With significant dollars at stake, it's wise for real estate investors who own multiple properties to look for ways to keep costs in check and minimize legal risks. For some, forming a series LLC may be the answer.
What is a Series LLC?
A series LLC (known as SLLC for short) consists of an umbrella LLC with separate LLCs beneath it. The series LLC business structure’s formation documents allow for multiple “series” within a master LLC to operate as separate entities. The series have their own business names, maintain their own bank accounts, and keep their own records. Each series’ assets, liabilities, operations and membership interests are separate from those of other series in the umbrella LLC.
Advantages of a Series LLC for Real Estate Investments
The series LLC structure can benefit real estate investors with multiple properties in several ways. By setting up each property as its own series in a series LLC, investors can:
- Reduce liability – If one series gets sued, other series aren’t liable. For example, if someone falls and becomes injured at one property, only the assets of the series set up for that property are at risk.
- Minimize expense – Regardless of how many series will be part of a series LLC, the business pays only one formation filing fee.
- Consolidate federal income tax preparation – With a properly structured series LLC, all series in the LLC can be reported on a single tax return for the Series LLC.
Disadvantages of a Series LLC for Real Estate Investments
The series LLC isn’t an option for every real estate investor. Unfortunately, not all states allow businesses to form a series LLC.
States and U.S. territories that recognize the SLLC business structure include:
- District of Columbia
- North Dakota
- Puerto Rico
Although California doesn't form domestic Series LLCs, the state does allow series LLCs created in other states to register as a foreign entity and do business there.
Another potential disadvantage of the series LLCs is that tax treatment and reporting requirements vary depending on the state. Sometimes, the rules aren't crystal clear. States might treat each series as a separate tax entity or have the master LLC and all series treated as a single entity.
How to Form a Series LLC
Forming a series LLC is similar to registering a traditional LLC. Articles of Organization must be filed in the state where the master LLC will operate. Typically, that formation paperwork will need to reflect that the LLC is authorized to form series beneath it.
Other tasks that might apply when forming a series LLC include:
- File DBAs – If the individual series in the series LLC will have names that do not include the first and last names of the LLC members (owners), states will also require filing DBAs (Doing Business As) for the series' fictitious names.
- Obtain EINs – The master LLC and each series that is part of it must obtain its own EIN (Employer Identification Number) from the IRS.
- Designate a registered agent – A series LLC must appoint and maintain a registered agent in each state where the master LLC and any series are located.
- Set up business bank accounts – Another important step is to set up individual bank accounts for the master LLC and each series so that their finances are handled separately.
- Obtain the necessary business licenses and permits – These will vary depending on where the main LLC and the series underneath it are located.
- Establish operating agreements – A series LLC should also have a company operating agreement that sets forth how the master LLC should be run and all roles and responsibilities of members and managers. An SLLC's operating agreement will also need to include language explicitly explaining that each individual series in the SLLC is its own business entity and therefore not responsible for the legal actions and debts of other series in the LLC.
Also, each series should have its own operating agreement to define any unique rules that apply to it. A series LLC doesn't have to file its operating agreements with the state, but the business should keep them in its records. It’s helpful to ask the Secretary of State office and local government agencies to provide details on what must be done in their jurisdictions.
To Form or Not to Form a Series LLC for Your Real Estate Investments
The entity type you choose will impact your startup expenses, tax obligations, legal and financial liability, reporting requirements, and ongoing business compliance filings. Before deciding on a legal business structure for your real estate investment activities, I encourage you to get professional legal and accounting guidance from trusted professionals. SCORE mentors can help you connect with knowledgeable resources in your community and provide you with valuable guidance on a myriad of business issues.