Should We Take the Series LLC Seriously?

Since 2005, Nevada has been one of only a few states which provides for a special type of limited liability company (LLC) known as the Series LLC.

One method for protecting assets from misfortune associated with other assets is to segregate assets into separate legal entities.

For example, say you own five separate residential rental properties. If all five properties are owned by you directly, or if, as is often the case, all five properties are held in the name of the same LLC, if there is a liability associated with one of the properties, if the value of that one property is not sufficient to cover the liability associated with that property, the aggrieved party may look to the other assets of that LLC to cover the loss associated with the initial property.

If this is done and there is a loss associated with one of the properties, and if that loss exceeds the value of the asset in that one LLC, the aggrieved party in many cases may not be able to obtain compensation for the loss from the value of the properties held in the other four separate LLC’s.

This is because the LLC itself creates a boundary, so to speak, around each separate LLC so that the affairs of one LLC do not attach to the affairs of any of the other LLC’s. So each LLC acts as a “firewall” to protect the other LLC’s from risks associated with each separate LLC.

Benefits of the Series LLC

The benefit of the Series LLC is that a person could create one master LLC (the “Umbrella” LLC) and that Umbrella LLC could then create an unlimited number of other subsidiary LLC’s, each such subsidiary LLC sometimes referred to as a “series.”

As long as the assets in the various series LLC’s are kept separated and are separately accounted for in each series, the misfortune associated with one such series LLC will not affect the other LLC’s created under the master Umbrella LLC.

Perhaps the major benefit of this approach is that the annual filing fees of normally $350 needs to be paid only for the Umbrella LLC and not for the other LLC’s under the Umbrella. So where the annual filing fees for five separate LLC’s would normally be about $1,750 (5 time $350), only the Umbrella LLC must be recorded with the State and only the one LLC fee for that LLC must be paid annually, saving a lot of effort and expense.

Previous Law

Up until a change in the law made in 2017, it appeared to be reasonable to create the Umbrella LLC and then assign property to each separate series.

The property, if real estate, would be titled under the name of the series LLC. The opportunity for planning, from the series LLC owner, was that with only the Umbrella being a recorded entity (being registered with the secretary of state) the various series could be created with names which would be untraceable to the Umbrella.

The result was that the series owner of a particular piece of real property would not be recorded anywhere because the name of each of the series LLC’s (i.e. the subsidiary LLC’s) could bear a name completely unrelated to the name of the Umbrella, and since the series name did not get registered under the name of the Umbrella, it would be difficult, if not virtually impossible, for the series owning a particular piece of property to be identified, thus providing a great deal of anonymity in titling of assets.

Current Law

In March 2017. NRS 86.236 was added to require the name of each series to include the name of the Umbrella LLC so that a person could trace a series LLC to the recorded name of the LLC.

Many LLC had been established under the prior law which did not require the ability to trace a series to its Umbrella LLC. It appears that if this is not corrected, the various series will not be deemed as separate entities, with he likely result that any liabilities associated with any one non-complying series LLC can be associated with the other series LLC’s.

Created LLC Under Nevada Law?

Consequently, if you have created a series LLC under Nevada law, if you wish for the various series to be considered separate from each of the other series under the particular Umbrella, the names of the various series should be changed to include the name of the registered Umbrella.

This can be done by registering the series under a DBA (“doing business as”) filing in the county where the series LLC is doing business or holds the real property. All marketing materials, correspondence, contracts and other business carried on in the name of the series LLC should include reference to the name of the Umbrella company.

As with the previously existing law, all business of each separate series should be accounted for separately under separate accounting records for each series. Failure to do so will cause the liabilities and equity value of all series under a particular Umbrella to be lumped together, thereby effectively eliminating the firewalls.

Many questions remain to be answered for the series LLC.

1. For example, if one series LLC is in a bankruptcy situation, must the other series under the particularly Umbrella also declare bankruptcy? If they were separately-filed LLC’s if the bankruptcy is only related to the business of the one LLC, this would likely not require bankruptcy for the other LLC’s; with a series LLC, the answer is probably unknown at this point. Either way, you probably do not want to be the test case to determine the answer.
2. May a series LLC hold property in another state? If the property is an account, such as a bank account, the custodial institution holding the account will likely have its own in-house rules for deciding on this one. But for real property in a state which does not have a series LLC enabling statute, we recommend that you not use a series LLC to holding real property in a non-series LLC state. The risks outweigh the additional costs of creating and administering multiple recorded LLC’s, versus avoiding these costs with the series LLC.

But until answers to some of these questions become settled, it may be best to, in many cases, go the safe route and avoid use of the series LLC. If you choose to keep using one, be sure that the DBA for each series is filed in any county where the particular series is doing business or holds property.

Reach out to our business planning attorneys for a free consultation and professional advice on your situation.