If you are an individual with rental properties or foresee yourself purchasing rental properties in future, how you choose to incorporate and hold title to these properties will determine the strength in which your assets are protected. The traditional Limited Liability Company has long been the go-to entity for real estate investors as they provide strong insulation from personal liability for property owners. However, Texas, along with 12 other states, now allow for the creation of a special type of LLC called a Series Limited Liability Company.
Traditional LLC vs. Series LLC
A. Traditional LLC: The traditional LLC is a very popular type of entity created by real estate investors because of the ease of maintenance, management, and relatively low cost for filing. The traditional LLC can offer protection from lawsuits/creditors and can increase productivity through organization and structure. A typical real estate investor would utilize a traditional LLC by either personally purchasing a property and transferring it into the traditional LLC or purchasing a property through the traditional LLC. Once title to the property is held by the traditional LLC that asset is afforded the protection outlined in that company’s operating agreement.
B. Series LLC: The series LLC is very similar to the traditional LLC in regard to the protections and structure it provides, however it extends these benefits through the creation separate “series” within the series LLC. A “series” is essentially a subsidiary LLC within the parent company. If a real estate investor has two houses that they rent out, a series LLC could create a separate series for each house, 2 (two) series total, with this separation each house would be protected from the liabilities of the other. With a traditional LLC both houses would be held in the “same” LLC and if one house was found in a lawsuit, both homes would be considered assets of the traditional LLC and could possibly both be put at risk.
Series LLC In Action
C. How A Series LLC Works: A series LLC is an entity wherein each series in essence works as a subsidiary LLC within the parent company. For example, John Doe creates a series LLC named “J. Doe Rentals, LLC.” Mr. Doe has 3 (three) rental properties: Rental A House; Rental B House; and Rental C House. Mr. Doe creates 3 (three) separate series, one for each property, and then transfers each respective home into its series. Mr. Doe now has a separate holding entity for each property owned by “J. Doe Rentals, LLC.”
D. Example of Series Protection: One day Mr. Doe’s tenant in Rental A House falls down the stairs and injures himself and decides to sue J. Doe Rentals, LLC. The tenant wants to sue J. Doe Rentals, LLC for all its assets because he believes the company was negligent in maintaining the safety of the stairs. Since Mr. Doe created a separate series and had the correct ancillary documents for Rental A House, the tenant is limited to the assets of series Rental A House. By doing the series LLC, Mr. Doe has protected himself from personal liability, protected Rental B House from liability, protected Rental C House from liability, and has also protected the assets of the parent company, J. Doe Rentals, LLC.
E. Example of A Traditional LLC Disadvantage: Rather than using a series LLC, Mr. Doe decided to create a traditional LLC and had titled all of his properties to be held in this LLC. Just as before, tenant in Rental A House was injured from the stairs on the property and decided to sue J. Doe Rentals, LLC (traditional). By doing the traditional LLC, Mr. Doe protected himself personally from any liability, but he does not have any protection for the other two rental homes as all three were held together in the traditional LLC. At trial J. Doe Rentals, LLC was found liable and because of his decision to have a traditional LLC, all assets owned by the company, including the three rental properties, were awarded to the tenant to satisfy the amount of the judgment.
Although a traditional LLC is still a viable option for some real estate investors, namely those who have one rental property, the series LLC can be much more useful by providing more protection and simplifying administration. Although with the traditional LLC. Mr. Doe was not personally liable for the damages, in order for have to have the same protection as was provided with the series LLC, he would have had to create a new LLC through the state for each house, which would have resulted in at least three times the amount of filing fees as the series LLC. It is evident through the example used in this article that Mr. Doe and any similarly positioned real estate investors would benefit from the use of a series LLC.
Casey Cook, Esquire.
This article is meant as an education piece and should not be relied on as legal advice. If you have any questions regarding the series LLC or any other legal matter, please consult a legal professional.