Series LLC Strategy - What Do You Think?

Question

Hey everyone,

So I'm trying to outline a basic strategy of how to get started in real estate investing (with a focus on multi-family properties in a few Midwest states)

What do you agree / disagree with below? Sorry if some of my terminology is off - I'm still learning ;)

• Form a series LLC in a business-friendly state (Delaware, Texas, Nevada, etc) with myself as the sole member

I have seen some controversy surrounding series LLCs, claiming there may be legal uncertainties surrounding them, especially if doing business in a state which does not have laws allowing creation of them. Any thoughts or experience with this?
• I have seen some controversy surrounding series LLCs, claiming there may be legal uncertainties surrounding them, especially if doing business in a state which does not have laws allowing creation of them. Any thoughts or experience with this?
• Register as a foreign (series?) LLC in other states, as needed

Again, are there concerns doing this as a series LLC?
• Again, are there concerns doing this as a series LLC?
• Buy a property using a conventional residential loan with a personal guarantee
• Transferring the property to the series LLC, using a quitclaim deed

This also seems to have some controversy surrounding it, with talk of mortgage fraud, etc
• This also seems to have some controversy surrounding it, with talk of mortgage fraud, etc
• Repeat steps 2-4, with each property its own "series" or "cell" within the series LLC
• After building up business credit, buy properties using commercial loans with the series LLC as guarantor

• I have seen some controversy surrounding series LLCs, claiming there may be legal uncertainties surrounding them, especially if doing business in a state which does not have laws allowing creation of them. Any thoughts or experience with this?

• Again, are there concerns doing this as a series LLC?

• This also seems to have some controversy surrounding it, with talk of mortgage fraud, etc

Thanks a lot for the feedback!

Matt

George Skidis · Answer

A series LLC lets anyone who checks with the Secretary of state know how many buckets (Properties) in the LLC. You will be required to file tax returns in the states you do business in. This will also incur foreign entity registration and a few other costs.

There are other business entities to choose from.

For tax purposes a single member LLC is a disregarded entity and as such shows up as schedule c on your income tax return.

You still need to keep full books and seperate records for the LLC.

Weston Couch · Answer

@Matt Quock Sounds good!

@Scott Mac A legitimate concern for sure, but that's unlikely because of the full faith and credit clause. I can share some materials with you too if you're considering a Series.

John Warren · Answer

@Matt Quock I am personally going to be using single member LLCs to buy properties here in Illinois. The state lowered the filing fees and the fees to set them up, so now there is no real advantage that I can see to doing a series here in Illinois.

Matt Quock · Answer

@Hideyuki Gojima That's a good point, it can definitely provide some peace of mind.

Hideyuki Gojima · Answer

@Matt Quock

I am not sure if there is significant tax benefit in your state but if there is not, I would rather form LLCs in my state because my accountant is more familiar with state law. Real estate is local business. Federal stuff, probably any decent CPA can do it but I have some bad experiences so I form llcs in my state now. It just makes me feel more comfortable for now..

Kevin Auyong · Answer

The whole idea of the LLC is to remove that property from your name, You and the llc are two different entities which is why there is protection. you don't think the lender is going to have an issue if they come after you for non payment and it turns out the house is no longer in your name but owned by an LLC.

They may not catch the changeover, but if they do they certainly can call the loan.

Matt Quock · Answer

@Kevin Auyong I have the same concern, too. From what I've read, if the property is purchased in the same name as the sole member of the LLC, it should not be an issue. I don't know if that is 100% true or if it applies to your situation.

Kevin Auyong · Answer

is anyone concerned that when the property gets moved  into an LLC a due on sale clause may be invoked?

Matt Quock · Answer

@George Skidis Thanks for the advice!

@Alfred Harrison Thanks - I'm glad it sounds like we have been seeing the same information. I'm also trying to weigh the pros and cons to see what approach will hopefully prove the best. Good luck to you, too!

Alfred Harrison · Answer

@Matt Quock Excellent set of questions. I have been researching the Series LLC myself and the responses in this thread seem about right. There doesn't seem to be any case law in any state where the series was has been put to the test in court. So, it's still kind of up in the air as to the asset protection seemingly offered by the S-LLC. At the federal level on the tax side, there was an IRS PLR recognizing validity of the S-LLC. So at least on that small front, there is seems to be some clarity.

As mentioned above though, you 'likely' still need to register each series as a separate foreign entity in your S-LLC with your home state (assuming the series is out of state) and pay any associated fees (annual filing fees for example). Beyond that, you of course will need to register each series and pay any associated fees for the state in which you organize the series.

And you need to keep distinct bank accounts, transactions, accounting, etc. and do as much as possible to keep each entity separate. It almost seems like it may not be worth it in the end. But, someone much more knowledgeable may offer better insight. I'll be contacting a tax specialist in my state to see what may be best in my situation. Good luck.

Series LLC Strategy - What Do You Think?

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