@Brynn Misener, @Scott Yanta, I regularly recommend the series LLC to my Illinois real estate investor clients. But as we all know, real estate investing always requires an analysis of risk, and I like to discuss the uncertainties surrounding this form of entity before we file with the SOS. So, the question always becomes, what's the risk of forming a series LLC to hold my real estate assets versus forming individual entities; entities that have more developed case law supporting their structures? My clients believe (myself included) that the series LLC rewards outweigh the risk. And here's the general format of the discussion that ensues..
There are clear advantages for using the series LLC structure: one series LLC essentially provides the same benefits as multiple LLCs but for significantly reduced costs. You aren't paying for multiple filings, fees, annual reports, and in some cases, tax returns that would come with traditional LLCs.
However, the strength of its liability protections and the legal ramifications of the relationships of the series to each other and to the master LLC have not been tested to any great extent by litigation. The last time I checked, only 17 US states have adopted the series LLC structure. Whether the courts of a non-series LLC state would respect the liability shields of a series LLC is not known.
The IRS has issued proposed regulations providing insight into the IRS’ treatment of these entities:
1) Each series within a series LLC will be treated as a separate entity for federal income tax purposes;
2) Each series is allowed to choose its own entity classification independent of the classification of other series; and
3) Each series should only be liable for federal income taxes related to that series.
The proposed regulations do not address the entity status of a series organization for federal tax purposes nor do the proposed regulations specifically address whether each series within a series LLC should obtain a separate employer identification number (EIN) and file a separate federal tax return.
Until final regulations are issued, I advise clients to obtain separate EINs and file separate income tax returns for each separate series which, I believe, helps each series maintain separate and distinct corporate identities, thereby reducing the risk anyone may be able attached a judgment to you or another series and pierce the corporate veil.
Other ways to minimize the chance that one series may be held liable for liabilities of the entity as a whole (or another series) include the following:
1) Create a separate bank account for each series (again, you’ll need a separate EIN to do this)
2) Don’t commingle funds within series.
3) Always sign documents in the name of the series.
4) Properly document all loans between series.
5) Conduct all transactions between series in an arms'-length manner at fair market prices using appraisals.
6) Keep the assets and operations of each series separate from the other series. Each asset should be owned solely by one series. In other words, two or more series should not be co-owners of the same property.
7) Make sure each series is adequately capitalized.
Good luck with your investing and if you have any other questions, feel free to PM me or contact me directly.
