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Warning against series LLCs

I wrote about series LLCs (Delaware Series LLCs) in this blog many years ago. Recently I got an email from the folks at TACPAS warning against using them.

What Warren said:

  • Whether a liability could be contained within a single LLC within the series has not been proven in court.
  • States may differ in their interpretation of series LLCs.
  • Tax treatment, particular with different types of entities, is unclear.
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As a real estate investor I attend a lot of seminars. One I attended recently was put on by Adie Gorel’s ICG’s group. One of the guest speaker’s was Jeffrey Lerman. He gave a good preso on Delaware Series LLCs.

I’m going to, if that is OK, skip a detailed explanation on LLCs. If you don’t know what they are, google on LLC (limited liability corporation). Essentially they are the preferred legal entity that real estate investors use to hold title to real property in. The idea is that by holding title to your real estate investment property in an LLC you are shielding your personal assets from lawsuits. However setting up an LLC is not without cost.

  • California charges $800 a year per LLC for “franchise taxes”
  • It costs anywhere from $500 to $2500 to have one set-up
  • If you have gross income (including sale of property) of over $250K there is taxes
  • And there is the overhead of keeping a corporate entity up, refiling, keeping minutes, setting up separate bank accounts etc..

So when you have multiple properties, you start wondering, it is really worth it to set these things up? Maybe just getting an umbrella policy is sufficient? Well the problem is that you are at the mercy of the insurance companies if a claim is filed against your insurance.

This is where the Delaware series LLCs comes in. The Delaware series LLC has a umbrella document that describes the entire legal entity. For each property though, there is a separate “series” addendum. So the idea is that, it costs less to setup, and less overhead to maintain, but each property is in it’s own little legally defensible sandbox.

And how legally defensible it is, you ask? Wellllll…. The Delaware series LLCs have been around for 9 years. During those 9 years there has not been a serious legal challenge to the firewalls between each series. There has been no California cases that involve these types of LLCs. So your mileage may vary.

There are other states offering series LLCs (such as Iowa) but they are very new and have no track record.

But here’s something to consider. The Delaware law is stronger in protecting the manager of these LLCs than the California law. If you have the right lawyer it can be written so that your LLC manager can be idemnified against all sorts of things, not so with California LLCs.

And if you own a lot of properties it is hard to agrue with the economics. Lerman cites a case study where an California investor with 10 properties saves 146K over 3 years.

I would be remiss if I didn’t point out that if you are seriously considering a Delaware Series LLC, you need to talk to an attorney. This information I have presented is most likely incomplete and you need to do your due dilligence. But something to think about .. eh?

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