Milwaukee, WI · Member since 2019 · 21 posts · 9 votes
Hi all,
I am hoping to get some clarification on how you can structure a Series LLC as a holding company that owns traditional LLCs within it. I understand a Series LLC provides the option for multiples "cells" that each act as their own LLC.
But... from what I gather, not all states (including WI, where I intend to purchase properties) have laws or cases that recognize Series LLCs or "cells" within a Series LLC. In theory, this could potentially eliminate any separation of liability between the "cells" within a Series LLC.
Is it possible / how would I structure a Series LLC (formed in TX, for this example) to accomplish the following:
1) Act as a holding company for traditional LLCs formed in WI for properties located in WI
2) Form "cells" within the Series LLC for properties in other states
In this example, would each "cell" need to register as a foreign entity in states outside of TX or only the Series LLC?
@Matt Quock Great question! The Traditional LLC that you would use for your shell company or "doing the errands" is a totally separate entity. I like to think of it as your left hand and your right hand. On the left you have the Series LLC holding your assets. On the right you have the Traditional LLC acting as your face to the world - entering into rental agreement (if no property management company exists), hiring contractors, etc.
Scott,
In this example, would it be necessary for "Traditional LLC" to distribute money to each series? Or would any net profits realized by Traditional LLC just become rental income on the person's Schedule E, assuming that both Traditional LLC and the Series LLC are all 100% owned by the same single member?
For example, let's say my name is Jim Smith and I have a series LLC with three series that each hold one property:
Jim's Real Property, LLC
123 Main Street, LLC
456 Second Avenue, LLC
789 Third Way, LLC
Then I also have what you have been calling a "Traditional LLC" outside of the series that collects rent, pays the bills, etc. Let's call it Jim's Management, LLC.
If Jim's Management, LLC, collects a total of $5,000 a month in rent from the three properties contained in Jim's Real Property, LLC, does Jim's Management, LLC, then have to turn around and distribute that rent back to 123 Main Street, LLC, 456 Second Avenue, LLC, etc, or can Jim's Management, LLC, just use those proceeds as it sees fit to pay for a new roof on the house at 123 Main Street, pay the property tax bill at 456 Second Avenue, distribute some of the money to Jim Smith's personal account, etc?
In the end if all single-member LLCs are fungible disregarded entities in the eyes of the IRS, does it matter which one is ultimately "reporting" the rental income on Jim Smith's 1040? Is there any danger here in mixing funds?
If it's completely fine for Jim's Management, LLC, to operate in this fashion, is it even necessary for 123 Main Street, LLC, 456 Second Avenue, LLC, etc, to have their own bank accounts at all? The only thing those entities would be doing in that scenario is owning a single property. They wouldn't have to cash or write any checks themselves because Jim's Management, LLC, is doing it all.
I hope I'm understanding your example correctly. Please let me know if I am missing something.
Great questions! One of the big concerns I see on the BP forums revolves around people using a Series LLC in states that don't offer the option to form their own Series LLC. While a state may not offer it's own Series LLC, they will still respect the entity that has been formed in another state generally - I can dive into more specifics on this, but if people could break the Series LLC for crossing state borders than it wouldn't be as popular as it is today.
Generally I see investors trying to operate the Series LLC opposite of what you are suggesting. They will form the parent Series LLC and then place the individual properties into separate child series (cells), that way each properties liability is separated from one another. that means you just have your property from 123 Main Street in child [Series A] and 456 Main Street in child [Series B] and so on. From there investors will often use a traditional LLC (maybe two or three depending on their portfolio) to function as the operating company LLCs for the individual properties. The traditional LLCs hold the majority of the liability, but don't end up holding anything outside the liquid assets.
One other issue people can run into with the Series LLC is paying the foreign filing fees for each state. This can actually be avoided through the use of land trusts, while actually offering additional benefits. The strategy involved would have you purchase the property into your personal name (offering you the best financing options available,) then transferring the property into the land trust (which is a protected transfer thanks to the St Germain Act - banks wont stop this,) and since the land trust is technically operating the property you aren't charged the foreign filing fee by the state. From an asset protection standpoint it is also a bonus that you can implement more anonymity because you can have your attorney sign for the land trust, removing your personal name from public record.
This isn't legal advice, just my opinion as a real estate investor. Hope some of these ideas help out. I work with these structures all the time, so if you have any questions just tag me or shoot me a message! Best of luck to you moving forward.
@Scott Smith Thanks for the input! I'm a little confused about your description of the traditional LLC usage:
"They will form the parent Series LLC and then place the individual properties into separate child series (cells), that way each properties liability is separated from one another... From there investors will often use a traditional LLC (maybe two or three depending on their portfolio) to function as the operating company LLCs for the individual properties. The traditional LLCs hold the majority of the liability, but don't end up holding anything outside the liquid assets."
Can you help explain the purpose of having both a "cell" and traditional LLC for 1 property? This seems redundant to me.
The property would only be nested inside the "cell" of the Series LLC. The Series LLC would simply hold the assets in the separate cells to help compartmentalize your assets, but you wouldn't risk implicating the Series LLC more than you need to. This is where the Traditional LLC comes in.
The Traditional LLC doesn't own anything, it would only function as an operation company for the Series LLC. It would carry out the highest liability actions of the Series LLC (collecting rent, paying contractors, hiring property amnagement, etc,) but it doesn't actually own any assets. If there is a law suit regarding the operating company (Traditional LLC,) it would be the Traditional LLC that gets implicated. If you keep the bookkeeping accurate and operate the Traditional LLC correctly you should only be risking losing the Traditional LLC, which doesn't own anything, rather than the "cells" of the Series LLC which are holding the properties/assets.
Hope this helps answer the question. The goal is to compartmentalize the property in the Series LLC and create a protective barrier by using the Traditional LLC for all the high exposure activities.
This is not legal advice, just my opinion as a real estate investor. If you have more questions you can still tag me!
@Scott Smith Thank you for explaining how to use the traditional llc. Would you use the traditional llc on your leases with your tenants?
Also, I'm interested in creating either a holding company LLC which would own a series llc and the traditional llc as a way to compartmentalize my real estate a separate the risk. How does this strategy compares to creating a trust and having it as the owner of record for all series and traditional llc's instead of the llc holding company?
@Scott Smith Thank you for explaining how to use the traditional llc. Would you use the traditional llc on your leases with your tenants?
Also, I'm interested in creating either a holding company LLC which would own a series llc and the traditional llc as a way to compartmentalize my real estate a separate the risk. How does this strategy compares to creating a trust and having it as the owner of record for all series and traditional llc's instead of the llc holding company?
If you want to tie all those different entities together I would suggest a different strategy that allows them all to complement each other for effectively. I think they are all powerful components, but combined in the right ways and you unlock many advantages.
An ideal strategy for someone with multiple properties is to first get a Series LLC to function as your holding company, which will hold each asset separate from the others. Since it can scale infinitely, you can easily place each property in it's own "child series" as you grow, so there is next to no hassle. To do this, you would place the houses into land trusts (1:1 house to land trust ratio) and assign the trust to the child series with yourself as the manager. Benefits of this include it being a protected transfer from the Due on Sale Clause for good financing options, you can actually remove your name from public record for some anonymity, and whenever you decide to pull together you estate plan it will be all prepped for the move! Next you would establish the Traditional LLC as the operating company.
Here is an outline of what it may look like:
....................................................................... Series LLC ...................................................................................
Child Series A .......................................... Child Series B .......................................... Child Series C ..... (etc)
Land Trust A ............................................. Land Trust B ........................................... Land Trust C ...... (etc)
Property A .................................................. Property B .............................................. Property C ........ (etc)
.
Then the Traditional LLC is just doing the errands for the rest of your structure.
This is just an example of what it can look like. It all depends on what type of investments you have and your goals as you grow. The anonymity of the land trust is best achieved by having an attorney sign as the nominee trustee, so at that point the ownership is protected under the attorney/client privilege.
This isn't legal advice, just my opinion as a real estate investor. If you have more questions about setting these things up feel free to connect with me!
@Scott Smith In this example, when you say "Next you would establish the Traditional LLC as the operating company." and "Then the Traditional LLC is just doing the errands for the rest of your structure." what legal connection does the Traditional LLC have with the Series LLC?
@Matt Quock Great question! The Traditional LLC that you would use for your shell company or "doing the errands" is a totally separate entity. I like to think of it as your left hand and your right hand. On the left you have the Series LLC holding your assets. On the right you have the Traditional LLC acting as your face to the world - entering into rental agreement (if no property management company exists), hiring contractors, etc.
@Matt Quock Great question! The Traditional LLC that you would use for your shell company or "doing the errands" is a totally separate entity. I like to think of it as your left hand and your right hand. On the left you have the Series LLC holding your assets. On the right you have the Traditional LLC acting as your face to the world - entering into rental agreement (if no property management company exists), hiring contractors, etc.
Scott,
In this example, would it be necessary for "Traditional LLC" to distribute money to each series? Or would any net profits realized by Traditional LLC just become rental income on the person's Schedule E, assuming that both Traditional LLC and the Series LLC are all 100% owned by the same single member?
For example, let's say my name is Jim Smith and I have a series LLC with three series that each hold one property:
Jim's Real Property, LLC
123 Main Street, LLC
456 Second Avenue, LLC
789 Third Way, LLC
Then I also have what you have been calling a "Traditional LLC" outside of the series that collects rent, pays the bills, etc. Let's call it Jim's Management, LLC.
If Jim's Management, LLC, collects a total of $5,000 a month in rent from the three properties contained in Jim's Real Property, LLC, does Jim's Management, LLC, then have to turn around and distribute that rent back to 123 Main Street, LLC, 456 Second Avenue, LLC, etc, or can Jim's Management, LLC, just use those proceeds as it sees fit to pay for a new roof on the house at 123 Main Street, pay the property tax bill at 456 Second Avenue, distribute some of the money to Jim Smith's personal account, etc?
In the end if all single-member LLCs are fungible disregarded entities in the eyes of the IRS, does it matter which one is ultimately "reporting" the rental income on Jim Smith's 1040? Is there any danger here in mixing funds?
If it's completely fine for Jim's Management, LLC, to operate in this fashion, is it even necessary for 123 Main Street, LLC, 456 Second Avenue, LLC, etc, to have their own bank accounts at all? The only thing those entities would be doing in that scenario is owning a single property. They wouldn't have to cash or write any checks themselves because Jim's Management, LLC, is doing it all.
I hope I'm understanding your example correctly. Please let me know if I am missing something.