I spoke with a California attorney today about her client’s interest in a Delaware Series LLC. The client was a real estate investor with over 25 different rental properties. The attorney asked whether a Delaware Series LLC was an effective asset protection solution for this client.
A Delaware Series LLC is a special type of limited liability company established in Delaware pursuant to specific Delaware statutes. The distinguishing feature of this type of LLC is that a single LLC can be comprised of two or more “series.” The series are similar to subsidiary entities. Each series can own distinct assets. In theory, liability of one series does not affect assets in any separate series or the Series LLC as a whole.
In the case of the California client, the client could create a single Delaware Series LLC and register the LLC to do business in California with a California registered agent. Thereafter, each of the 25 different real properties could be owned by a separate series. If any one property generated a lawsuit or liability, only the one parcel of real estate owned by that particular series would be at risk.
No Florida court, or California court for that matter, has considered whether the divisions between different series in a Delaware Series LLC will be respected for creditor protection purposes. In theory, Florida and any other state should recognize the separate series created pursuant to Delaware law, and liabilities of any one series should be contained within that series and jeopardize only assets titled in the name of that particular series. However, until the Delaware Series LLC has been examined and tested in a creditor protection court case in a state other than Delaware (and in Florida, in particular) the Delaware Series LLC’s asset protection is not as strong as that of other plans and entities which are battle tested.
At this point in time, you should use the Delaware Series LLC as a holding company. If you own stock, use a separate series for each different company stock you own. With regard to real estate, if you own real estate in California and place it in a Delaware Series LLC, it will still be under the jurisdiction of a California Court. And the California Court may not respect Delaware Law. So my point is simple, set up a brokerage account in Delaware, have a nominee officer from Delaware operate your business. If there is ever a lawsuit, your adversary would have to file a claim in Delaware. And I would bet you a million dollars that the Delaware Courts would uphold the statutes which make the Delaware Series LLC such a formidable asset protection tool. This is an asset protection tool which will provide maximum protection only when used properly. I wouldn’t use it to hold it any real property outside of Delaware. This tool has its limitations. Respect those limitations and you shall be nicely rewarded. Don’t “overuse” of over extend yourself with the Delaware Series LLC. Set it up such that it strictly does business in Delaware. The bottom line is if you get sued, you want to fight it out in Delaware!
David,
Your comments are excellent. My only question(s) is what does it mean to have a nominee officer in Delaware? Run the company?
I was thinking of opening a brokerage account. Does this mean the person has to place the buy/sell orders?
David,
Is it still true that “No Florida court … has considered whether the divisions between different series in a Delaware Series LLC will be respected for creditor protection purposes”?
Andy
Hi David,
Great points on the series LLC and its limitation for holding real property outside the state. Further I have read a statement from the california franchise tax board that indicates that any series in a delaware series LLC will be subject to the same requirements (minimum franchise tax fee) if it does business in California… therefore the main benefit of the series LLC disappears for california property holders.
What are your or your colleauges reccomendations for a california property owner with multiple properties that would like to protect their assets with the minimum impact from franchise tax fees?
David,
I am just starting to investigate the opportunities the Delaware Series LLC could offer my company. We are required to be licensed by different regulatory entities within each state. We do business within 19 different states. I am looking to use this to eliminate licensing each series. What are your thoughts on this?
Tony
David,
My husband and I are evaluating a Delaware Series LLC for our informational marketing business over the internet. But we live in NC. What are the ups and downs of forming such an entity when doing business all over the internet and living in another state?
By the way, we love your comments!
Val & Todd
David:
I am thinking of doing a Delaware Series LLC to use the multiple EIN numbers as a means to set-up multiple savings accounts and purchase multiple CD’s in various banks to keep all my cash assets insured and protected by the $250K limit FDIC insurance per account. This should accoumplish the same protection as a CDAR’s program of spreading money around to multiple banks with CD’s. I have been finding local regional banks needing deposits and are willing to pay up to 4% interest on a savings account over $50K. This rate far exceeds the short term CD’s and is liquid on a daily basis. What do you think of the idea. My domicile is in the state of Florida.
Regards,
Keith F.