INVESTMENT STRATEGY
SERIES LLCS
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Are Series LLCs a Good Choice? AS YOU CONTEMPLATE SERIES LLCS, BE AWARE OF SOME NOTABLE ISSUES.
by Garrett Sutton
n 1996, Delaware introduced the series LLC. As one of the newer entity choices, series LLCs are an
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interesting creation. The idea was derived from Delaware’s statutory trust law, which was popular with mutual funds. Under this law, an investment company could form a trust with separate series, each with their own investors. The implementation of the series LLC gave mutual funds the option to use an LLC instead of the statutory trust, which was a much more flexible and desirable option. And it allowed for one Securities and Exchange Commission (SEC) filing, with each fund conducting its activities separately. The idea evolved into other industries, such as real estate investing. It has also spread to other states. Today, 23 states allow the formation of series LLCs. (Other states may not allow the formation of series LLCs, but many will allow a series LLC to register as a foreign entity doing business in the state.) A series LLC consists of a “master” or “umbrella” LLC and “series” (sometimes referred to as “mini-LLCs”) established under the umbrella LLC, usually through the operating agreement. Each series is treated as a separate entity for limited liability purposes, even though only one LLC is actually formed. The series LLC is an attractive option since a real estate investor, for example, could hold 10 properties in one LLC and each property would enjoy limited liability as if they were in separate entities. But is it too good to be true? Maybe. A series LLC certainly seems like a sensible option to achieve the goal of separating assets without having to form multiple LLCs. However, there are some notable issues with the series LLC.
will allow series LLCs to register to do business as foreign entities, they may not recognize the separation of assets as intended in the structure. Some states, such as California, have mandated that each series counts as a separate entity for franchise tax board purposes, thereby removing the cost savings incentive for using them. Therefore, if you do not live in a state that allows for formation of series LLCs or if you plan to work across state lines, series LLC may not be the best choice for you.
STATE-TO-STATE ACCEPTANCE First, as noted above, less than half of states allow for formation of the series LLC. And, although most states
18 | think realty magazine :: september - october 2022
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