Real Estate Investors & the Series LLC


This post is in: Real Estate
16 Comments

5-5-11

Real estate investing is heating up.

I’ve been working with the Series LLC for a few years now. During that time I’ve gone from being a skeptic to being an enthusiast.

For those of you wondering, a Series LLC is a regular LLC with a twist – it can have an unlimited number of subsidiaries (called Cells), and each subsidiary is treated as a separate structure where liability is concerned – if you set the structure up and run it properly. So far eight states have Series LLC legislation on the books (Delaware, Illinois, Iowa, Oklahoma, Nevada, Tennessee, Texas and Utah). But even if you don’t live or own property in one of those states, you can still use a Series LLC by qualifying it to do business in the state(s) where you want to operate.

I think this is perhaps the ideal structure for real estate investors (and anyone else) who wants to keep their assets safe without spending all the profit on legal structures.

Here are my 3 favorite reasons to use a Series LLC with real estate:

  1. Protection. It’s written into the legislation in each of the 8 Series LLC states. Do it right, and you have liability protection between each cell. So – if you’ve got a big portfolio, you can drop one or more properties into each cell and receive protection. Creditors on Cell 1 can’t come after the property in Cell 3, and so on. Under each state’s legislation, “doing it right” means properly documenting the creation of each cell. That means Resolutions at the main LLC level, establishing the Series Cell. It also means each Cell needs to have its own Operating Agreement, designating its own Managers and Members. Each cell needs to keep separate accounting records, get its own Tax ID number from the IRS, and maintain a separate bank account.

    Something I’ve had a lot of people ask me is if they can establish 1 bank account for the main LLC, and then just show the transfers to the various accounts on the books. My feeling is no – that will be treated as comingling and will likely cause your liability protection to collapse. I tell my clients that operating a Series LLC is the same amount of work as operating a multitude of separate LLCs … with one big exception.

  2. Cost.Your reward for all that extra bookkeeping is a single structure fee, and a single resident agent fee. If your LLC is located in Nevada, you pay the state fees of $325 + one resident agent fee, no matter how many subsidiaries you have.

    If you are operating in another state, the same would apply. Yes, you’d have two sets of fees (resident agent + annual filing fees), but contrast that to the costs of operating multiple LLCs. In a state like Massachusetts, for example, each LLC will cost you $500 + resident agent fees per year.

  3. Ease and Speed of Creation. Once you have the main LLC set up, creating subsidiaries is simple. It’s an internal process. No lawyers, no formation agents … just some documentation and 5 minutes on the IRS website to get a Tax ID number. Your cost = $0 if you do it yourself, and you’re done in less than an hour. If you want 1-hour service for a new LLC in Nevada or Delaware, you’ll pay $1,000 on top of all other fees … plus attorney or service-provider fees, which you can bet will be increased for such a fast turnaround.


16 Comments

  1. Megan Hughes says:

    Hi David,

    I like the Series LLC when you’ve got properties spread out everywhere.

    Where you put those costs will depend on how you structure the Series. If you use the top one as kind of your property management/investigation arm, with the properties actually held in subsidiaries, then what you’re suggesting would probably work. Talk with your tax advisor/preparer to be sure though – they may have different ideas!

  2. David says:

    I currently own 1 business property and will be getting more in the future in different locations, so I’m thinking a Series LLC is the best way to go (correct?). If each property becomes its own cell (Miami cell, Boston cell, etc) would the Main LLC be the vehicle for the costs associated with prospective (don’t own them yet) properties?

    Thanks for the informative blog.

  3. Megan Hughes says:

    Hi Donna,

    There are always lots of questions around guaranteed payments! I think that’s because the rules aren’t always clear. If I take a guaranteed payment in my capacity as a Manager of an LLC, for example, then can I also take a portion of the LLC’s remaining profit as a distribution? There’s lots of back and forth on that issue between tax professionals, and the IRS isn’t as clear as it should be on the issue.

    Definitely talk with your advisors before proceeding, to get the pros and cons of the guaranteed payment scenario. And if you need an advisor, feel free to contact us, at 866-829-2368 (ask for Richard).

  4. Megan Hughes says:

    Hi Bobby,

    Land trusts have been abused in some states, and aren’t very welcome in others because of that. Personally, I like the LLC route. It does offer a great amount of anonymity for the Members – and even the Series subsidiary Cells themselves (unless you are in Illinois or use an IL Series LLC, where you report the Cells to the Secretary of State).

    There’s always going to be plenty of administration. To make the asset protection work you’ve got to keep separate records between each Cell, and keep a separate bank account. Depending on the ownership of each Cell, they may have to file separate tax returns.

    Okay, now time for a shameless plug! Have you checked out our product on the Series LLC? It’s this week’s promotion on our home page. It may help to explain things further and let you draw a better comparison to find out which one works for you!

  5. Donna says:

    What is the best way for a Series LLC (possibly single member, not determined yet) with passive investors to paid/compensated throughout the year? I’ve been told an operating agreement should be drawn stating that a percentage of the profits during the first year’s will be used for reimbursement(salary).

    What I’m really asking is should a line item (guaranteed payment?) on the operational expenses be presented to investors?

  6. Bobby says:

    Hi Megan,

    I currently have a Delaware LLC with multiple properties under one Land Trust each. Properties are held in five other states. Would you say using a Series LLC better than the Land Trust route? What I need to accomplish is keeping my partners private, avoid personal liability, protect each property under the one LLC from each other, and ease of administration.

    Thanks,

    Bobby

  7. Megan Hughes says:

    Hi Paul,

    Nevada has no specific legal naming convention, but the Illinois approach [Main Series LLC Name], LLC – {Series name] Series, is always a good bet. You can file a d/b/a if you want, to just do business in the name of the Series. That makes it easier for banking, etc.

    The folks that prepared your Series LLC should have provided you with documentation to create new Series Cells — have you spoken with them? Typically you’ll want: Resolutions authorizing the creation of the Cell, and then a Cell package, which would be its own Operating Agreement, Organizational Resolutions, etc.

    Your Series LLC agreement should already give you the authority to create Cells without having to amend the main Operating Agreement. Again, talk to the folks who did the initial creation, and make sure they did it properly.

  8. Paul says:

    I have few rental properties in NV. Now I know how to setup a LLC as a Series LLC. Let us say I created a series LLC Named “SKY KERALA Properties, LLC”. How should I name the cell LLC for a property located on “123 Honey Lake St, Las Vegas NV” . After reading I should have cell LLC should follow the name of the main Series LLC “SKY KERALA Properties, LLC”
    Question for you
    1. How do I name my cell LLC based on the following example
    2. How do I modify the operting report stating that have few cell LLC?
    3. What documents needed to add a new cell
    Any help is really appeciated
    Thanks,
    Paul

  9. Megan Hughes says:

    For taxes, it’s pretty much a wash. Legally, it’s about the same, too. You can change ownership at any time internally though, so in the long run, no matter what you are free to do what is best. If you’re working with an attorney in Illinois, you may want to run the question past him or her, for their take on it.

  10. Raja says:

    A follow up question on my previous post.
    Say I have Main SM Series LLC “A LLc” owned by me exclusively and has a “Green Series” child Cell.
    Which is more benifitial?
    1.to have the “A LLc – Green Series” owned by me 2.to have the “A LLc – Green Series” owned by the “A LLc”

    Thanks in advance for the information.

  11. Megan Hughes says:

    Hi Raja,

    Yes, you can do that. It’s a great way to get legal protection, yet still keep your taxes relatively uncomplicated. But you will still need to treat each Series individually, with separate records and separate bank accounts. They will only consolidate for the purpose of the tax return.

  12. Raja says:

    Can there be a Single Memeber Series LLC where the main SMLLC is owned by just one person and all the other cells are owned by the Main LLC and in turn own Real estate properties?

    I am looking to open one such in IL to own properties.

    Thanks for all the useful information in your website and blog.

  13. Diane Kennedy says:

    Foreign investors pay the same tax that Americans do – income tax on net proceeds and capital gains tax on sales proceeds.

    There is often federal mandatory withholding on the gross rents and sales proceeds. These aren’t additional taxes, just withholding to be applied when you file a return. It is possible to avoid the withholding. Consult with a US CPA who is experienced in US investments held by foreign investors.

    As far as where the tax is due – the state in which the property is will likely require a state tax return and payment on income/gains and of course the IRS wants to get paid for the federal.

  14. Steve770 says:

    What about foreigners investing in US Real Estate?
    What taxes will they have to pay on their profits and where?

  15. Megan Hughes says:

    Hi Norm,

    So far, no courts have negated the asset protection in a Series LLC because a property is in a state with no Series LLC law. But, at the same time, I’m not sure if there’s been a court case specifically testing that. So, it’s always something to proceed with cautiously, and with some legal advice.

    If you were using a Cell to hold property outside of the USA, then it would be good to keep it separate.

    If you set up the Cells so they are owned by the main LLC, instead of you, and elect disregarded tax treatment, then yes, you can roll everything up onto a Schedule E.

  16. Norman Long says:

    Clarification: A series LLC with cells for each property I understand. I also understand the 8 states where they are valid. But if the properties are in locations outside those states, what happens? Protection or not?

    I live in Texas and have a rental property there. If I registered a Series LLC Texas, I assume I am protected. But if I also have a property outside of Texas and outside of one of the other 8-States, am I still protected?

    What if I own rental property in another country? Would I add that as a cell?

    Finally, are the properties under a Series LLC “owned” by the LLC or can they be leased to the LLC for rental purposes, retaining the Sch.E pass-through of paper losses partially based on income or totally based on REP status? -Norm

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