Series LLC Entity Structure

Steven Hamilton IIPro Member

Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes

13y

Kumar R,

I apologize,

I did not see your post before.

Welcome to BiggerPockets. I see we're also fairly close. I'm right by Gurnee(six flags). I have some good recommendations for you. I have a few great attorneys. I'm an accountant; however, I can also suggest others.

Kumar,

Most of the difference between entities depends upon what you want to accomplish. If any cell is going to be a separate entity you must be sure that you do separate accounting for each.

I recommend treating the individual properties as "disregarded" to be filed on Schedule E on your tax return.

The management entity would need to collect the rent retain it's portion and then deposit to the individual property's accounts From there you can feel free to transfer it to yourself. These actions would need to be done at least quarterly. Preferably monthly.

There would be a tax return filed for the management series, the flip series/ The parent LLC will not need to have a tax return filed; however, the individual properties may be included on your personal tax return. Unless you want to have the parent own them in which you would treat them as disregarded to the Parent S or C-corp.

If you're ever near the North Shore or in Lake County let me know. Let's do lunch.

-Steven the Tax Guy

Your guide to IRS laws, rules and regulations.

4 Reply

Kumar R

OP

Lombard, IL · Member since 2012 · 12 posts · 2 votes

13y

Thank you for the great information Steven. It seems like a series LLC is the way to go. If you do just buy and rent (no fix/flip), I think the following would suffice:
- a LLC cell for each property ( with disregarded status - no separate tax returns)
- a S-Corp cell for property management (files it's own tax return)

Would definitely like to do lunch. I'll keep in touch. Thanks.

Investor · Kingwood, TX · Member since 2012 · 97 posts · 21 votes

13y

My opinion.... I wouldn't have cell that differs so significantly from the other cells that they don't make sense in the series. For example. I think a series LLC taxed as a flow through entity makes a lot of sense for real estate. So you have 10 different projects, "ABC Co, Series A" through "ABC Co, Series J." These all would be have similar, separate protection as long as you accounted for them separtately and included the appropriate language in your formation documents. What I wouldn't do is make "ABC Co, Series C" a service-based company and include it in your series that appears to have been intended to hold assets. You mentioned an S Corp Cell as the management company, but I would assume you want to elect all cells to be taxed as pass through entities since you would clearly want the properties to be taxed as pass through entities.

To me I would set up a series LLC for the assets, and a completely separate LLC for the management company. Many lawyers would counsel you to have those two companies have very disimilar names to prevent people from finding them. Be aware that the management company is the one that would be sued as it deals with your counterparties, employees etc., so it makes a lot of sense to make it "appear" unrelated. It will deter some litigation. If you have the Series K cell be your management company then you pretty much tell Lawyers that you have a LOT of assets out there that the company is so tightly woven that it is worth seeing if your books support the asset protection you want and that may make a lawsuit easier to justify in their view. Then they start to poke at your accounting. Don't let your transaction driven arm (the management company) be a cell as it is worth the small fee to make all those transactions outside the series! One of the benefits to the SLLC is that you file one document with the state and can have a lot of separate companies behind the scenes that are not as easy to find.

Hopefully this logic makes some sense. The cell should just own assets (be on the deed and maybe the note) and receive a payments from the management company (not another cell). You will thank me.

One of the benefits of the Series LLC is that assuming you don't elect otherwise you can have these all taxed as though they are "one company," but receive the asset protection provided by the individual "cell." They are in fact 1 company that merely have statutory protection from creditors and various other rights at a series (cell) level.

Make sure when you file your initial formation doc with the State to include the required language that will protect allow you to protect the "cells." Also remember that your formation documents are also good to consider other languague that may deter a litigator looking for assets.

1 Reply

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

13y

I rarely disagree with the tax guy, but it doesn't sound right to me.

Your Series LLC is one company with different cells just as a department of company would, a store has sporting goods, men's clothes, women's clothes, household and appliances, etc. Each department records sales nd activities and consolidates earnings and expenses to the general ledger, it's from there taxes are computed. Steve may be right, but seems to me they are not separate tax entities.

Doing business between cells is the same thing as between multiple members in a regular LLC, it's done through accounting entries and the operating agreement and entered in the minutes as required.

The unique area of the Series is that each cell conducts business and it's liability with the public is limited to that cell, not so much by and between cells. Having a management cell might limit the public bringing any issue to that cell, but I'm not sure a service can be seen by the public as an individual entity, but the assets in that cell would be at risk or covered depending on the basis of a claim.

These are not available in my state, so I have not looked at them in depth, just read an overview for them in Texas. It wasn't that applicable for one commercial strip so didn't go there.

Where or who suggested having services divided in cells?

You can certainly do that with separate entities.

And, you might consider having a service like RE management in a separate entity as that entity would then be managing properties for other entities or company's and that requires a license, managing properties for others.

SO.......Opinions?

Investor · Kingwood, TX · Member since 2012 · 97 posts · 21 votes

13y

I think I have read that a "cell" can be taxed separately and can elect to be taxed as an S Corp, even if the rest of the series is C. They can file various other forms and get an EIN, etc. They have generally a lot of rights. I personally think that if you get to that point you may be defeating the whole purpose of the Series LLC to some degree.

Steven Hamilton IIPro Member

Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes

13y

Bill Gulley,

Individual cells can be their own entity if elected. Otherwise they will be considered consolidated or a disregarded entity.

Each cell is a separately entity as declared by Illinois law. You may have them taxed as one; however, this is usually not the preference. Many have chosen to use them for family businesses.

Tom C.,

In Illinois the annual report is over $250 per LLC. This is why the series is such a benfit. The initial organizing costs can be over $600 per LLC. Whereas with a Series it is under $850.

If you do not elect for a cell to be taxed otherwise it is simply a disregarded entity.

It is highly recommend to have a DBA for each and every cell of the LLC.

I can tell you this because I know from experience on series LLCs specifically in Illinois. They can even have completely different members.

-Steven

1 Reply

Investor · Kingwood, TX · Member since 2012 · 97 posts · 21 votes

13y

If $250 precludes setting up a prudent structure you might consider a sole proprietor.... Don't forget, the primary reason for what you are doing a SLLC is LEGAL, not tax. Although a couple bucks may hurt a piggy bank, it shouldnt' mean much to a business operating prudently as a going concern.

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

13y

I should have known better Steve, LOL, I stand corrected, strange but okay, doe each cell do business in the company name or is there an annotation, like... one, two, three? I'd go with a consolidated I'd think. :)

Investor · Kingwood, TX · Member since 2012 · 97 posts · 21 votes

13y

I typically see "ABC Company, Series A" as the legal name, but often that entity if transacting with the public will file a DBA as whatever it wants.

Steven Hamilton IIPro Member

Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes

13y

Bill Gulley,

Each cell should be doing business in it's own name to keep liabilities(financially and legally) separate.

In IL:
(Direct from IL publications and forms.)

In regards to the names: Must contain the entire name of the Limited Liability Company and be distinguishable from other names in the Series.

"Series LLCs
Illinois is one of only a few states that permits the organization of a type of limited
liability company commonly referred to as a "Series LLC." Such a company has the
ability to create within itself separate "series" or "cells" that have their own interests,
liabilities and members. One example would be a company having multiple
rental properties. A limited liability company with the ability to establish series could
separate the various properties into separate series, thus segregating the liabilities."

Tom C.,

Let me give you an example as to the savings for a landlord of starting a Series LLC vs a New LLC for each property . 18 rental properties and they want each in an LLC.

New LLC for each:

Articles of Organization: 18 x $500 = $9,000
Annual Reports: 18 x $250 = $4,500
Total Cost $13,500

Plus recurring Minimum Annual Report of $4,500 per year.

Series LLC

Articles of Organization: 1 x $750 = $750
Certificate of Designation: 17 x $50 = $850
Annual Report: 1 x $250 = $250
Total Cost: $1,850

Plus recurring Minimum Annual Report of $250 per year.

Results:
That is a one year savings of $11,650. Annually that is an approximate savings of $4,250

-Steven

2 Reply

Kumar R

OP

Lombard, IL · Member since 2012 · 12 posts · 2 votes

13y

The savings in filing costs, tax returns, etc do add up quickly as the property count grows.

Right now I have condominiums and am looking to grow, possibly into multi-family. Although, the price per unit is much higher than individual condos.

The idea of having a Series to hold properties and then having a separate LLC for property management does seem reasonable so that one hide the assets from prying eyes. However, can't someone just go to the state and find all the LLCs an individual owns/manages?

Investor · Kingwood, TX · Member since 2012 · 97 posts · 21 votes

13y

Steven, you missed the boat. I guess we are all guilty of missing the point when we only do a cursory reading. I never suggested an llc per property approach. I did suggest having the management company "outside the series" to deter litigation. Most lawyers have suggested the same. Don't forget the Origen of the series... It was created to hold assets.... Not businesses. That's why when the hedge/mutual fund industry lobbied Delaware to create the seeks and simplify their world... To hold assets managed by their management company.

Give my post a solid review and you will see my point.

Steven Hamilton IIPro Member

Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes

13y

Tom C.,

I had read it multiple times. I understand what you are suggesting and am not dismissing it in any way.

The fact is that it is very difficult/nearly impossible to completely hide your assets. This is even more true when you are a manager. Then let us consider a lawsuit in which you are found negligent will be required to list your assets after the judgement comes down. This is why you insure and you separate liabilities as best as possible. If you are negligent it is irrelevant as both LLCs will be named in the lawsuit and you will be named personally as the employee.

-Steven

Eric S.

Glen Ellyn, IL · Member since 2012 · 95 posts · 59 votes

13y

hello,
i have an illinois series llc and regret it. the outlandish annual fees are not worth it for a many reasons:
1. il llc's are required to make public their members. this provides you with no privacy. in case of a suit, you will be named personally.
2. single member llc's, whether series or not, are virtually useless anyway (important florida court decision after i created mine) when it comes to asset protection. unless you have multiple active members or a very well funded llc with lots of assets, good luck in the case of a lawsuit. you WILL NOT get the asset protection everyone tells you you will get. i have seen this happen. it is very easy to "pierce the corporate veil" in these cases.
3. make sure you keep very careful annual books/reports/filings. in the case of a lawsuit, the first thing you will be asked for are your books. if you don't have any or they are incorrect/incomplete, you will be an llc in name only. i have to pay a firm to maintain mine, which is another annual expense.
4. consider a delaware llc. delaware does not publish its members. from my understanding, out of state llc's can own property in il, but cannot do business or access the court system unless they are registered with the state. consider having an il licensed management company handle your in state business.
5. i'm not sure that a series llc is necessary for someone just getting started. i am an advanced investor and i regret it.
6. i am not a lawyer. make sure you consult one.

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

13y

Thanks Steve, good to know!