Missouri Series LLC
The Missouri series LLC law was enacted in 2013. This structure provides tremendous flexibility and significant asset protection at a fraction of the cost of traditional asset protection strategies. However, the Missouri series LLC law is only one of about ten such state laws in the country. As such, several questions remain unanswered about how this law will be interpreted by the courts and by the various taxing authorities. Therefore, use of the Missouri series LLC should be limited to certain Missouri businesses that would not otherwise form multiple entities as part of an asset protection strategy.
Use of a Missouri Series LLC
The main reason to form a traditional LLC is for the personal liability protection it affords. While an LLC does not provide absolute asset protection, hence the name “limited liability”, if you properly structure the LLC and properly operate the LLC, your personal assets will be protected in most circumstances. If someone gets a judgment against the LLC, they generally will only be able to take the assets of the LLC in order to satisfy the judgment, not your personal assets.
If your business has multiple assets and/or multiple operations, you might further limit your personal liability and reduce the exposure of these business assets by forming multiple LLCs. For example, if you run a restaurant and you own the building where the restaurant is located, you could form one LLC to own the property and a second LLC to operate the business. The first LLC might be the landlord and the second LLC could be the tenant. If a customer injures himself or herself in a slip and fall accident at the restaurant, then the customer is likely to only get a judgment against the tenant LLC, not the landlord LLC. This dual LLC structure reduces, but does not eliminate, the exposure of the property to a slip and fall lawsuit.
Similarly, if you are a real estate investor, you can significantly reduce the risk to your personal assets by having owning the property through an LLC instead of owning it in your own name. However, if your LLC owns multiple properties, then all of the assets owned by the LLC are exposed to the liabilities incurred by the LLC. For example, if your LLC owns three apartment buildings, on three separate parcels of real estate, and a tenant injures himself or herself in a slip and fall accident at one of the buildings, then all three apartment buildings can be seized to satisfy a judgment that the tenant might obtain against the LLC. You can further protect each apartment building by forming three LLCs, each of which owns just one of the properties. Now that same slip and fall tenant will likely get a judgment only against the LLC that owns the one building where the accident occurred, and that tenant will likely not be able to seize any of the assets of the other two LLCs, or your personal assets, in order to satisfy the judgment.
A Missouri series LLC affords similar protection at a fraction of the cost of forming multiple individual LLCs, as each series, like each LLC, is, when properly structured, a separate legal entity. If for example, you own ten apartment buildings, you would be prudent to form a separate LLC for each building. Depending on whether these LLCs are single member or multi-member LLCs, the cost to have an attorney form ten LLCs can range from $2,000 to more than $5,000. The cost to have an attorney form a series LLC should run about 25% of that cost.
Unlimited series within a Missouri series LLC
When you form a Missouri series LLC, you can form as many series within the Missouri series LLC as you want, all for the same filing fee. If you later run out of series, you simply amend the articles of organization of the Missouri series LLC and the operating agreement of the Missouri series LLC to add more series. So if you own five apartment buildings today, and you anticipate buying five more in the next five years, you can form ten series now, transfer each of the current five buildings to their own series, and the remaining five series are there when you need them – although you will need to amend your operating agreement before acquiring the future property. (You should also consider the consequence of transferring property encumbered by a deed of trust, as the lender will likely have the right to accelerate the note pursuant to the “due on sale” clause in the deed of trust.)
Questions about the Missouri Series LLC
The Missouri series LLC is a relatively new concept. Only about ten other states have laws that permit the formation of a series LLC, Missouri being the most recent state to adopt this business structure. Because so few states have enacted series LLC laws, the U.S. Treasury Department and the states have not yet provided guidance on how they will tax series LLCs, and the federal bankruptcy laws do not provide for the treatment of them. As for the taxation issue, it is not clear whether the IRS and the states will tax each series as a separate tax entity, or if the profits and losses of each series will roll up to the master LLC and be taxed at that level. This is probably not an issue for a single member Missouri series LLC that does not elect to be taxed as an S corporation, as a single member LLC is a disregarded entity for tax purposes, meaning that all income and losses of the LLC flow to the tax return of the owner. You might be able to achieve the same result with a multi-member Missouri series LLC by forming a holding company LLC that is the sole member of the Missouri series LLC. These are issues you should address with your tax adviser before forming a Missouri series LLC.
As for bankruptcy, it’s not clear whether a series can file for bankruptcy protection without subjecting the assets of the master and of the other series to the proceeding. Owning assets in multiple LLCs may provide greater protection in bankruptcy than owning them through individual series.
Finally, states that have no series LLC laws may not recognize your individual series as a separate legal entity, something you must seriously consider if you operate your business outside of Missouri. Courts in those states might regard the master LLC and each series as a single entity, thereby exposing all of the assets of the master and of each series to the liabilities of a single series operating in a state outside of Missouri. Even the series LLC laws among the few states that have series LLC laws can differ, meaning that the rights and obligations of your Missouri series LLC may not be identical, or even recognized by, some of the other states with series LLC laws.
Conclusions about the Missouri Series LLC
First, you should as a general rule conduct your business through a legal entity that will provide liability protection to your personal assets. An LLC is currently one of the favorite structures for personal asset protection. Second, if your business has multiple operations and/or multiple assets, then you should seriously consider forming multiple legal entities, such as multiple LLCs, to further reduce your personal liability exposure and the liability exposure of the assets owned by your business. Third, you’re less likely to encounter the above uncertainties regarding taxation and foreign state treatment of your Missouri series LLC if your Missouri series LLC is owned by a single member or a holding company; if it only conducts business in Missouri; and if it only owns property and/or assets located in Missouri. Fourth, it’s generally far better to segment your business assets with a Missouri series LLC than to hold numerous valuable assets in a single LLC.
Therefore, if you own multiple valuable assets located in Missouri and/or your business has multiple operations in this state; if you are the sole owner of the enterprise, or you form a holding company to serve as the sole member of a Missouri series LLC; and if you would not otherwise form multiple entities to protect these assets and to further reduce your personal liability, then you should consider forming a Missouri series LLC.
The information provided in this article is for general purposes only and is not intended as legal advice. Your circumstances may be unique, and you should therefore consult an attorney for advice regarding any of the issues discussed in this article.
Michael Sewell, MBA, JD, is the principal owner of Sewell Law, LC, d/b/a Sewell Law, which provides affordable legal services to business owners.
You can reach Michael at 314.261.7528, at Michael@stlouisLLCattorney.com, and at www.stlouisLLCattorney.com.
