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.
Foreign States Like CA that don’t have series LLCs Makes it harder. But we discussed work arounds.
There can be no assurance that a state without an express provision on the internal liability shield will be recognized. But that goes with any AP Plan. Noting is guaranteed. Some state statutes with series provisions have specific provisions that recognize the internal liability shield of a foreign LLC. So a legal analysis is required before LLCs were authorized in every state will be required for the series. Does that state recognize the internal liability shield of a foreign LLC? While the general rule is that the law of the state of formation should govern the regulation of the internal affairs of an entity, including the liability of an owner of the entity for obligations of the entity, it would appear to be a stretch for a jurisdiction without series LLCs to recognize the liability limitation function of the series within the LLC on the basis of the internal affairs doctrine - the effect of the liability limitation function applies to third-party creditors of a series, not just to the internal affairs of the entity and its members inter se, nor, unless a veil-piercing claim is involved, to the liability of a member for debts of the series or the series LLC. If the internal affairs doctrine does not apply, the next question is whether a non-series state would be required to recognize the internal liability shields of a series LLC because of the Full Faith and Credit Clause of the United States Constitution:
Full faith and credit shall be given in each state to the public acts, records, and judicial proceedings of every other state. And the Congress may by general laws prescribe the manner in which such acts, records, and proceedings shall be proved, and the effect thereof. U.S. Const. Art. IV, Sec. 1.
In other words, if an individual series of a Delaware series LLC is doing business in a non-series state, say Colorado, does the Full Faith and Credit Clause require a Colorado court to respect the internal liability shield of the Delaware series LLC legislation in a suit brought by a Colorado resident seeking to hold the juridical series LLC and all its series liable for an accident caused by the activities of one of the series in Colorado?
Although it is well-established that a state's statutes are "public acts" for purposes of the Full Faith and Credit Clause, Bradford Electric Light Company v. Clapper, 286 U.S. 145, 154-55 (1932), a state is not required "to substitute the statutes of other states for its own statutes dealing with a subject matter concerning which it is competent to legislate." Pacific Employers Ins. Co. v. Industrial Accident Commission, 306 U.S. 493, 501 (1939). The Court cited Pacific Employers approvingly in 1998 in Baker v. General Motors Corporation, 522 U.S. 222, 233 (1998). (Although a court may be guided by the forum state's public policy in determining the law applicable to a controversy, the Court's decisions support no roving "public policy exception" to the full faith and credit due judgments.)
Accordingly, a court in a non-series state could, without running afoul of the Full Faith and Credit Clause, refuse to uphold the internal liability shields of a series LLC on the ground that the forum state's legislature, by not enacting series legislation, had expressed a public policy that internal liability shields within a single entity should not be recognized. But then this moves to not a legal matter but now a public policy issue / judge bias. It is a public policy issue court determinative. Not for any lack of legal support or law on Series LLC's etc. It comes down to does that state recognize the internal liability shield in any way or not? And what is the public policy of that state? Which is the difference of Legal Authority Vs. Practical authority.
The legal authority consists of statutes, which are enacted by State and Federal legislation, and cases which make precedent which occur also both at the State and Federal level. Statutes are typically considered better than case law, since they are theoretically more clear and trump case law when in conflict. In the case of the Limited Liability Company (LLC) and the Limited Partnership (LP) these are governed by the Statutes of the State in which the LLC or LP was created. practical authority, I mean what power a judge actually holds to make decisions which affect the status of your assets. In order for a judge to be able to enforce decisions which are reached via their legal authority, a judge has very broad practical powers with respect to reaching your assets. The problem comes when a judge without the legal authority to do those things, nevertheless chooses to exercise his practical authority power and do them anyway. This could be done in direct contravention of establish statutes and case law, or it could be done with some ‘rationale' like saying that your LP or LLC is invalid, or is considered your ‘alter-ego'. In any case, the result is that the practical authority of the court is used to take assets
The solution is to remove or vastly hinder a judges practical authority over your assets, so that he cannot usurp the legal process and if forced to rely on legal authority. That is where multiple lawyers come into play. For asset protection based on removing practical authority to work, you must use a trust structure that removes the power from you to act regarding the assets when you are in the risk position. LLCs or Series LLCs set up with Domestic Trust that is linked or bridge with a Foreign Trust where when the pre-determined trigger os stress hits the assets automatically move out of the jurisdiction of the US or Judge. That is about as close to protection as you can get and from states that do not want to recognize your entity, nor recognize the internal liability shield, refuse to recognize the full faith and credit clause, and take power in their own hands.
@Brian Bradley well said. Asset protection, and your particular goals, can typically be done with different strategies. Whether a State allows a foreign series LLC to afford the protection of its home state is one where the expense of litigation, even if you win, might negate using this particular asset protection strategy over others.
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!
Meanwhile, back at the ranch...
For what purpose are you trying to establish an LLC? Buy and hold?
What type of assets will you be holding? Little houses with debt? Enjoy crappy commercial financing. Higher risk, higher rates, balloons, calls, arms and reporting your financials to them every year. Welcome back to HS.
I don't call carrying these types of loans for no reason 'asset protection' at all.
If your holding commercial assets, by all means, get an LLC. Be like normal people and start with one. Worry about series-ing it with out of state foreign children later.
A nobody's 2c, but I didn't see where you've even been asked what you will be buying.
Generally speaking, if you are comparing "1 LLC and 5 properties in it" vs "1 series LLC and 5 series under it with one property per series," in theory, series sounds better. However, as mentioned in one of the replies, the better comparison may be "5 LLCs vs 1 series LLC with 5 series." From an asset protection view, in theory/technically, it should be a wash, as that is the reason why the series LLC was created. But then it becomes quickly complicated as you can tell from all the replies. The questions will be "What does it mean to establish a series LLC in State X while you live in AZ?" or"What is the size of the assets you are trying to protect here?" "How would it affect the cost of establishing it, maintaining it and preparing a tax return?" Etc.
Without saying, this is just my opinion and how I feel, and not necessary recommending or saying is the right thing to do or the right way to think, but for some reason, we like to talk about asset protection, yet we rarely hear about those who lost everything due to no or poor assets protection. It doesn't mean it hasn't happened, it doesn't mean that it's not necessary, and it doesn't mean that you won't need it. It just means that, to me, keep it simple, do it and just move on and get back to the business. We all run into a person/post from those with virtually no assets spending a lot of time wondering what kind of asset protection is the best for him/her.
Currently, I have series LLC, but in the near future, I won't. All will be in one LLC. While some may argue that series is simpler, to me it was more complicated. As long as each property value is reasonable, I will pick 5 properties under one LLC any day over one series LLC with 5 different series (one series per property).
It's hard for my brain to really understand what it means to have a series LLC. For example, if you have a "Best Investor, Sereis LLC" with 3 series, how many bank accounts are you suppose to have? One for each series, a total of 3? Or 4, one for the "parent" and 3 for the series? If 4, what are you suppose to do with the parent bank account? Use it for an expense that applies to all the series, such as BiggerPockets membership fee? Or you can have 3 or 4? What is the relationship between the "parent" LLC and the series? What kind of transactions are allowed, if any, and how should it be recorded?
One thing for sure (to me), I made a bad decision making a series with one property per series when each property was not that expensive.
Soh - Not an attorney
Generally speaking, if you are comparing "1 LLC and 5 properties in it" vs "1 series LLC and 5 series under it with one property per series," in theory, series sounds better. However, as mentioned in one of the replies, the better comparison may be "5 LLCs vs 1 series LLC with 5 series." From an asset protection view, in theory/technically, it should be a wash, as that is the reason why the series LLC was created. But then it becomes quickly complicated as you can tell from all the replies. The questions will be "What does it mean to establish a series LLC in State X while you live in AZ?" or"What is the size of the assets you are trying to protect here?" "How would it affect the cost of establishing it, maintaining it and preparing a tax return?" Etc.
Without saying, this is just my opinion and how I feel, and not necessary recommending or saying is the right thing to do or the right way to think, but for some reason, we like to talk about asset protection, yet we rarely hear about those who lost everything due to no or poor assets protection. It doesn't mean it hasn't happened, it doesn't mean that it's not necessary, and it doesn't mean that you won't need it. It just means that, to me, keep it simple, do it and just move on and get back to the business. We all run into a person/post from those with virtually no assets spending a lot of time wondering what kind of asset protection is the best for him/her.
Currently, I have series LLC, but in the near future, I won't. All will be in one LLC. While some may argue that series is simpler, to me it was more complicated. As long as each property value is reasonable, I will pick 5 properties under one LLC any day over one series LLC with 5 different series (one series per property).
It's hard for my brain to really understand what it means to have a series LLC. For example, if you have a "Best Investor, Sereis LLC" with 3 series, how many bank accounts are you suppose to have? One for each series, a total of 3? Or 4, one for the "parent" and 3 for the series? If 4, what are you suppose to do with the parent bank account? Use it for an expense that applies to all the series, such as BiggerPockets membership fee? Or you can have 3 or 4? What is the relationship between the "parent" LLC and the series? What kind of transactions are allowed, if any, and how should it be recorded?
One thing for sure (to me), I made a bad decision making a series with one property per series when each property was not that expensive.
Soh - Not an attorney
My take on the bank account question is that you have ZERO bank accounts. Just use the series and the parent to hold assets. Have a separate operating LLC that conducts transactions. That's just my take.
@Soh Tanaka: A practical approach.
@James Martin read the Forbes article in re requirements to "do it right". If an REI is not going to bother with a bank account, he probably isn't going to bother with proper books, minutes, etc. I've seen it a million times - all the expenses are run through one LLC instead of each one that owns a property - and it's a mess with due to/due from accounts, lousy tracking, etc. Just had an IRS audit with someone who took that approach - they got crushed.
Remember the human element of the law - it is not just what is on the books. Your job is to persuade a living breathing life form that your LLC is "real" and a separate legal person from you. Who can it be a separate financial person if it lacks a bank account? How seriously will a judge take an LLC that one could not be bothered to run real transactions through? Best way to destroy and LLC - commingle its money with your personal money or that of other LLC's. How is not commingling to run all your LLC's money through a "management company" or the like?
Better to have one LLC that is properly maintained and run than a dozen that are done half-assed and will fall apart with the slightest scrutiny. If you are not willing, for example, to have a bank account for each LLC, you probably have too many LLC's and will not properly maintain them. I have seen it thousands of times with entrepreneurs over the last 20+ years.
Most REI LLC's could be pierced in ten minutes by a competent litigator.
@Scott Smith should be able to be of assistance on these questions.
@Soh Tanaka: A practical approach.
@James Martin read the Forbes article in re requirements to "do it right". If an REI is not going to bother with a bank account, he probably isn't going to bother with proper books, minutes, etc. I've seen it a million times - all the expenses are run through one LLC instead of each one that owns a property - and it's a mess with due to/due from accounts, lousy tracking, etc. Just had an IRS audit with someone who took that approach - they got crushed.
Remember the human element of the law - it is not just what is on the books. Your job is to persuade a living breathing life form that your LLC is "real" and a separate legal person from you. Who can it be a separate financial person if it lacks a bank account? How seriously will a judge take an LLC that one could not be bothered to run real transactions through? Best way to destroy and LLC - commingle its money with your personal money or that of other LLC's. How is not commingling to run all your LLC's money through a "management company" or the like?
Better to have one LLC that is properly maintained and run than a dozen that are done half-assed and will fall apart with the slightest scrutiny. If you are not willing, for example, to have a bank account for each LLC, you probably have too many LLC's and will not properly maintain them. I have seen it thousands of times with entrepreneurs over the last 20+ years.
Most REI LLC's could be pierced in ten minutes by a competent litigator.
If the management LLC tracked every transaction to each property would this matter? Just curious.
I am not a lawyer or an accountant, which is why I hire good ones and do what they tell me. I know that every transaction in my management group is directly allocated to a property with a paper trail (literally every nickle of every transaction).
Would that not make this an easier sell (to keep the assets in separate LLCs and run the transactions through a managmenet LLC).
If the paper trails are strong, then wouldn't it work fine?
@James Martin, that is way better than what most entrepreneurs, especially small to medium REI, manage to do.
Still - if I were trying to pierce, I'd argue that you commingled money - you just did a really good job if tracking it. Would that suffice for me to pierce? Maybe, maybe not. Surrounding facts do matter, and they tend to add up. I personally think failure to have a bank account for an LLC is a strong factor in favor of piercing. Perhaps your otherwise organized approach would suffice to overcome the issue.
@Soh Tanaka May I ask what made the Series LLC more complicated for you? It's unclear from your post, but if it's the tax situation I have a resource about simplifying taxing the Series entities that may help you out. The thing to be wary of with multiple properties in one LLC is that if you are hit with a lawsuit, all of your properties could be vulnerable. There's little case law involving successful suits of Series LLCS (because most lawyers won't even bother), but cases in every state of an LLC structure alone being pierced. If you go with this plan, it might be worth considering using Anonymous Land Trusts in conjunction with your Traditional LLC to maintain an additional layer of protection. There are a couple of ways to structure such a system (one per property, or Trust owning the LLC) that you could ask your attorney who assists you with these matters about.
@Joseph Lucas Jr You are absolutely correct that for most investors, a Series LLC is a superior entity structure. I can go on for days with reasons, but the main perk for us RE investors is that you can easily incorporate new assets into the structure and ensure they're totally protected within their own child Series. Creating a new series takes a few minutes on the computer and a couple of signatures. You will want to get the help of a qualified real estate attorney in the area you form your entity in. An attorney in your destination state can also serve as your Registered Agent--a legal requirement for all LLCs that I wrote about here on BP recently.
May I ask exactly why you'd be concerned about moving the Series structure to AZ? In most cases I can't imagine why this would be necessary. Your TX Series LLC could hold properties from any state. You are NOT prohibited from forming an LLC in Texas. Arizona not offering one just means there isn't an AZ Series LLC--but you're free to pick from any of the states that do permit its formation. My fellow asset protection attorney colleague Brian Bradley is correct and made great suggestions for formation states. Each has its own perks, though I may be partial to my own state (Texas), NV, and DE, for tax, operational, and judicial benefits respectively.
I must respectfully disagree with @Michael Plaks on the use of a TX Series LLC outside of Texas. I form these entities for clients all over North America, and provided they call when they need help, rarely have issues. There can be charges for foreign entities, but my firm can't be the only one that offers flat rate Series LLC set-up. Check with real estate attorneys near you if that's a concern. Most of us are happy to explain pricing during a cheap initial consultation.
Please feel free to ask any additional questions you may have about the TX Series LLC or asset protection in general. Yes, I'm clearly in favor of this entity, and I do believe you sound like the type of investor it could be extremely useful for. But happy to help!
I cannot agree or disagree with you, as I'm not a lawyer. I have nothing against Texas Series LLCs from my point as an accountant, plus I'm in Texas myself. I'm simply asking a question, and let me ask you this same question.
My concern is being sued say in Arizona. Since AZ does not have its own Series LLC, would AZ courts afford an AZ investor the protection of separation between Series within a TX Series LLC, per Texas law? Or would they treat it under AZ statute, which would potentially result in ignoring the Series and exposing ALL assets held by the entire Series LLC?
@Scott Smith The complication came from the fact that I overprotected my assets relative to the value, not necessarily the fault of series LLC itself. The same thing could've happened, had I created 5 regular LLCs. It's not the tax as I just have to give the information to my accountant (although it got certainly complicated, when I tried to do it myself - mistake.)
If you have 5 series with one property per series, that means 6 bank accounts (1 master + 5 series,) 6 checkbooks, 6 checking accounts, 5 savings accounts (if the master has no savings account,) and carry 6 debit cards. If you want credit card points, add 6 credit cards in your wallet. To avoid a bank fee, you need to maintain a certain amount in each account. Sometimes one account goes low, so you have to move money from one account to another the right way (which is more than just transferring money from one account to another) so that it won't be considered comingling.
While there was a benefit, which is a clean bank account per property, as all the transaction of property ABC was in bank account ABC, the above hassle factors were bigger than the benefit, at least to me.
In general, as long as the assets are not huge, most of us, if not all, agree that putting one property per LLC (regular LLC or series LLC) is an overkill. A lot of us put at least a few properties under one LLC, knowing that one lawsuit could wipe out all the properties in it. At least to me, the goal of the asset protection is NOT to get the most robust protection I can get but to balance out the cost to establish/maintain, the likelihood of losing everything by getting sued and the hassle factor with the size of assets I'm trying to protect.
Done right, I'm sure there's a way to use trust + LLC (or series LLC) + LLC in another state to make the protection really strong, but I'm not at the point where I feel like that is necessary.
@James Martin Regard to the bank account, the take on my attorney/accountant was to have a bank account for the master also.
@Soh Tanaka thanks for sharing. Your experience does highlight the simple truth that asset protection is not one size fits all. All of us investors have to do cost-benefit analysis. It’s easy for those of us that are already super busy to forget to weigh in where our time is best spent. Time is a real cost, and you at least know what you are willing to trade off for it. The plan that you had may be awesome for a multi-unit investor or even you in five years, but sounds like it wasn’t what you need at this exact moment. What works for one investor won’t work for all. That is a nuance that gets lost when anyone—including people like me who handle AP for a living—makes sweeping generalizations about any strategy or structure. So much of good planning is about tailoring to the individual’s needs. I hope you have an attorney and CPA to help you out with making the best choice for your particular situation. I also hope your professionals help you capitalize more on your time.
The other major lesson I see in your case is that any structure can become stressful if you go it alone or try to do it all. Ideally, professionals are there to help you manage these things so you can do what you do best—running your business. It sounds like yours could have been more involved with setting you up for simpler day to day operations. Don’t be afraid to ask for what you need, whether that is simpler banking, more involvement, etc. Really appreciate your insight here.