| In order to diversify risk, someone with multiple rental or | | | | In order to create a series LLC, special language must |
| other investment properties would likely be advised to | | | | be included in the Articles of Organization, which is filed |
| place each property into a separate entity. This was | | | | with the Illinois Secretary of State. A Certificate of |
| traditionally achieved with the use of a corporation or | | | | Designation for each series apart of the LLC must |
| limited partnership in years past. Recently, however, | | | | also be filed with the Articles of Organization. |
| the limited liability company has quickly become the | | | | But keep in mind, obtaining and preserving separate |
| entity of choice for real estate holdings. | | | | liability status requires that each series be operated as |
| Placing high risk assets in separate entities, away from | | | | a separate entity. This means separate records should |
| each other, and especially separate from low risk | | | | be kept for each series, with the assets of each |
| assets, defines asset protection. For example, | | | | series identified. Unfortunately, case law is largely |
| someone who operates a demolition company through | | | | undeveloped for the series LLC structure. This is |
| use of a corporation or LLC should not then place an | | | | especially true in Illinois. Without the benefit of judicial |
| investment rental property in the same LLC or | | | | decision, many facets of the new series LLC legislation |
| corporation. Similarly, someone with a large amount of | | | | may be subject to reasonable difference in |
| low risk assets such as cash, securities, etc. should not | | | | interpretation. For instance, some practitioners have |
| be advised to place those assets into the same entity | | | | argued that it is safe practice to provide each series |
| as an ongoing business. But, adherence with the | | | | with a separate bank account. |
| principle tenets of asset protection can be costly. | | | | Also, an entity formed in one state cannot do business |
| Placing each parcel of real estate into separate entities | | | | in another state unless it is first "qualified" to do |
| incurs separate filing fees, and incurs additional legal | | | | business in the non-formation state. This is achieved by |
| and accounting fees in most instances. | | | | filing an application with the Secretary of State of the |
| There is, however, a solution to the increased fees | | | | non-formation state and paying a foreign filing fee of |
| associated with multiple filings: the Series LLC. | | | | some sort. Without qualifying to do business in the |
| The Delaware LLC Act first authorized the creation of | | | | non-formation state, the entity may later incur penalties |
| separate series within the same LLC. Under the Act, | | | | and other fees for not qualifying. Once an entity |
| debts and other liabilities under the Delaware Act are | | | | qualifies to do business in the non-formation state, it |
| enforceable only against the segregated assets in the | | | | basically becomes subject to the non-formation state's |
| particular series to which those assets have been | | | | laws, presenting a problem for the series LLC |
| placed. (Delaware Limited Liability Company Act, | | | | structure. |
| Section 18-215). The Delaware Act also states that | | | | If an LLC is formed in Illinois, and qualifies to do |
| each series may have different members, or the | | | | business in another state so that it can own real |
| same members with different percentages than in | | | | estate in that state, then that LLC becomes subject to |
| other series apart of the parent LLC, providing flexibility | | | | that state's law. The exception is the internal affairs |
| for projects with multiple investors. | | | | and management of the LLC itself. The non-formation |
| This combination allows a series to be treated in many | | | | state will normally apply the law that is either |
| ways as a separate and distinct LLC. The Act also | | | | designated in the LLC's Operating Agreement or the |
| authorizes the Operating Agreement of the LLC to | | | | laws of the formation state. But, this typically involves |
| designate a series of members, managers or other | | | | disputes between members as to how the LLC is |
| interests that have separate rights and duties with | | | | owned or operated and does not include disputes with |
| respect to specific LLC property. | | | | creditors or third-parties who are not a party to the |
| Recently, the Illinois General Assembly has adopted an | | | | operating agreement. Any state without Series LLC |
| amendment to the Illinois LLC Act authorizing the | | | | legislation is very unlikely to apply the Series-legislation |
| creation of the series LLC. (805 ILCS 180/37-40). | | | | as to creditors, claimants, and other third-parties who |
| Similar to the Delaware Act, the Illinois Act states "the | | | | did not agree to be bound by the Series legislation. |
| debts, liabilities and obligations incurred, contracted for | | | | This problem is why corporations, LLCs, and other |
| or otherwise existing with respect to a particular series | | | | entities formed in other states probably don't offer any |
| shall be enforceable against the assets of such series | | | | advantages over those formed in the state where |
| only, and not against the series thereof,....". (805 ILCS | | | | property will be held or business is conducted. |
| 180/37-40(b)). | | | | Effectively, doing this doubles formation fees and |
| For Illinois real estate investors, this means you can | | | | non-formation law will apply anyways. |
| create one parent LLC with multiple series to protect | | | | Regardless of any perceived disadvantages, this |
| your assets, avoiding multiple state filing fees, legal | | | | structure is quickly becoming the vehicle of choice for |
| fees and other professional costs associated with | | | | Illinois investors with multiple properties. |
| creating each separate LLC. | | | | |