Over at the real estate blog, BiggerPockets.com, Ali Boone wrote an excellent article entitled “Should You Put Your Rental Properties in an LLC?” As of today, the article has generated over 90 comments. Below, I have republished my comment from back in August here for my readers:
I am a Texas attorney and I have formed a number of series limited liability companies for my real estate investor clients (both residential and commercial). In addition, I have converted several limited liability companies to series limited liability companies. I have written and spoken on the series limited liability structure.
For the unfamiliar, a series limited liability company is an LLC that, in essence, has a “master” LLC and one or more individual “series”. (More on this in the last section – below the dashed line.)
The following states have a series limited liability statute: Delaware (since 1996), Texas (since 2009), Illinois, Iowa, Nevada, Oklahoma, Tennessee, Utah, Kansas, District of Columbia, and Puerto Rico. Each state is a bit different and your readers in these states should consult an attorney familiar with their state’s statute (and any relevant case law interpreting that statute).
In Texas (under the Texas series limited liability statute), a series LLC is a great choice for real estate investors. It offers all the advantages you mentioned in your article (i.e., asset protection, tax advantages, and it sounds really cool). More importantly, however, it ameliorates many of the disadvantages you identified. Briefly, here’s why:
In Texas, the filing fee for a series LLC is $300 ($325 if expedited). Every time a new series is added to the series LLC the owner does not have an additional filing fee.
Many larger lenders in the states I identified above are becoming more comfortable with this choice of entity. Depending on the borrower, some lenders may want to cross-collateralize the assets (cross-collateralization is often required by lenders making a loan on multiple properties in the series LLC) and most still require a personal guarantee (which most of the time can be negotiated to include the so-called “bad-boy carve-outs”).
(3) Non-foolproof asset protection:
In a business friendly state like Texas (and Delaware), states are respecting the individual structure of each series. As long as the owner keeps a proper accounting among the assets there should not be any issues. Series “A” will only be liable for the debts and obligations of Series “A” and Series “B” will only be liable for the debts and obligations of Series “B”. In other words, a lawsuit against Series “A” won’t affect “Series “B”.
(4) Triggering due-on-sale clauses.
This is only a disadvantage if the respective loan is not personally guaranteed. If the loan is personally guaranteed then this shouldn’t be a problem (just be sure to get consent from each lender).
A typical series LLC structure for many of my real estate investor clients looks like this (I’ll use my last name in the example):
Master LLC = Clark Holdings, LLC, a Texas series limited liability company.
First series = Clark Property Management, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company.
Second series = 123 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company.
Third series = 456 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas series limited liability company.
I run my property management through the first series. The second and third series each hold their respective property and the respective debt.
If, subsequently to setting up my series LLC, I buy another property, I simply add a fourth series (i.e., 789 Main Street, LLC, an individual series of Clark Holdings, LLC, a Texas limited liability company). If I subsequently sell the asset in the first series, I then can dissolve that individual series.
I hope this gives you and your readers some valuable insight in to the structure of a series LLC.