment property is a positive step in the right direction. However, it is a step. Keep the ‘Big Picture’ in Mind: What are you trying to achieve by investing in real estate in the first place? You are trying to build and maintain secure wealth that will provide you with cash flow and a future for your loved ones. Remember that every property you acquire is part of a dynamic construction process. They are using a system to find, acquire and finance each property. Use the tools that empower you and don’t get overwhelmed by the little details that can sidetrack you if you let them. Use professionals for tax preparation, property acquisition and financing, and adding to your portfolio with focus and discipline. Use professional advisors as a support system, but remember that they are working for you so you can enjoy what you do best – find more profitable real estate.

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