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Real Estate and the New Series LLC
A national trend is developing. Today, more LLCs than corporations are formed in the US.
Necessity, they say, is the mother of invention. Given the simplicity, protection and flexibility of the Limited Liability Company (‘LLC’), some states have begun to adopt the new ‘Series’ form of LLC. Starting 10 years ago with the concept of ‘cell’ captive insurance companies used offshore, the states of Delaware, Nevada, Oklahoma, Iowa and now Illinois have adopted the new ‘Series’ LLC. It can be well-suited for certain types of businesses and investments — such as multiple income-producing properties, aircraft leasing, container ships such as tankers and cargo ships, franchise businesses (ie multiple fast food outlets), trucking and transport fleets , and companies that have operational departments that need to improve liability protection to better protect one part of the business activity than another.
THE CONCEPT MAKES SENSE.
Using multiple LLCs for property owners is a conservative and safe way to go. However, instead of registering a traditional LLC, forming a new ‘Series LLC’ may be a smarter way for real estate investors. The concept is simple. It is based on the Cell Captive Insurance Company model used in other countries.
Although a single ‘parent’ LLC entity is established, each separate cell within it (called a series) can be accounted for separately, and each can own assets and operate as a separate business enterprise. The idea behind the law is that the liability of one station does not infect others as long as the guidelines are followed.
So now, instead of using land trusts or a number of traditional LLCs, a cheaper option may be to hold several rental or fix-and-flip properties in a single Series LLC – giving each cell within it a separate business designation, i.e. ‘Valley Properties LLC Series I or Series II or Series III’ or ‘Valley Properties LLC Series A or Series B or Series C’ for example. This simplifies the formation and reduces legal and tax costs, since only one registration in the state is done and one single consolidated tax return is prepared. To keep the paperwork clean, each batch will need to be separately identified as distinct from the others in all business and tenant transactions — including leases and leases, deposits, bank accounts, etc. in the name of that particular batch as opposed to the ‘mother ship’ ‘ LLC or any other series. Of course, it will have to register as a ‘foreign’ company in any other country where it has ownership – but only once.
WORKING ON NUMBERS.
Real estate investors ‘count’ every day. Buying an investment property, fixing it up, advertising and insuring the property, attracting stable tenants, maximizing tax breaks and working on cash flow management are all part of how you build a portfolio of income producing properties. To save on costs, instead of paying for multiple ‘traditional’ LLCs, consolidating through a single ‘Series’ LLC can offer significant cost savings.
Let’s consider an example case. If an investor has 20 properties and uses a new Series LLC, even if the franchise tax is applied, the savings in multiple entity formation and tax preparation costs can be significant. The difference would be better spent acquiring more rental income properties and marketing them to new paying clients, don’t you think?
WHAT ELSE TO CONSIDER?
o An Illinois-type Land Trust (sometimes called a ‘Real Estate Privacy Trust’) is effective for protecting privacy and avoiding probate, but it is not liability protection. It’s just a ‘privacy mask’. Some real estate investors in the past have used multiple real estate trusts built around LLCs to save on franchise taxes, but now that the Series LLC has arrived, that practice will disappear, like the 8-track tape and the Beta video system. . With a Series LLC, you can have privacy and protection in one entity.
o Using a Series LLC will not make sense if there are a large number of unrelated parties – as considering the flow can be quite a burden for your accountant. After all, simplicity is what stands behind the new LLC series. Real estate investors will want to take advantage of the Series LLC as a preferred form of property ownership, especially if the members of the LLC are sole proprietors, married couples, perhaps a family trust, or a family limited partnership.
o Once your Series LLC is registered and the members sign the Operating Agreement, be sure to sign separate ‘Series Agreements’ for each cell they choose to use. All future transactions should reflect the name of the particular lot to reinforce the “separate” quality of each of the lot’s units or “cells”. As long as income and expenses are accounted for separately (perhaps using Quicken® or QuickBooks®) and one consolidated tax return is prepared, the fact that multiple properties are under the umbrella of one ‘mothership’ (sub-labeled as Series One, Series Two, etc.) makes it easier tracking revenue, expenses, tenants, fees, property taxes and profits of each batch.
WHERE SHOULD SERIES LLC BE ESTABLISHED? About seven (7) states have accepted the Series LLC so far. However, four (4) other states have enacted legislation that strictly limits LLC creditors to the ‘sole remedy’ known as a ‘collection order’ (passive distribution lien). However, of all 50 states, only Nevada has done both. Once your new LLC is formed, if you intend to use it in another state, simply register it as a ‘foreign’ (out-of-state) company with that Secretary of State’s office. Once registered for business, we can show you a smart way to protect your liability risks and legally manage your tax costs so you have more to put into your retirement accounts for the future.
After that, in your business transactions, make sure that each individual batch is clearly distinguished from the others. Treat it as a separate job. Consider each series using separate brokers, separate lenders and perhaps different banks just to make it clear they are separate. Lease agreements and all other paperwork will need to reflect the series designation to make it clear that the lessee is not dealing with the ‘mothership’ LLC, but with one particular series as a separate business enterprise.
LOOKING AT THE ‘BIG PICTURE’.
Forming an LLC to hold real estate investments is a positive step in the right direction. However, that is one step. Keep the ‘big picture’ in mind: What are you trying to achieve by investing in real estate anyway? You’re trying to build – and preserve – secure wealth that gives you cash flow and a future for your loved ones. Keep in mind that every property you acquire is part of a construction process that is dynamic. Use the system to find, acquire and finance each property. Use the tools that empower you and don’t get bogged down by the little details that can derail you if you let them. Use professionals for tax preparation, property purchases and finance, and continue to grow your portfolio with focus and discipline. Use professional advisors as a support system, but keep in mind that they are working for you so you can enjoy what you do best — acquiring properties that bring in more income.
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