If you are a current or future real estate investor who wants to understand the best way to organize and protect your assets, you should seriously consider forming a series LLC for your real estate business.
For those unfamiliar with this term, here is a simple definition: A series LLC allows you to form a “master” LLC that functions as sort of an umbrella organization over multiple real estate LLCs, which together are part of a related business or investment portfolio. The series LLC model is only available in several states (DE, IL, IA, NV, OK, TN, TX, and UT), but it can be a simple and cost-effective way to structure your real estate holdings while minimizing the risk they can have on each other.
Though we can give our opinion on using series LLCs here, remember this article does not constitute legal or professional tax advice. When deciding which form of LLC is best for your real estate holdings, it’s always a good idea to discuss your options with a lawyer and/or CPA who has experience in real estate investments. However, you can use the following information as a starting point in your research.
Here are a few possible reasons why a series LLC might be the right choice for your real estate business.
Series LLCs Help You Organize Your Real Estate Assets
Real estate investors often choose series LLCs because this business structure streamlines the organizational process that is required by state and federal agencies. Series LLCs only require one Registered Agent, which can be nice savings. (Of course, if you operate in multiple states, you will need to pay additional Registered Agent fees in each state where you do business.) Overall, the costs and fees for operating a series LLC might be cheaper in the long run if you set up shop in the right state.
Once you set up a series LLC, it is much easier to create your subsidiary or “mini” LLCs that will operate under the master company. Each “series” is organized using the Operating Agreement, which needs to describe the intended structure in detail in order to ensure compliance. With this type of company, each subsidiary LLC acts as a business-within-the-business. Each mini-LLC will have its own:
- Bank account
- Operating rules
- …and other characteristics allowed under the laws pertaining to regular LLCs
With online LLC formation services like the ones that Incfile provides, you can set these businesses up easily and customize your documents for each one.
Series LLCs Can Lessen Risk
Real estate investors are often advised to separate their holdings for one very simple reason: Doing so can lessen the risk of any one property affecting the others due to a lawsuit, bankruptcy or other unexpected liability issues.
With a series LLC, each individual real estate LLC under the umbrella company has the same protections that non-series LLCs have. This can be a lifesaver in several scenarios! For example, let’s say you try to evict a problem tenant from one of your properties, but they retaliate by deciding to sue you over a manufactured grievance. If you do not have a series LLC (i.e., you have all your real estate holdings operating with one bank account as the same company), then any profits or cash used for those other properties could be at risk if that lawsuit goes in your tenant’s favor.
However, keep in mind that a series LLC is not a magical shield. In order to maintain the protections for each LLC, be sure you understand the rules in your state and follow the guidelines for maintaining your series LLC status. Some lawyers or CPAs with real estate LLC experience will advise you that there are many areas of unsettled law on this topic, and that a series LLC may not protect you in such a thorough manner as you might assume. Again, this is why it is absolutely essential to discuss the best way to form your LLC with licensed professionals who regularly deal with these matters in relation to real estate.
Liability Insurance Simply Isn’t Enough
Many real estate investors might think they don’t need a series LLC because they can just buy liability insurance to protect themselves from lawsuits. This is a mistake! Getting liability insurance is often a good idea — but you shouldn’t assume that liability insurance will protect you from all the risks and headaches associated with bad tenants or declining investments (especially when you consider the limitations on protection that many insurance policies contain).
For example, imagine an unhappy tenant sues you for mold on one of your rental properties, and you realize mold claims aren’t covered under your liability insurance. Not only could you lose out on the assets of the property in question, but your other investments could fall prey to this lawsuit because you didn’t separate them using the umbrella model of a series LLC.
The series LLC is still not available in most U.S. states, and it isn’t going to be the right solution for every real estate investor. However, if you own multiple real estate properties in states where series LLCs are allowed, then setting up a series LLC might be a good option to reduce your risk and improve the efficiency of your business operations.