LLCs, like corporations, provide protection for the owners from lawsuits directed against the entity. However, the assets within the entity are not protected and the creditor of the LLC may be able to reach the LLC’s assets. This can create problems when, for example, an LLC owns multiple parcels of real property, or several different types of business assets.
Accordingly, rather than place all assets in one LLC, investors often form multiple LLCs, placing a single asset in each LLC. But for a client with many assets, the fees and costs of setting up multiple entities adds up quickly. In these cases, a new type of entity, the Delaware Series LLC, can serve as a creative (and cost-effective) solution.
Under Delaware law, a single LLC can have assets placed within separate “series” (similar to compartments) and an asset placed in one series is protected against the liabilities arising from a different series or the LLC generally, provided separate books and records are kept for each series [Sec. 18-215 Delaware Limited Liability Company Act]. Furthermore, the LLC can add additional series at any time, for example, if the LLC purchases another property.
In addition to the liability limitation, Series LLCs offer the added flexibility of having different managers and members in each series. For federal tax purposes, the Series LLC can choose whether to file one tax return for all series or a separate return for each. Further, only one Operating Agreement needs to be drafted for the Series LLC.
While the Series LLC may be the perfect entity selection for someone with multiple assets, beware. The California Franchise Tax Board takes the position that each series is a separate business entity and each has a filing requirement if it is registered or doing business in California. This means that each series doing business in California must file its own Form 568 and pay its own separate LLC annual tax and fee.
if you would like to discuss whether forming a Delaware Series LLC may make sense for you, call Burkhalter Kessler Clement & George LLP at 949-975-7500 or contact our Irvine or Westlake Village offices online.