The Good News and Bad News About Series LLCs

I received a simple question a few weeks ago, “Does a Series LLC still work?” The answer isn’t as simple, unfortunately. Let’s start off with a definition of what the Series LLC actually is.

What is a Series LLC?

A Series LLC is a form a limited liability (LLC). In this case, you are allowed to separate membership ownership, assets and operations into independent series members (or cells). Each series operates like a separate entity with a different bank account, separate books and records. The cells can even have different owners and managers and different tax structure.

There are several important differences with a Series LLC. Each series (cell) has their own separate liability protection. In most states, you don’t need to register the separate cells so there is privacy as well. And, again, in most states, you don’t need to pay an additional fee per each cell.

So, they are cheaper.   

Which States Have Series LLC Law?

Series LLCs continues to gain acceptance, so make sure you check to see if your state now has Series LLC law. Currently, these states have Series LLC law:

Alabama, Arkansas, Delaware, District of Columbia, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, North Dakota, Oklahoma, Puerto Rico, Tennessee, Texas, Utah, Virginia, and Wyoming.

Other states have enacted statutes that recognize the Series established in other states. Again, check with your state to see the status.

The Problem With Series LLCs

There are a couple of possible problems with Series LLCs.

First, the American Bar Association (ABA) declined not to endorse the Series LLC. It doesn’t mean they condemned them. It just means that they didn’t endorse them.

Second, the IRS has not given us clear-cut law on how taxation works with the series (cells). They have issued a Private Letter Ruling (PLR) which allows each series (cell) to be taxed differently than each other cell and the master Series LLC. But a PRL isn’t law in and of itself. However, there is nothing that says they can’t be separate.

In my opinion, both issues aren’t huge problems. It would be better if the ABA and the IRS gave us an answer with certainty as to asset protection and how each entity choice works, but they haven’t said that we can’t have those things.

There is also the contention that the Series LLC costs more than a regular LLC. In a few cases that could be right, mainly if you use the Series LLC in California. (Of course, it had to be California!) In that case, California wants you to pay the $800/entity fee for each separate series (cell). Plus, you would have to pay the filing fee in the state in which you set up the Series LLC. Barring those issues, though, the Series LLC isn’t more expensive. Just stay out of California!

From Attorney William Bronchick

Real estate investors are quite possibly the most common users of Series LLCs. The structure allows them to protect each property separately for a lot less cost (unless you live in California).

Since real estate investors turn to Series LLCs, it makes sense to get the opinion of a real estate attorney like William Bronchick. For more information, visit his site at www.BronchickLaw.com.

One of the things that he stresses is the importance of following a specific protocol so that each series (cell) can be “insulated” from other series (cells). And yet you can still file just one tax return. That cuts down on cost and makes it easier to run.

At a minimum, follow these rules to maintain asset protection:

-A separate bank account and/or accounting records must be maintained for each series (cell).

-All obligations should be signed in the name of the series (cell)

-Any loans or business between series (cells) should be properly documented.

-Each series should file a “dba” in each state and/or county where it owns the property, for example, “ABC, LLC – Series II”

-Keep the assets and operations of each series separate from the other series.

-Make sure each series is adequately capitalized and insured

-Make sure every contract the series signs states that liability is limited to that series

-Each series should have its own operating agreement

If you decide to proceed with a Series LLC, make sure you get both an attorney and a CPA who are familiar with these types of entities. And if you are going to hold real estate, be extra certain that you are working with professionals who understand the unique tax and asset protection issues for real estate.

Contact us to see how we can help. https://www.ustaxaid.com/contact-us/