There is a growing national trend. Currently, more LLCs are formed in the US than corporations.
Necessity, it is said, is the mother of invention. Given the simplicity, protection, and flexibility of a Limited Liability Company (‘LLC’), several states have begun adopting the new ‘Series’ LLC form. Starting 10 years ago with the concept of a ‘cell’ captive insurer used overseas, the states of Delaware, Nevada, Oklahoma, Iowa, and now Illinois have embraced the new ‘Series’ LLC. It may be particularly well suited to certain types of business and investment holdings – such as dual income generating real estate, aircraft leasing, container vessels such as tankers and cargo ships, franchised business enterprises (i.e. some fast food stores), trucking and transportation fleets, and companies that have operating divisions that need to improve liability shields to better protect one part of a business activity over another.
THE CONCEPT IS SENSE.
The use of multiple LLCs for property owners is a conservative and safe way to go. However, instead of registering a traditional LLC, forming a new ‘Series LLC’ may be a smarter way to find real estate investors. The concept is simple. It is based on the Cell Captive Insurance Company model used in other countries.
Even though a single ‘carrier’ LLC entity is formed, each separate cell within it (called a series) can be counted separately, and each can own assets and operate as a separate business company. The idea behind the law is that one cell’s responsibility does not infect others as long as guidelines are followed.
So now, instead of using traditional land trusts or multiple LLCs, a less expensive option might be to hold multiple rentals or fix-and-flip properties in a single Series LLC – giving each cell within it a separate business designation, i.e. ‘Valley Properties Series LLC. I or Series II or Series III’ or ‘Valley Properties LLC Series A or Series B or Series C’ for example. This simplifies formation and reduces legal and tax costs, as only one registration is done with the state and one consolidated tax return is prepared. To keep documents clean, each series must separately identify itself as different from the others in all business and tenant transactions — including lease and lease agreements, deposits, bank accounts, etc. on behalf of that particular series as opposed to an LLC ‘carrier’ series or any other series. Of course, he must register as a ‘foreign’ company in any other state where he owns property – but only once.
WORK WITH NUMBERS.
Real estate investors ‘work the numbers’ every day. Acquiring investment properties, making repairs, advertising and insuring properties, attracting stable tenants, maximizing tax advantages, and working on cash flow management are all part of how you build an income-generating real estate portfolio. To save costs, rather than paying for multiple ‘traditional’ LLCs, consolidating through one ‘Series’ LLC can offer significant cost savings.
Let’s consider one case example. If an investor owns 20 properties and uses a new Series LLC, even if franchise taxes are applied, the savings in the cost of forming multiple entities and preparing taxes may be significant. The difference could be better spent acquiring more revenue-generating rental properties and marketing to new paying customers, don’t you think?
WHAT ELSE TO CONSIDER?
o Illinois-type Land Trusts (sometimes called ‘Real Estate Privacy Trusts’) are effective for protecting privacy and circumventing probate, but they are not liability safeguards. It’s just a ‘privacy mask’. Some real estate investors in the past have used multiple real estate privacy trusts built around an LLC to save on franchise tax costs, but now that Series LLC has arrived, that practice is fading away as are 8-track recording and Beta video systems. With Series LLC you can have privacy and protection in one entity.
o Using a Series LLC does not make sense when there are a large number of unrelated parties – as flow considerations may be quite a burden on your accountant. After all, simplicity is what’s behind the new LLC Series. Real estate investors will want to utilize Series LLCs as their preferred form of property ownership, especially where the LLC members are sole proprietors, a married couple, perhaps a family trust or family limited partnership.
o Once your Series LLC is registered and Members have signed an Operating Agreement, be sure to sign a separate ‘Series Agreement’ for each cell they choose to use. All future transactions must reflect a specific series name so you reinforce the ‘separate’ quality of each series unit or ‘cell’. As long as income and expenses are recorded separately (perhaps using Quicken® or QuickBooks®) and one consolidated tax return is prepared, the fact that many properties fall under the umbrella of one ‘mothership’ (sub-designated as Series One, Series Two, etc.) makes it easy to track income, expenses, tenants, fees, property taxes, and profits from each Series.
WHERE SHOULD I FORM MY SERIES LLC? About seven (7) countries have so far adopted the Series LLC. However, four (4) other states have adopted laws that strictly limit LLC creditors to the ‘sole remedy’ known as a ‘filling order’ (passive lien on distributions). However, of the 50 states only Nevada does both. Once your new LLC is formed, if you will be using it in another state, simply register it as a ‘foreign’ (out of state) corporation with the secretary of that state’s office. Once registered to do business, we can show you smart ways to keep your liability risks in check and legally manage your tax expenses so you have more to put in your retirement account for the future.
Thereafter, in your business dealings, ensure that each Series is clearly separated from the others. Treat it as a separate business. Consider having each series use a separate broker, separate lender, and possibly a different bank just to make it clear that they are separate. The lease agreement and all other documents must reflect the series identifier so that it is clear the lessee is not doing business with the ‘mothership’ LLC but rather with one particular Series as a distinct business enterprise.
VIEWING THE ‘BIG PICTURE’.
Forming an LLC to own investment property is a positive step in the right direction. However, it is one step. Keep the ‘big picture’ in mind: what do you hope to achieve by investing in real estate? You’re trying to build – and maintain – a secure fortune that provides you with cash flow and a future for your loved ones. Remember that every property you acquire is part of a dynamic building process. You use the system to find, acquire, and finance each property. Use tools that empower you and don’t get overwhelmed by small details that can distract you if you let them. Use the professionals for tax preparation, property acquisition and finance, and continue to add to your portfolio with focus and discipline. Use professional advisors as a support system but remember they are working for you so you can enjoy what you do best – earn more income generating real estate.