Last year Kansas became the ninth state to adopt a Series LLC statute and their law is now in full effect. A Series LLC allows a real estate investor with multiple properties to increase their asset protection by minimizing their liabilities between properties. But before we explain how Series LLCs work and the states where it is available it is helpful to first explain how many properties you should hold in a regular LLC.
Most real estate investors use a limited liability company (“LLC”) to hold their properties as the LLC protects the owner of the LLC from the liabilities of the business/property. In other words, if something goes wrong on a property the tenant/plaintiff is forced to sue the LLC and cannot sue the owner of the LLC personally or get at the LLC owner’s personal assets. However, the plaintiff in a suit against an LLC is able to go after the assets of the LLC, which would include the property and anything else in the LLC. So, if you have multiple properties in one LLC the plaintiff can go after all properties. In order to avoid this liability situation investors can separate out the properties among multiple LLCs so that if something goes wrong in one property that liability is contained in the LLC that holds only that property and the other properties held in their own separate LLCs are outside the reach of the plaintiff. The benefit to multiple LLCs is that you can have separate liability protection for each property but the downside is that you have additional costs in setting up and maintaining additional LLCs.
When determining whether to put multiple properties in one LLC or whether to put separate properties into their own LLC the primary issue is how much equity is between the properties because the equity in the properties is what is being protected in a multiple LLC scenario. As a general rule we typically advise clients to use multiple LLCs when they have $200,000 in equity between properties in an LLC (or will have with a new property). At this level of equity there is enough value to protect between the properties to outweigh the cost of the new LLC set up. If there is only $10,000 in equity between multiple properties in an LLC, because each property is fully mortgaged, then there is less equity to protect and we wouldn’t recommend separate LLCs for asset protection purposes. Additional factors to consider in determining whether to establish multiple LLCs for your properties are the type of properties (e.g. multi-family would be more in need versus single family) and the location of the properties.
In nine states as well as the District of Columbia and Puerto Rico, a real estate investor can set up what is called a series LLC. A series LLC provides for what are called sub-series and each sub-series (essentially its own LLC) holds its own property and gets separate liability protection. This is all accomplished in one Series LLC filing to the state and then one tax return for the series LLC but allows for an unlimited amount of sub series and as a result allows real estate investors to have each property they own treated separately for asset protection purposes. So, for example, a series LLC owner would own one property in Series 1 of ABC Investments, LLC, a series LLC, and then Series 1 would own one property. If something happens on the property in Series 1 then the liability is contained there and Series 2, 3, 4,5 etc. cannot be attached or otherwise subject to the liability of Series 1.
The Nine states with a true Series LLC statue are; Delaware, Iowa, Nevada, Utah, Illinois, Oklahoma, Texas, Tennessee, and now Kansas.
I should note that Minnesota, Wisconsin, and North Dakota offer an LLC called a Series LLC but it is confusingly different from what I have described as a Series LLC as these states only allow for different interests of ownership of the LLC but don’t allow for separate treatment of each series for assets and liabilities. Be weary in these three states when creating a Series LLC, as it may not be what you are expecting.
Keep in mind that the Series LLC structure only works when you have properties in the states that recognize Series LLCs. For those with properties in states without a Series LLC statute, we recommend the traditional multiple LLC structure described above to obtain the increased asset protection amongst multiple properties. For assistance in analyzing whether your asset protection structure would benefit from multiple LLCs or a Series LLC please contact the Law Firm at 435-586-9366.