Series LLC.. Can I move it?
Phoenix, AZ · Member since 2018 · 11 posts · 8 votes
Good morning BP nation,
I have just become aware of the Series LLC, which appears to afford much better asset protection than a standard LLC due to the ability to essentially nest entities within each other. Based off some quick preliminary research, it would appear I can not create a Series LLC in my home state of Arizona however could I not just form the Series LLC in let's say, Texas, and just go through the process of domestication to move it to AZ? Or does the fact that Arizona doesn't allow the formation of Series LLC's prevent me from even moving one in? As always, I appreciate the help BP.
Take care!
For discussions like this, we really need the LOL icon, like they have on Facebook.
Once again, and the last time, I'm not relying on anything. I'm asking attorneys for their professional opinion. You have one, other attorneys have theirs. I'm learning from all.
Also look at DEL. CODE ANN. tit. 6, § 18- 215(b).; V.T.C.A., Bus. Org. Code § 101.606(a). G Management LLC v. Young Brothers and Co., Inc., 2007 WL 551761 (D. Me. 2007); GxG Management LLC v. Young Brothers and Co., Inc., 2007 WL 1702872 (D. Me. 2007); National Securities Series- Industrial Stock Series v. Commissioner, 13 T.C. 884 (1949), acq., 1950-1 C.B. 4. ; and the list goes on and on and on.
The GxG Management cases are unreported or non-appellate (and therefore not citable as authority in pending cases) and the 1949 tax case you are citing pre-dates the existence of LLCs, let alone series LLCs. I think this tends to emphasize the point that there does not appear to be much case law on series LLCs at this time.
@Rob K. you are so off the path its funny. This forum is not for case law. It is a quick here you go. Its strange how its been around for 28 years and over 13 states keep adding it. And its interesting how you seem not to understand how case law works. National Securities Series case is used as legal president that shows the courts recognize Separate portfolios of a series business and that if each series is treated as a separate trust and the creditors of one series of the trust may not reach the assets of any other series of the trust. this is just basic law 101. Not sure if you actually do anything in court and write briefs and argue in-front of judges etc. The Series Classification of assets has been ruled on a long time before the Series LLC existed and further supports and strengthens it since the legal principle was established before its existence. the position taken in the investment fund private letter rulings and the principle of Rev. Rul. 55-39, 1955-1 C.B. 403, make it likely that the Service will take the same view in the case of an LLC series. Bishop and Kleinberger, Limited Liability Companies ¶ 2.11 (May 2006). More legal experts stating the same. Just saying Rob you have zero clue what you are talking about and keep discrediting yourself.
A project on the federal tax classification of a series was included in the Treasury’s 2008-2009 Priority Guidance Plan, and reappears in the 2009-2010 Priority Guidance Plan. General Tax Issues, Item 20 (classification of series LLCs and protected cell companies under §7701) (Nov. 24, 2009). If each series is treated as a separate business entity for federal tax purposes, then it appears that each series is an “eligible entity” that may elect its own tax classification See Treas. Reg. Section 301.7701-2. Even the IRS is ruling on the favorability of the Series LLC as Separate. Sorry. again you are way out of your league Rob.
CA is one of the tricky states with Series LLC's and we have already discussed the work around of that in multiple ways. Used openly by almost all firms. So again, you are wrong.
You seem to blindly attack what you do not understand or know and are not open to learn. Not good. And not an attack. just an observation from your conclusionary statements that just keep getting blown up. I am not going to go into every case law that exist since it is not the point of this forum or BP. Go take CLE courses and learn from experts in the field before you opine.
Well you finally cited case law, and I just pointed out the effect of the case law you cited the way an attorney would normally do if they were in court.
You on the other hand, have a tendency to comment on what you state is the inherent lack of knowledge and ignorance of persons who make statements or ask questions you do not like. I do hope you hold back on that when you litigate as my experience is that such ad hominem arguments are not well received by judges in court.
And Rob K. (an actual litigator) nails it. When someone blows so much smoke and is so quick to get nasty & personal instead of addressing the substance of the discussion.....well, such tawdry behavior reflects poorly on that person's judgment & credibility.
Back in a bit with some actual substance.
For discussions like this, we really need the LOL icon, like they have on Facebook.
I am mostly a tax attorney. But have done a good deal of asset protection work for the last 23 years because taxation, asset protection, and especially entities go hand-in-hand.
I think getting out of state series LLC's in AZ will provide you little benefit. Certainly not enough to justify the costs. The costs would arise in the form of money (paying someone like Brian or me) but also hassle, time, etc. In other words, the nice attorney is saying "don't pay me to do this work". Now when a professional is honest enough to tell me that, I tend to listen (and return when I need an honest professional).
At best AZ would treat TX (or DE or NV) series like AZ LLC's. They certainly will not treat them any better than an AZ LLC. AZ would almost certainly be looking to see the TX LLC's registered in AZ – meaning that you'd pay both TX and AZ fees, file reports in both states, etc. There are plenty of Asset Protection Salesmen who would advise not to register the TX entities to do business in AZ. As a legal matter, that approach only works if the TX series LLC’s are so passive as to fall below AZ’s definition of “doing business”…..someone would have to know what you intend to do in the LLC’s and know or research AZ law to give an honest answer. Most Asset Protection Salesmen never bother to do that research or even to mention the need for it. The next paragraph explains why that is.
Another approach is very common with Asset Protection Salesmen: Just don't tell AZ. My issue with that: If local law requires a thing, I think we should follow the law. Goes with having a law license. Don't get me wrong, when the law is grey, my job is to advocate for the best interpretation for my client. But when it's black & white, I should advise the client to follow the law. Further: Most judges & bureaucrats do not take very kindly to people ignoring the law (e.g. – registration requirements) and then later trying to claim protection of the law (e.g. – liability shield). Indeed, such an approach often bites one in the butt later – it's the nature of dealing with bureaucrats and judges. They remember. They judge you – and if they think you are sleazy or deceptive, they will generally find a way to get you. Add to it: Some states are serious about registering to do business with out-of-state entities and penalizing failure to do so. For example, CA denies you access to the courts if you are doing business there and do not register your foreign LLC. OH treats failure to register as a "deceptive business practice" and levies a fine, often of circa $10k. Bottom line: You want the protection of the law, you probably ought to follow the law.
Some Asset Protection Salesmen offer to use trusts to help you hide your foreign LLC from the state where it does business – especially if the state is California (they have insane annual fees for LLC's). But here's the thing: If the target state (e.g. – CA) knew all the facts (e.g. – the trust is a front for an LLC) would they impose a cost (e.g. – CA LLC fee)? If the answer is yes, then you are deliberately trying to mislead the state by hiding behind a trust. Sounds like "deceptive business practice" to me. Not a good idea – even if "you won't get caught". Further: My direct experience with the IRS and with attorneys general is that word has gotten around as to how trusts are misused. Far from preserving privacy, they often attract extra attention. I had one AG put a stack of "trust/asset protection" courses in front of me, state that she had read them, knew that the trusts were used to hide things, and wanted to know what my client was hiding with her many trusts. Ouch.
Not saying one shouldn't use trusts – in an appropriate way and circumstance. But they have so often been abused to hide things…..I'd be wary of using them to hide a foreign LLC from a state where one is in fact "doing business", as defined by that state.
Do out of state entities provide superior asset protection to local LLC's? Rarely, especially if real estate is concerned. With very few exceptions, AZ is not going to follow TX law, regardless of where your LLC came to be. And the few exceptions are very unlikely to apply to you. For example: Derivative lawsuits are often decided in the jurisdiction where the LLC was formed. OK, great. What's a derivative lawsuit? Essentially, it is when the owners of a company sue the managers. Well……for most people on this forum, those are the same people. Gonna sue yourself? Probably not. Bottom line, TX law (assuming that it is better than AZ law) is very, very unlikely to apply in AZ, especially for RE-related endeavors.
Now Brian keeps mentioning the Constitution and the Full Faith and Credit Clause. He seems to think that means that AZ has to follow TX (or NV or whatever) law. Not so. I cited a specific case, which he of course ignored.
In Toni 1 Trust v Wacker, an Alaska Domestic Asset Protection Trust (“DAPT”) was used to try and protect assets from creditors in Montana. The case went to the Alaska (not Montana!) Supreme Court. And the Alaska court ruled (quite unsurprisingly) that Alaska law does not apply in Montana. Who knew? Here’s a link to an excellent, if rather long and somewhat technical, discussion of that case: https://www.forbes.com/sites/jayadkisson/2018/03/05/alaska-supreme-court-hammers-last-nail-in-dapt-coffin-for-use-in-non-dapt-states-in-toni-1-trust/#337a197e62a7. That is how the US Constitution applies – I challenge Brian to show me case law that goes the other way. I have not seen it. Bottom line: AZ does not have to follow TX law, even if one screams “US Constitution Full Faith and Protection Clause” over a Ouija Board at midnight on Friday the 13th. AZ will recognize a TX LLC – on AZ's terms and under AZ's rules.
I don’t see much benefit, and I do see some costs. I’d pass.
There’s more, but this should be enough to guide your decision.
How to spot an Asset Protection Salesman, as distinct from an asset protection attorney?
1) The attorney asks specific questions about your situation to see what really fits and customizes the answer. The Salesman has lots of templates, one of which will surely fit you.
2) The attorney honestly addresses issues and presents both weaknesses and strengths of a structure. The Salesmen minimizes or ignores weaknesses, emphasizes strengths, ignores data he does not like, and substitutes bad temper and clownish insults for measured & substantive responses.
3) The Salesman if often, but not always, located in NV or UT.
4) The attorney explains things in a clear manner with citations and evidence. The Salesman spews mumbo-jumbo.
5) The Salesman sells fear. The attorney balances risk and reward in a sober manner.
I'm sure I've missed a few. But I'll bet the Reader can sort the one from the other.......
That is not what the case or the commentator said. It is merely your attempt to distract from the ultimate holding: Alaska trust law does not apply in Montana. Nor, in 99.9% of cases, does TX law apply in AZ with regard to LLC's, series or otherwise. Do you seriously deny that?
Did you miss this part of the case?
" The Supreme Court found that “Full Faith and Credit” does not require states to go quite so far. Instead, “jurisdiction is to be determined by the law of the court’s creation, and cannot be defeated by the extraterritorial operation of a statute of another state..."
"But comity is not a legal rule; rather it is “a principle under which the courts of one state give effect to the laws of another state . . . out of deference or respect.”31 In other words, while courts may elect to follow a statute like AS 34.40.110 out of comity, they are not compelled to do so.32 Furthermore, AS 34.40.110 is more than a “limitation[] [Alaska’s] legislature place[d] on its own laws”33 — it purports to deprive other states of jurisdiction over all fraudulent transfer actions concerning Alaska trusts, even those based on causes of action arising under that state’s own law."
The fraudulent transfer statutes happened to be the laws in play - but the result would be the same with other laws as well. Your attempt to use the word "fraud" to ignore all the other words in case fools no one.
Have you some case law showing how TX (or NV, etc.) LLC law applies in AZ in any way that has some chance of mattering to a small real estate investor? Or just gonna blow some more smoke in hopes of confusing the laymen? Might work on (a very few of) them. Won't work on me.
And now Brian wants to talk about his (surely Magical and Trademarked) Cook Islands product. How about we stick to use of foreign series LLC's in AZ, the original topic?
So, as I mentioned, Jay Adkisson is an authority in the area of Series LLC's. He writes some good articles on the topic. Easier to digest than case law, especially with Brian wanting you only to read one word in the case.
Here's a link to a good & readable article in re Series LLC's: https://www.forbes.com/sites/jayadkisson/2018/06/1...
Here are a few interesting quotes (bolding & underlining are mine):
"For these reasons, the Series LLC is not an entity for general consumption, for the do-it-youselfer or even the average LLC planner who is inexperienced with Series LLCs. From time to time during the drafting process, there was talk of restricting the use of Series LLC only to those regulated industries which already have some experience with these entities and can be expected to use experienced counsel in forming them, those entities being primarily the hedge fund and insurance sectors. Releasing the Series LLC to the general public was feared to be, in the words of noted LLC expert Tom Rutledge, like "giving an Uzi to a three-year old". In the end, however, it was decided that if users were willing to take the risks then the Series LLC should be available to them.
So you wanna pay hedge fund or insurance style fees to experienced counsel? Sure - as long as the benefit of the Series is sufficient to cover those costs. So I'd ask yourself: How much is benefit? Wait, wait, I know! You can have Texas law apply in Arizona! NOT.
"If for whatever reason records do not exist or are not well-kept as to an asset, then the asset is deemed to be "non-associated" and is thus available to the creditors of any tranche or the parent organization, i.e., it is up for grabs for whichever creditor of any series or the parent organization gets to the asset first. Suffice it to say that for this reason Series LLCs are not for those who are not particularly good at keeping the books, and it is somewhat anticipated (based on, if nothing else, common sense) that a Series LLC will have its own professional accounting staff to make sure that the books are well kept."
Good Lord, if that does not describe REI, I don't know what does. You REI gonna maintain all that? Really?
"The obvious key to a successful Series LLC is a comprehensive and detailed Operating Agreement and ancillary documents that are carefully tailored to the specifics of the deal. Although a barebones or weak Operating Agreement might not cause too many problems with an ordinary LLC, that would be tantamount to suicide with a Series LLC. An off-the-shelf or do-it-yourself Operating Agreement for a Series LLC, or an Operating Agreement for an ordinary LLC with only slight modifications, will be little more than legal suicide should a significant issue arise."
Once again, most small REI are terrible with operating agreements and similar admin details. Gonna pay for the custom job to "save money via a Series LLC"? Gonna keep professional books, hire experienced lawyers, and draft and understand complex operating agreements like the big boys - all in the name of saving some money on LLC set up & annual fees? Really?
But wait! For only a small fee, I know someone who can do all this nice & cheap - no really!
"the funny thing is most this has nothing to do with what the original poster asked."
Actually, I stayed on topic. TX (or other foreign) series LLC in AZ. I think it's a bad idea for REI (especially small to medium) and explained why in no small detail.
"The other thing is we will at least agree on one thing their is no perfect set up, especoslly if you are purley donestic, but you can get close if you link domestic with foreign. Then any rogue court or judge it would not matter and increase your leverage and negotiation strength."
I agree in principle, easy to do, very broad statements. It's always a question of very specific & personal details, costs, and benefits, as well as subjective clients who have different views of risk and different levels of ability to properly execute. And size matters - a lot. More to protect, more incentive & ability to do so.
@John Hyre And yes the case is about fraudulent transfers and who has control over saying when it is fraudulent. the Alaska statute purports to have sole control over determining whether any transfers to the trust shall be deemed fraudulent. That is where the Alaska statute when wrong and was to bold. The issue was based around can another state with an action before it determine if a transfer was fraudulent or not. That is very narrow. And the court gave a very narrow ruling in accordance with the Full Faith and Credit Clause relating that narrow topic of fraudulent transfer and Alaska Legislatures going to far. The jurisdiction was disregard for specific reasons.
Now, for AP, it goes to show that the protection can be lost if you don't follow the law and even other courts can determine the matter to be fraudulent. But that has nothing to do with the legality of a Series LLC, or Trusts etc. You are going very broad on a narrow ruling. The case literally had to do with AZ's ability to determine fraud despite the AK Domestic Trust Act in relation to criminal activity. Read the facts of the case.
Now to get even more protected, the Family still kept their assets since despite the domestic trust being piered due to fraud, when it got transferred to the Cook Island Trust. Hence the power of having both domestic and the foreign trust option.
And its very strange how you think that only certain states can have AP Attorney's despite every state having them and in almost every city, and huge large national firms. Makes zero sense and no logic how only 4 states and those attorneys can practice AP Law. Does that logic apply to other areas of law also? And other profession? sounds like personal anger and bias. But that was how you started when you wrote to me. Maybe we just move on from this topic since we can do this all day and week and get nowhere. I have given many references and even book options for case law and code statute and even said go ahead and email me and I will send you additional 40 +page summary just on the LLC with caselaw and codes etc from some of the best AP Attorneys in the nation. But I have no email yet. So you seem to just want to be angry and ramble.
Read "Start Your Own Corporation" by Garrett Sutton, ESQ. In it he states... paraphrasing here: No judge has EVER made a ruling on a series LLC where it is recognized as separate legal entities. It's all treated as 1 LLC. If someone sues your series LLC, they will get all the "llc's" under it. DON'T DO IT! and don't believe people who tell you otherwise! This is coming from common law, where the past is heavily leaned upon, and series LLCs are not in the past, their so new that judges don't have a basis for upholding their protection for you. There's more safety in structure, don't be lazy about it.
The other practical aspect of this discussion that needs to be observed is that if you have a complicated asset protection set up, once there is a significant claim in which you desire the setup to protect you, their is a good chance it will be put under a microscope once litigation commences.
Granted, such a setup can sometimes give you negotiating leverage with a creditor trying to collect. On the other hand, the attorney's fees for having to defend it in court can get very high. Their are many litigation tools competent litigation attorneys have available to them to put your structure into issue in court. Even if you win, you may lose because of the cost you have had to incur. My experience is that most real estate investors who thought they had a foolproof asset protection plan experience a high amount of stress and anger once they learn of the cost and energy it will take to defend it in court and the amount of private information that will need to be turned over to the creditor in the discovery process. The litigation process is inherently uncertain.
This is why having insurance that can cover you is the best first line of defense. If the claim is covered, the insurance company pays for the defense of the claim against you which allows you to sleep at night.
Far better for the real estate investor to educate themselves and learn to assess and understand their tolerance for risk and how and what activities create risk for them before embarking on an asset protection plan. It is not always easy or foolproof, but avoiding the claim in the first place can be the best protection.
1) See the language I posted from the case. It was broad - under FF&C, no state can force its law on another state. This narrow case followed those broad principles. Which is pretty normal with case law.
2) I am not questioning legality of Series LLC or trusts. For you to assert I am doing so is to twist what I have said. That is not an honest approach and I do not appreciate it. It is a sign of severe weakness when you address what you wish I had said instead of addressing what I in fact did say. To repeat it yet one more time: I am saying that having a TX series LLC in AZ does not mean that TX law applies in AZ 99.99% of cases - and those few cases where TX would apply are extremely unlikely to matter to small to medium REI. You have never addressed that point. Ditto need to register TX series in AZ. Ditto true costs of Series, per Adkisson.
3) Who said anything about AP lawyers being restricted to a few places?
4) You seem to be an expert on personal anger the way Charles Manson was an expert on murder. You have consistently engaged in personal/ad homenim attacks. As Rob K said, I hope you do not do that in real life. People like me will take full advantage of it. Don't want hard pushback from the likes of me? Don't engage in personal attacks. Easy. Or at least simple.
Someone please give @Joseph Lucas Jr some kind of BiggerPockets award for opening the biggest can of worms of 2018.
Now, if anything is clear from this debate to a casual observer, then it goes like this:
1. Even attorneys will never agree on asset protection. Much less the rest of us, mere mortals.
2. Keep it simple.
3. Don't use TX Series LLC outside of TX - unless you want to be engulfed in heated debates like this one.
4. A heated debate is a reliable sign that the solution in question is not reliable.