| There's a lot of talk about Series LLCs. More and | | | | two properties.) Many people prefer series LLCs |
| more people are wondering if they're a smart | | | | because at first glance they appear to be cheaper |
| idea. The short answer is that they aren't - they | | | | to set up. However, this assumption is false. It's |
| haven't been tested, giving them limited | | | | actually more complicated to set up a series LLC, |
| applications if they have any at all. | | | | making it more expensive than the basic type. In |
| First, some background. LLCs alone are an | | | | California you might find a series LLC appealing |
| excellent structure for many different uses. For | | | | because the Franchise Tax Board charges an |
| instance, they work well as a method of holding | | | | annual fee of eight hundred dollars for each entity. |
| high dollar assets like real estate. If you own | | | | Many people think that setting up a single series |
| commercial or rental property, it's important that | | | | LLC means paying only one fee in California. |
| you hold title to that property in an entity. If this | | | | However, the Franchise Tax Board takes the |
| entity (most likely an LLC) is run and managed | | | | position that each series counts as its own LLC |
| properly, it can protect you from any personal | | | | for fee purposes, meaning you'll have to pay the |
| liability. | | | | same whether you set assets up in series or in |
| Many people own a number of different | | | | their own separate LLCs. |
| investment properties. They want to protect both | | | | The biggest problem with series LLCs is that |
| their investments and themselves by placing them | | | | many states (including California) don't have series |
| into one or more LLCs. The task then is scenario, | | | | legislation and may choose to ignore the laws of |
| every investment is held under a different LLC. | | | | the state where the series was created. That's |
| That's not a popular answer for people who have | | | | because you're subject to their rules when doing |
| lots of investments, but it's built on sound | | | | business in their state. The example of the |
| reasoning. Think of LLCs as giant shoeboxes. As | | | | attitude of the California Franchise Tax Board |
| many investment items as you like can be placed | | | | applies to fees, but liability protection is also an |
| inside, but they're all at risk if something happens | | | | issue. Since series LLCs are so new they've never |
| to the box. If a lawsuit happens, every | | | | been tested by courts, even in the states that |
| investment you've placed into that LLC will be in | | | | permit them. That means there's no guarantee |
| danger. | | | | that limited liability protection will be extended to |
| The solution is to separate your investments. | | | | each series until every state rules on the subject. |
| Ideally, you should use a separate LLC for each | | | | It's hard to see how a court would choose to |
| one. If you can't, be sure to examine the equity | | | | grant this kind of protection inside one entity, and |
| you have at stake in every investment along with | | | | only time will tell if courts will do this. But do you |
| its liability potential. Then group them in LLCs | | | | want this type of uncertainty when you are |
| accordingly. As an example, it's not a good idea to | | | | trying to protect your assets? |
| include a single family beach front rental in Maui in | | | | Again, one should be concerned about how series |
| the same LLC as a duplex on the wrong side of | | | | LLCs will be treated by the states that don't have |
| town. You may have several thousand dollars of | | | | laws permitting them. If you set up a series LLC |
| equity stored in the house on Maui, which is placed | | | | in Nevada then register it as a foreign entity |
| at risk by including it in the same LLC as the | | | | conducting business in the state of Massachusetts, |
| rough edged duplex. Keep them separate. | | | | each series in the LLC own a separate piece of |
| However, if you own three single family homes in | | | | property. If there's a lawsuit in regards to one of |
| Idaho, each within about twenty thousand dollars | | | | these properties you can't be sure that the |
| of equity, you might feel that placing them | | | | Massachusetts court will honor the series |
| together is an acceptable risk. But that | | | | structure of the LLC, applying Nevada's law to the |
| segregation strategy can get expensive. | | | | real estate and activities that are located in |
| If you have ten properties, using ten different | | | | Massachusetts. If they do, the claimant can collect |
| LLCs might seem confusing and costly. Series | | | | only against the property in that series. If they |
| LLCs seem to provide a solution as statutes in | | | | don't, the claimant can collect against the |
| certain states allow you to create separate series | | | | properties in other series as well. States are |
| within a single LLC, the debts and liabilities of which | | | | expected to give full faith and credit to legislation |
| are only enforceable against that series. These | | | | of other states, but the answer is uncertain. |
| laws allow LLCs to establish separate series of | | | | Exceptions do happen. It is also important to note |
| interests, members and managers, giving them | | | | that the American Bar Association did a review of |
| separate duties, powers and rights. Those include | | | | series LLCs and declined to endorse them. You |
| the rights to profits and losses with respect to | | | | can be certain that future court cases will take |
| specific property and obligations. In states that | | | | note of this development. |
| have this kind of enabling legislation, each series | | | | Since the laws about creating series LLCs are |
| within the LLC works as a separate entity under | | | | different in every state that permits them, it |
| state law. This is why many people are attracted | | | | might take a long time before enough case law is |
| to series LLCs - they theoretically have the ability | | | | accumulated to give us any level of comfort |
| to shield property in different series from liabilities | | | | about using them. If you want to make sure your |
| incurred in or against one another without paying | | | | assets have good, solid protection, it's a much |
| state fees for multiple entities. This means that an | | | | better idea to avoid corporate structures that |
| LLC containing two properties can choose to place | | | | don't provide reliable protection. Avoid series LLCs |
| each into a separate series, so that liabilities from | | | | as a form of protection until a definitive case law |
| one can't cause problems with the assets of the | | | | is established and rely instead on known, tested |
| other. (Remember the same effect can be | | | | entities such as individual LLCs. |
| created using two different LLCs to hold these | | | | |