Diane and I did a teleseminar this evening on how using a Series LLC is beginning to pay off for many of our clients. We went through five different uses for the Series LLC, including one where we substituted a Series LLC in the place of a traditional Family Limited Partnership, and why that might be a safe and economic choice.
I see family limited partnerships used all the time. Mom and Dad run the partnership, amass assets, and slowly transfer their assets over to the kids. The partnership agreement is written very carefully, to make sure that divorces don’t wind up diluting the partnership assets to ex-spouses (usually this means that an ex spouse is paid a dollar amount in lieu of receiving part of the other spouse’s limited partnership rights), and grandchildren, etc., are provided for.
One of the limitations of a limited partnership has been the liability that sticks to the General Partners – i.e., Mom and Dad. Unless they structure the FLP carefully, and perform their General Partner activities through a second entity, mom and dad can unwittingly create a hole in their asset protection structure. Remember, General Partners remain personally liable for the debts and acts of a limited partnership. That’s why we always recommend that anyone with a limited partnership set up a separate corporation or LLC as the General Partner, and provide services through that entity. That way, the General Partners can still receive personal liability protection.
Of course that means you wind up running two structures, have two tax returns, two annual filing fees, two resident agent fees, and so on. Using a Series LLC instead, mom and dad can get rid of the need to buy and maintain a second structure. That’s because the Series LLC can establish subsidiaries at no additional cost.
It gets better, though. If the Series LLC is set up properly those subsidiaries will each have full liability protection from each other. Now Mom & Dad can divide up their pool of assets into different subsidiaries, rather than lumping everything together in a single entity (risky!) or creating multiple LLCs underneath a limited partnership (expensive!).
Here’s another idea: what if you had several kids some of whom were interested in learning about investing, while others weren’t?
You could encourage your budding entrepreneurs and keep the family assets safe at the same time with a Series LLC. By creating one or more subsidiary cells to hold the bulk of the family assets you can stay in control. But you can also set up one or two other subsidiaries, and put an asset into each. Then, you can work with your kids, one-on-one, who are interested in learning. You might find one child grabs hold of the ideas and grows his or her starting asset into an empire. Another may be more content to let her starting asset appreciate slowly, while another may be more interested in converting that asset into cash and investing in a different type of business.
That’s the neat thing about a Series LLC. It’s so flexible, it can be shaped just about any way you can imagine.