Series LLCs: Asset Protection Simplified

Any good asset protection lawyer knows that bullet proof planning requires a number of layers.  We use tools ranging from limited liability companies to family limited partnerships and offshore asset protection trusts.  One strategy that we’ve discussed a lot is the use of limited liability companies to shield individuals from their risky assets.  Risky assets are simply those assets having the potential to create liabilities for their owners.  Things like office buildings, cars, boats, airplanes, and jet skis are all examples of risky assets.  At the drop of a hat, any of those assets can create liabilities for their owner.

Packaging Risky Assets

If you’ve seen the video on the homepage of Lodmell & Lodmell, then you know that after we conduct an inventory of your assets, the first step in implementing an asset protection strategy is to place risky asset in separate limited liability companies.  The reason for using separate limited liability companies (“LLCs”) is to keep assets that “go bad” from infecting other assets with liabilities.  The goal is to compartmentalize risk.  Creating a number of different entities does cause additional administrative work.  To counteract that additional administrative burden, some asset protection friendly states have enacted Series LLC statutes.

Benefits of Series LLC Statutes

A series LLC is a structure that allows risky assets to be compartmentalized for asset protection while, at the same time, reducing the administrative burden that accompanies the creation and maintenance of multiple business entities.  The way it works is that a parent LLC can establish a series of additional sub or mini-LLCs within the structure.  Each series is compartmentalized, meaning that the assets and liabilities are contained within the sub-LLC.  There is then only one operating agreement that governs the entire structure and only one annual tax filing to worry about.  The states that authorize series LLCs also have provisions allowing for different members to participate in sub or mini-LLCs, in which case a separate tax filing is required.

Use of a Series LLC for asset protection should only be considered within states that have a statute specifically authorizing this type of business entity and only after you have fully researched the topic and obtained the advice of an asset protection attorney.  Otherwise, there is no guarantee that protection and compartmentalization will be effective or that the structure will be tax efficient.  For example, in 2007 California asset protection attorneys were informed that sub-LLCs would each be subject to the $800 franchise tax.  While this topic may seem complex, one thing is clear: Use of a series LLC can benefit a well structured asset protection strategy, if used in the correct way.