Real Estate Investor’s Guide to Series LLCs

By Sean Robertson

The series LLC is a relatively new business entity, which Illinois just began to allow in August 2005. A series LLC is a limited liability company that has the power to create separate “mini-LLCs” or “series” within the larger LLC entity. Each series may have separate members, managers, assets and liabilities, and business purposes. Each series has limited liability protection and is protected from the liabilities of each of the other series. The LLC, and not the individual series, is treated as the legal entity under Illinois law. This minimizes initial formation costs, filing expenses, state franchise fees, administrative expenses and more. It is very similar to having one LLC parent company that owns multiple LLC subsidiaries. The series LLC is a less expensive and less burdensome way to accomplish essentially the same goals.

(Looking for something different, take a look at tax lien certificate investing.)

Traditionally, real estate investors have used two approaches to structuring their businesses:

One approach is to place the business into an LLC or corporation

which holds all of the real estate investment properties. The advantage of this approach is that it offers personal liability protection to the investors, protecting his or her personal assets (i.e., home, personal bank accounts, and personal investments) in the event the business gets sued. The main problem with this approach is that while it protects the owner’s personal assets from the liabilities of the business, it will not protect one asset owned by the LLC or corporation from being used to satisfy a judgment related to another asset. For example, assume the LLC or corporation owns three real estate properties, and someone is injured at one of the properties. If that person sues the business and wins, then all of the assets of the business – including the other properties it owns – can be used to satisfy the judgment against the LLC. One bad lawsuit and the entire business could be bankrupt.

The second approach is to form multiple LLCs or corporations

each holding one or more real estate investment properties. This is a response to the above problem as it allows the properties to be segregated into different businesses. Therefore, if someone sues the business and wins, they are generally limited to the assets in that LLC. The assets in the other LLCs are protected. The problem with this approach is that it can be expensive and administratively burdensome to create and operate multiple LLCs or corporations.

A Different Type of LLC

Real estate investors now have another option that can be very advantageous. In August 2005, Illinois joined the ranks of Delaware and other business-friendly states and amended the Illinois Limited Liability Company Act to allow series LLCs. Using the series LLC, an investor can form a separate series (like a “mini-LLC”) for each property. It is much less expensive and less burdensome to use one series LLC than to use multiple LLCs. Once the original series LLC is established, it is very easy and inexpensive to add additional series. Each series would hold separate assets and be treated as a separate entity. Each series would maintain its own books and records and keep its accounts separate. The assets of each series would be protected from liabilities associated with the LLC or any other series. In general, the series LLC provides all of the benefits of using multiple LLCs or corporations at a reduced cost and reduced administrative burden (i.e., less paperwork and state filing requirements).

Requirements To Be Met

In order to fully benefit from the series LLC, there are some requirements that must be met. For instance, the LLC articles of organization and operating agreement must provide for the establishment of series, and each series must keep separate books and accounts. In addition, each series must have the same registered agent and office, and the name of the original series must appear in the name of all subsequent series.

Not available in all states.

Series LLCs are a relatively new concept, but like any other business structure, they are not for everyone. For instance, while Illinois, Delaware and a handful of other states allow series LLCs, they may not be recognized in other states that do not allow them. So while real estate investors should definitely consider using series LLCs to manage their businesses, it is very important to contact your business attorney to discuss whether it is the right business structure for you.

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Sean L. Robertson is the founding partner of the Law Office of Sean L. Robertson, P.C.  He may be reached at 312-570-5506 or sean@slrtaxplanning.com

©2005 All Rights Reserved.

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