NEW ASSET PROTECTION TOOLS - Delaware Series LLC
Many corporations
own and operate more than one business, and likewise, many individual
real estate investors own multiple properties legally titled
under a single name or business entity. A problem with
"single-pot" ownership of multiple businesses or property
is that any legal liability relating to one business or property
jeopardizes all other assets. Therefore, most owners of related
businesses and real estate investors with several properties
seek to separate ownership so that lawsuits against one business
or one property will not jeopardize the owner's other investments.
Traditionally, liability segregation meant setting up new and
different business entities to own each business or each property.
As businesses grow, multiple entity ownership can become complicated
and expensive.
The Delaware legislature
created a new type of legal entity which aims to solve this
planning problem by permitting a single limited liability company
to own multiple subsidiary limited liability companies each
of which wons a single-asset business. This new entity
is called "The Delaware Series LLC."
Although a Series LLC must be created in Delaware, it can register
to do business or own property in any other state. This
innovative concept allows one LLC to establish separate series,
or units, under the same LLC umbrella. Each unit of a
Series LLC can own distinct assets, incur separate liabilities,
and have different managers and members. A Series LLC
pays one filing fee and files one income tax return each year.
Under Delaware statutes,
liability incurred by one unit does not cross over and jeopardize
assets titled in other subsidiary units of the same Series LLC.
Although the same liability isolation can be achieved in any
state with multiple entities, the Delaware Series LLC, in theory,
offers superior and more economical asset protection under a
single roof.
There are several
practical applications for a Delaware Series LLC. One
such use is ownership of multiple parcels of real property in
separate series within a Delaware Series LLC. This is
less expensive then creating, filing, and maintaining several
different LLCs to segregate property ownership. Second,
an operating business could benefit from a Delaware Series LLC
if the business owns real estate used in its operations.
If the business were formed or merged into a Delaware Series
LLC, one series could own the real estate and a different series
could operate the business. Liability incurred by the
business operations, in theory, would not jeopardize the real
estate. In addition, there should be no sales tax due
on rent paid by the operating series to the real estate series.
Another possible benefit of a Delaware Series LLC is the ability
to transfer assets among related businesses without income tax
on built-in gain or liability for real estate transfer taxes.
Given the protection
possibilities and planning flexibility provided by Delaware's
Series LLC statutes, one might expect to see Florida's business
landscape covered with innumerable Delaware Series LLCs registered
to do business in Florida. Yet, Delaware Series LLCs remain
relatively uncommon in Florida and other states. There
are two principle reasons for this incongruity. The first reason
is uncertainty about how a Delaware Series LLC will be taxed
for federal income tax purposes. A recent article by the
prestigious and widely-followed BNA Tax Management Service,
Tax Management Memorandum, Vol 45, No. 4, February 23,
2004, concluded that the lack of clear federal tax standards
for a Series LLC with multiple members restricts adoption of
this potentially useful business entity. The second reason
is that the asset protection and planning advantages of the
Series LLC are only theoretical, and unproven, in actual asset
protection combat. No Florida state court and no Florida
bankruptcy court has yet examined the asset protection effectiveness
of a Delaware Series LLC. Therefore, business people,
investors, and advisors should proceed cautiously before relying
on this new device to protect their wealth from creditors pending
further court interpretation.
