At the end of this blog, I’m going to go over two possible issues with the Series LLC. So, please make sure you read all the way through if you’re exploring the Series LLC for your real estate investments.
Asset protection concerns in a litigious society, skyrocketing state fees and aggressive IRS issues have brought us to this point. Let’s go through these issues, one by one, and see how a Series LLC might fit into to your overall business structure plan.
- Asset protection. If you have 10 properties that you put all in one entity, you have protected yourself against something that might happen with the properties. And you have protected the properties from a personal judgment. But you haven’t protected the properties from each other. In other words, if one property has an issue that results in a judgment, then everything inside that entity will be fair game for the creditor.
The solution is to separate out the properties. But that would mean 10 different structures and that’s cumbersome and expensive.
With a Series LLC, you can set up each property inside a cell. The cells are set up without a separate registration fee and you don’t have to pay anyone to do that work. You can easily do it yourself. A warning here though: Do not do-it-yourself on the Series LLC formation. These are tricky and you need an expert for that. But once it’s done, you’re through FOREVER with paying for formation.
- Skyrocketing state fees. One thing you can be sure of in today’s economy is that state fees are going up. They’ve already taken a jump in many states and as money runs out, the recession effects trickle down to the states and the economic stimulus money runs out, look for more fees. That’s one of the best parts of a Series LLC. You’ll save a lot of money. That’s because you don’t need to register the cells. No registration means no fees.
- Tax Considerations. In the past, we’ve used Limited Partnerships to hold real estate. There is one possible issue that we’ve warned our clients about for years, now, though. The issue is that a Limited Partnership, by definition means that you have a general partner and a limited partner. The general partner has full control and risk. The limited partner has no control and no risk outside of his investment.
- The Series LLC allows maximum asset protection with active participation.
So the asset protection strategy is to hold as much value in real estate as a limited partner.
But there are two problems with this strategy. First, that means you need one more entity to hold the general partner ownership. And secondly, the IRS might not let you take a real estate loss because you must have active or material participation. And by definition, as a limited partner, you can not.
A recent Tax Court case may indicate otherwise, so it’s a little confusing exactly what you may end up with.
Now the warning: California wants you to pay for each cell. So, if you live in CA or have investments there, talk to a professional. And in Illinois, a Series LLC must register the creation and dissolution of every cell, although the registration costs are minimal.
Intrigued by the Series LLC? We love it! Learn more about how you can save money and get better asset protection as part of our Coaching program.
We had a standing room only coaching session this past month on Series LLCs. If you haven’t yet become a coaching client, now is the time.
If you sign up for US Tax Aid Coaching for just $67 per month by 5 pm Pacific on Friday, you’ll be able to participate in both of March’s coaching session PLUS get a copy of the Series LLC course ($99 value) and Nexus Handbook ($99 handbook)
You must sign up by Friday at 5 pm to take advantage of this special offer, though.