Legal Status

[Andy Wayne]

Hi Everyone, I just closed on my second property of the year. And I was wondering for the people with multiple rentals, how do you have them structures from a legal standpoint? Right now, the properties are just in my name. But should they each be in an LLC? Should they have their own? I have about a 25% equity position in one and a 50% equity position in the other one, if that matters. Thanks, Andy

[Charlie Fitzgerald]

I'm not a licensed Attorney in Indiana...talk to a RE Attorney in your area about the following:  (This information is from information provided on the website of a Texas Attorney I know that is top in the field of Real Estate Law - in my opinion.)

Recently, a new type of LLC–the series LLC–has become available . It is an excellent way for real estate investors to own multiple properties and businesses, allowing investors to acquire multiple assets and sort them into separate cells.

This information discusses structural and operational details of a series LLC as they relate to an asset management and protection program. Note that it is not necessary to implement the series aspect of a series company unless and until one is ready to do so; until then the company operates exactly the same as a traditional LLC. Accordingly, there is no downside to electing to form a series LLC rather than a traditional LLC, even if there is no immediate intention to create series.

Series LLCs began in Delaware in 1996, arrived in Texas in 2009, and are now available in thirteen states. Our preference is for Texas and Nevada, which have similar statutes. The series LLC is an idea whose time has come, particularly for real estate investors who can acquire multiple properties while avoiding complex structures with multiple entities.

A series LLC allows an investor to hold assets and liabilities within separate cells or series which effectively operate as subcompanies. However, the series are not stand-alone legal entities in their own right–at least not technically–but in many respects they act as if they are. An individual series is statutorily empowered to file and defend lawsuits; enter into contracts; buy, sell and hold title to property; grant liens and security interests; and "exercise any power or privilege as necessary or appropriate to the conduct, promotion, or attainment of the business, purposes, or activities of the series. A series can obtain its own EIN if it chooses and be treated separately for federal tax purposes. A series may (but is not required) to have its own bank account. A series can (and should) operate under its own assumed name. Given all of these characteristics, declaring that a series is not technically a stand-alone legal entity may be a distinction without a difference, at least most of the time.

The series LLC shares characteristics with the traditional LLC, including the benefit of informal management, an effective liability shield, and pass-through taxation; but a series LLC also has the ability to segregate and compartmentalize assets and liabilities within individual series. This offers significant protection and operational flexibility.

How does a series LLC differ from a traditional LLC? The answer is found in one word: exposure. In the case of a judgment against a traditional company, all assets of the LLC are available for purposes of satisfying that judgment. Not so with a series LLC. If a series is sued, liability is contained within that series and does not spill over to other series or the company at large.

Hope this helps.