“I Use Series LLCs to Save on Filing Fees” and Other Really Silly Things People Have Said
The series LLC is a highly complicated organizational form that, conceptually, allows the segregation of debts and obligations within a series thereof, protecting the LLC and any other series from liability thereon. Series are not available under the Kentucky LLC Act, but they are available under the Kentucky Statutory Trust Act. With respect to the series provisions of the Kentucky Statutory Trust Act, see Rutledge, The Kentucky Uniform Statutory Trust Act (2012): A Review, 40 Northern Kentucky Law Review 93 (2012-13); HERE IS A LINK to that article. With respect to the structuring of series organizations and the myriad questions that are not yet resolved as to this organizational form, see, for example, Rutledge The Man Who Tells You He Understands Series Will Lie To You About Other Things As Well, 16 J. Passthrough Entities 53 (March/April 2013) (HERE IS A LINK to that article) and Rutledge Again, For the Want of a Theory: The Challenge of the “Series” to Business Organization Law, 46 American Business Law Journal 311 (2009) (HERE IS A LINK to that article).
It has been asserted by some that they use series, which typically do not require their own state filing and filing fee, in place of single-member LLCs, which do require a state filing and filing fee. Having recently given the issues some additional thought from the perspective of the requirements to maintain the liability shield between series, that explanation simply fails.
Under the various series acts, in order to achieve limited liability between the series and as well between each individual series and the LLC itself, property must be “associated” with either the correct series or the LLC. The “association” of property can be a time intensive issue, requiring that the relationship of the series and the property be reflected on the books and records of the LLC. Essentially, every time it is intended that a series receive property, that property must be associated with the series.
Consider an LLC that has 12 pieces of rental property, each of which is associated with an individual series. Each month, the tenants pay on their leases in the amount of $2000 per tenant. All else being equal, where Property A is associated with Series One, the $2000 received on that lease needs to be associated with Series One; if that association does not take place then those funds are available to satisfy claims against any of the other Series Two through Twelve or to satisfy an obligation of the LLC. That has to be done every month for each payment made to each series; we now have 144 bookkeeping entries to be accomplished each year.
Now, let's assume that, with respect to Property C that is associated with Series Three, in March the washing machine goes out. The LLC calls its usual handyman, who runs over to the local big box home improvement center, picks up a replacement dishwasher that is charged to the LLCs account, and installs it in Property C. For the reasons recited above, that dishwasher now needs to be associated with Series C or it is available to satisfy claims against the other series. The same happens when, in October, the water heater in Property L, which property is already associated with Series Twelve, fails and needs to be replaced.
Mind you, if each of these properties were in a single-member LLC wholly-owned by a master LLC, association would not be a problem. Rather, for example, when the tenant of Property A pays on the lease, even to a common payment agent, those funds are the property of the SMLLC A without the need for further action.
So let's get back to avoiding filing fee. Assume that in any particular state in which LLCs are allowed to set up series, there is no filing fee to set up a series but there is a $100 filing fee for each LLC. In the series structure outlined above, only $100 in filing fees would need to be paid. If, conversely, the were a master LLC with 12 SMLLCs underneath, each holding one property, $1300 in filing fees would have to be paid. If that differential of $1200 is not spent each year as the additional cost in associating property to each of the various series, that association is probably not being done properly.
Furthermore, had a string of single-member LLCs, rather than series, been used in this structure, there would have been no risk of assets not being associated in order to achieve asset partitioning. Rather, it would have happened simply by virtue of the LLC Act.
Combine the de minimus nature of filing fees against the incurred cost of association of property with the uncertainty that exist as to secured financing, bankruptcy, veil piercing, etc., and I submit that the claimed reduction in filing fees dwarfed by additional costs incurred and legal uncertainty undertaken.