So after reading this entire thread and being swayed on all different sides by mostly good points and debate, I'm still coming to the conclusion that Scott Smith's original strategy that was presented in his podcast was correct:
Set up a Delaware Series LLC to be on title for flips
Set up a Delaware Series LLC to be on title for holds
Set up a Delaware Series LLC for operations
Set up an LLC in your state that is owned by the Delaware Series LLC for operations
That's a total of 4 entities.
If I'm following Scott Smith's logic correctly on this, here are the benefits:
1 - Delaware companies are anonymous, the only way to know who owns them is to file a lawsuit, so you don't know what assets are there to go after until you have already committed to the lawsuit.
2 - At least in Washington State, you are required to register your business in Washington if you will be conducting business transactions (i.e. operations) in the state, and they require disclosing the ownership of the LLC. The ownership, however, can be another LLC from out of state, hence the Delaware Series LLC for operations to own the WA State LLC, to keep things anonymous.
3 - Every series allows for pretty much unlimited separate, independent "cells" that are used for holding title on each property so there is no asset overlap and the liability risk is always kept only within the individual "cell" that is getting sued. It's treated as a separate LLC within the parent series LLC. In that regard, the liability of each asset is protected from eachother within the series.
4 - You only have to file one set of taxes for each series LLC. This should solve all the problems for everyone that was complaining about having all the accounting and tax headaches of multiple LLCs (i.e. one per property), right?
5 - By holding one series LLC for each category, you keep the types of taxes appropriately separated (capital gains taxes for flips, income taxes for holds) so the IRS can't tax you the higher of the two rates on all your properties.
6 - By having a third operating LLC, you can run all funds, income, expenses, etc. through that company (like a property management company), so you only need one set of books (I'm not 100% clear how this works yet, I'll be talking to a CPA about this sometime in the near future), although you still need to account for the expenses of each property just like a property management company would anyway.
7 - Every "cell" in a series LLC can have its own operating agreement, it's own set of ownership, it's own agreements with 3rd parties, profit splits, etc. etc. - essentially eliminating the need for new joint venture LLCs for every project with partnerships, etc. Do your own deal, or do deals with other people, every deal can be a different cell in the series LLC with it's own DBA. Just put flips in the flip series and holds in the hold series, and run all the money through the operating LLC.
8 - When setting up a new cell for a new project, you don't have to do a new filing, you just add a DBA for that cell with minimal filing and pretty much no additional fee, making this process extremely simple - just have templates set up (I'm not sure on these details)
9 - The operating company becomes more of the target for lawsuits because that's who renters make payments to and have disputes with, and it's the only local LLC. If they push to sue the ownership on title, the name on title is the name of the cell LLC (not the series LLC). I'm sure they could eventually figure it all out to sue the right people, but it's harder to figure out - the cell LLC is still anonymous, and it's in Delaware, so they have to sue in Delaware to sue the cell LLC, even though the partners may be in WA State or wherever. Again, they wouldn't know what assets are held before committing to the lawsuit. It's easier to sue the operating company, but the operating company doesn't own any of the assets. And it's also anonymous, since it's owned by another Delaware LLC. I don't know the details of the relationship between the operating LLC and the flipping series LLC, but I'm assuming there's a similar relationship where the money goes through the operating LLC and not the flipping series LLC.
10 - Operate your rentals as an employee of the operating LLC (i.e. you work for the property management LLC when you are doing things like repairs, etc.) - that should separate you more legally and give more protection from anyone being able to go after your personal assets as though you've pierced the corporate veil - remember, the asset would be owned by the series LLC for holds, so it's not in your personal name.
I'm probably missing a few points here. I know Scott mentioned DSTs, I'm just not as familiar with how trusts work compared to business entities.
I'm also sure I don't have everything right - I haven't actually done any of this, this is just my understanding / impressions so far, and I'll be looking into it more because I intend on doing different kinds of deals with various partner set ups, etc., and this does seem to simplify, protect and give me a lot of flexibility with any project type I want to try.
I talked to a Delaware lawyer about the Delaware series LLCs, and the only flag he brought up was that series LLCs haven't been tested in courts much yet. Delaware courts are more progressive for business laws since they are already used to Delaware's progressive business culture, but other states could still possibly throw out the series protection. I thought California already basically doesn't recognize series LLCs. So you probably have to research how your state is treating these to evaluate if you want to try it out.
Two questions:
@Brian Burke - You've done 700 properties - if the series LLC I've just outlined above is correct, doesn't that make sense for you, instead of separate individual LLCs for different properties? Wouldn't the series LLC strategy reduce accounting/tax/government filing headaches for someone investing in that many properties? In other words, what am I missing?
@Seth Mosley - I'd love to hear about what you learned from the private consult you mentioned in your last post, and anything else you've learned since.
