When would a Series LLC be the best choice for my real property?
What is a Series LLC?
In Wyoming, the Operating Agreement can establish a Series LLC having separate rights, powers or duties with respect to each of your properties, and the profits or losses associated with each property. One of the great attributes of the Series LLC is that any debt, obligation or other liability of any particular Series, whether arising in contract, tort or otherwise, is enforceable against the assets of the particular series and shall NOT be enforceable agains the assets of the LLC generally or any of the other Series. Here is a link to the description of and attributes of an LLC for asset protection.
One analogy for the Series LLC is: The Operating Agreement if the LLC is the house. The "house" has many rooms. Each of your properties is assigned a "room" or series. Each "room" or series is separate from the other. The debt of one "room" or series is not enforceable against the LLC generally, or any of the other "rooms". Any debt incurred by one of the other "rooms" or series is not enforceable against any member of the LLC.
In Wyoming, the Series LLC is established by statute. The statute provides that the Series shall have the power and capacity to contract, hold title to assets and have separate rights with respect to the asset, and can hold the Series in the name of the Series or in the name of the limited liability company. For example, let's say you have property in Casper, property in Cheyenne and property in Parker, Colorado. Each property would be a "series". The Casper property could be the "Casper Series", then the "Cheyenne Series" and the "Parker Colorado Series". The Operating Agreement would "hold" each Series but they are each separate "rooms".
The management of the Series is in the members. If a member ceases to be a member of the Series upon sale of the member's interest in the Series, it does not mean the person ceases to be a member of the LLC or any other series and it does not cause termination of the Series, regardless of whether the person was the last remaining member of the Series.
If a member of a Series becomes entitled to receive a distribution, the member has the status of a creditor of the Series with respect to the distribution. This provision will be in the Operating Agreement.
The LLC may make a distribution with respect to a Series unless the total assets of the series after the distribution would be less than the sum of its total liability plus the amount that would be needed if the Series was to be dissolved, wound up and terminated at the time of the distribution.
Another great attribute of the Series LLC is that the Series may be terminated and its affairs wound up without causing the dissolution of the LLC. In the example above, if you sold the real property in the "Casper Series" you could then terminate that Series but it does not cause dissolution of the LLC. A series is terminated by (1) dissolution of the company by filing articles of dissolution; (2) happening of events set out in the Operating Agreement; (3) the vote of the members; or (4) on application by a member of the series, or (5) the entry of a court order terminating the series on the grounds that it is not reasonably practicable to carry on the purpose of the series in conformity with the Operating Agreement.
The documents to be created are Articles of Organization that state some of the foregoing, and an Operating Agreement that sets out each property and its own Series.
As part of the formation of a Wyoming Series LLC, I will work with the title company and the lender, if there is one, to transfer your property into the Wyoming Series LLC.
What are the record keeping requirements?
In addition, I will assist you in maintaining the limitation on liability and enhanced protection in your LLC. For the limitation on liability to apply in Wyoming, you must:
- keep the records for the particular series that account for the assets of the series separately maintained from the records that account for the assets of the liability company or any other series;
- records must reasonably identify the assets of a particular series, including by specific listing, category, type, quantity and how procured;
- percentage or share of assets for each member;
- identify the assets separately from the assets of the limited liability company;
- identify the assets separately from the other series.
What is double protection?
An added protection for your assets is the "double protection" of blending your real property asset protection and your estate plan. Here are some estate planning considerations for LLC owners:
1. Does the LLC Operating Agreement contain clear provisions about transfer of membership interests upon the death of an owner?
2. Does the LLC owner have a valid will or trust that specifies whom should inherit the LLC's interest?
3. Are there other legal documents, such as a buy-sell agreement or shareholders agreement that my restrict the owner's right to transfer the membership interest?
4. Does the LLC agreement and the owner's estate planning documents contain conflicting provisions?
5. Has adequate life insurance been purchased or have other arrangements been made to ensure that operating of the LLC's business can continue upon death of the member, if that is one of the goals of the estate plan?
6. Does the owner want the heirs or beneficiaries to have an active role in the LLC business or only receive the income or sales proceeds from the business?
7. Has the owner made a durable power of attorney and does the LLC Operating Agreement contain provisions to deal with the owner's incapacity or disability?
8. If the owner wants the business of the LLC to continue after the owner leaves the business, is there a business succession plan in place?
So--What happens when your Trust and your LLC Operating Agreement Do Not Agree?
Non probate mechanisms are often used to transfer a decedent's property outside of the probate system. This includes among other things, Totten Trusts, joint tenancy, life insurance, employee benefits, payable upon death accounts and other contractual means. Common to all of these mechanisms is that the assets are distributed immediately upon the transferor's death, without the need for judicial intervention. The question becomes whether the LLC interest was subject to the terms of the will and trust or whether the operating agreement immediately passes the interest as provided in that agreement.
Remember that a will only governs those assets that are owned by the decedent and are in the probate estate. If the LLC interest is removed from the probate estate by a buy-sell agreement or some other agreement, that interest does not pass to the trust.
The important thing is to look over your documents to be sure you have consistency of disposition of assets. I would be pleased to review your documents with you.
Please keep in mind that LLCs have their own distinct, statutory default rules applicable when a member dies. Disposition and rights associated with the membership interest of a deceased member are uniquely amenable to the preferences of the LLC members as expressed in the Operating Agreement. However, the beauty of the LLC is the broad freedom members have to bargain for contractual rights and obligations, embodied in an Operating Agreement, that modify or are contrary to the statutory default rules.
Disputes often follow the death of a co-owner of any type of closely held business entity, not just LLCs. The best way to avoid such disputes, is to include in the Operating Agreement buy-sell provisions or other means of ensure that the decedent's heirs are not unfairly deprived of the entity's economic benefits while also ensuring the entity's survival and viability. The case law in this area does underscore the extra diligence required for LLC planning due to the primacy of the Operating Agreement and the weakness, relative to other business forms, of the statutory protections for nonmember assignees of LLC interests.
Thoughtful planning can help protect your family from these issues and many others. Find out how by calling 307.200.1914 and schedule a free phone consultation. Not ready to schedule? Keep checking this website for important updates that could affect your estate.