Series LLCs

Series LLCs haven’t been around, relatively speaking, very long. The series LLC is a creation of state law. Only about a dozen states have series LLC laws today. More states are passing series LLC legislation all the time, but most states don’t currently have series LLCs laws.

If you are in a state that allows series LLCs, you can establish a primary LLC, and then without state supervision, you can create “cell LLCs” underneath the primary LLC. There is a state fee for the primary LLC, but the cells don’t have any additional state fees, so the series LLC saves money. In theory, each of the cell LLCs has its own asset protection boundaries and are independent. They are supposed to be independent asset protection and accounting cells.

Legal cases concerning cell LLCs are still in a state of flux. We aren’t sure how secure the boundaries between the different cells really are, so the “jury is still out” on how effective the cells are for asset protection. They certainly provide some protection, but how much and under what conditions is still a little up in the air. (How’s that for a nothing legal sentence?)

You can’t establish a series LLC in one state and then use the cells to own property in another state; at least not in a state that doesn’t recognize series LLCs. For example, you couldn’t form a series LLC in Nevada and create a dozen cells under it and then have each one of your twelve rentals in California owned by a different cell. State law in California doesn’t recognize the entities (cells) as related LLCs. California has gone so far as to pass laws which say each LLC in the series has to pay its own California ($800 + per year) fees and will be treated as an independent LLC.

If you are in a state and have multiple real estate investments, the series LLC may be a way to give each one of your holdings individualized asset protection. Set up the principal LLC and then create a cell LLC for each property. Lots of gurus tell you to use a different LLC for each property. That’s ok, but I find that you can’t keep up the details of a dozen LLCs or corporations, and in the end everything will collapse because you haven’t followed all the formalities for each LLC. The series LLC may make it easier to maintain the formalities in your LLC, as compared to a half dozen totally independent LLCs. So series LLCs are a good idea.

Utah has series LLC laws, and my properties are mostly in Utah. I have not used the cell LLC concept. Instead I have created several independent LLCs and have a couple of properties in each LLC. It is so cheap to create LLCs in Utah that there almost isn’t a need for the series LLC concept. Generally, it is the states that aren’t making money off of the company registrations that have passed the series LLC laws. The states that look at company registration fees as a source of significant revenue probably won’t ever pass series LLC laws. (Welcome to California, New York, New Jersey and other foreign countries.)

This information originally appeared as part of my August 2015 Newsletter. If you are interested in receiving monthly in-depth treatments of legal, real estate, and personal estate information, sign up here.