top of page

INTRODUCTION

THE EMERGING USE OF SERIES LLCS FOR REAL ESTATE
HOLDINGS AND VENTURES: OPPORTUNITIES AND
UNCERTAINTIES:
The Delaware Series LLC

The booming real estate market in 2005 and the correlating increase in real estate investors holding multiple properties have presented a problem:

“how to find a simple, effective and cost-effective way to protect
your assets when you own multiple properties”.

You could drop those properties into one limited liability company (the most popular entity of choice for real estate investors).

However, lenders don’t usually like that and the liabilities of one property could wipe out your equity in one or more of your other properties.

You could set up multiple LLCs-one for each property-but that gets prohibitively expensive.
Frustrated by the flaws in these two solutions, many investors simply give up and resign themselves to holding title to their properties in their own names, fully exposing their personal assets to potential lawsuits.

Enter the Delaware Series LLC.

Simply put, the Series LLC is the most exciting development in real estate ownership and asset protection since the LLC itself.

An innovative concept created by statute nine years ago, but just recently getting more attention (Iowa and Oklahoma recently enacted Series statutes and other states are considering it), the
Series LLC is essentially a single “umbrella” entity that has the
ability to partition its assets and liabilities among various sub-
LLCs or series.

Each sub-LLC may have different assets, economic structures,
members, membership rights and managers. The profits, losses
and liabilities of each sub-LLC are legally separate from the other sub-LLCs.

More specifically, the debts, liabilities and obligations incurred with respect to a Sub-LLC are enforceable against that sub-LLC only and not against the main LLC or any other sub-LLC.

The structure is similar to a parent corporation with subsidiaries,
only without the expense, the formalities and the heavy doubletaxation.

The main benefits of the Series LLC are profound:

• It enables investors to place multiple assets in a single LLC.

• It compartmentalizes the liabilities associated with each of
those assets, essentially creating a firewall between each sub-LLC.

• It eliminates the administrative burden of forming multiple LLCs.

• It eliminates the expense of forming multiple LLCs.

How much expense can it save?

Lots.

Assume you have an investor who owns ten properties, all located in California.
Assume further that none of the properties has annual gross revenues of more than $250,000, but at least half will sell for more than $250,000 (this is, after all, California).

The investor could either form ten separate LLCs or one Series LLC.
When you take into consideration filing fees (for Articles of Organization, Statements of Information, filing service and counter fees), legal fees to set up each entity, accounting fees (ten separate federal and state tax returns), California’s annual $800 franchise tax, and California’s gross receipts fee, it totals approximately $70,000.

Compare that with the filing, legal, accounting and related fees and costs associated with setting up one Delaware Series LLC with ten separate sub-LLCs, which total only about $16,000, for
a total savings in the first year alone of $54,000!

Hold those same properties for at least three years and the savings soar to over $100,000!
Do you need to own ten properties before this tool makes sense?

Absolutely not.

On these same assumptions, holders of as few as three properties can still save thousands of dollars employing this strategy.

Other benefits include the ease of adding or dissolving sub-LLC to the umbrella entity, the fact that you should be able to do 1031 transfers between sub-LLCs, and you may be able to avoid
Proposition 13 reassessment on such transfers.


Source: https://journaloflegalstudiesinbusiness.org/wp-content/uploads/2015/08/teusl_2010_-88to122.pdf

bottom of page