Delaware Series LLC

[gingersnap]

Hi everyone. I'm looking for someone who has experience with this type of entity, although this question is more legal than about taxation.

I have a client who is considering this entity for a four-person partnership that will be investing in residential rental real estate, with an umbrella as the Delaware Series LLC and each rental property as an entity underneath the umbrella.

I'm getting hung up with the bank accounts. In order to open a business bank account with multiple members you need an EIN. If we get an EIN for each rental property that means a tax return has to be filed for each entity, which is one of the things we're trying to avoid. But if we use the umbrella's EIN for every account do we lose some of the liability protection that comes from separation of assets? Is a rose a rose by any other EIN?

[Bees Knees]

I don’t know if this is what you are looking for, but one of the reasons why a group of brother/sister corporations exist is because they wish to separate liability into multiple business groups. For state liability purposes, each business unit of a consolidated group is shielded from the liability of a brother/sister corporation. Yet for federal tax filing purposes, they all file one consolidated return.

You can form multiple LLCs and have each one elect to be taxed as a C corporation, thus allowing you to file just one return as a consolidated group. That may solve the multiple filing issue. However, I’m not sure electing C corporation status merely to avoid filing multiple returns is best for your client.

[Bees Knees]

Just a side note, I think sometimes clients make things more complicated than they need to be. I’ve heard clients who own multiple rental properties tell me that they have attended seminars where they advise that each rental unit should be separated from the next through multiple entities. It all has to do with liability concerns.

I question whether the increased complexity can really reduce risk. A person seeking to recover damages against the owners of a rental complex can easily pierce through the maze of multiple ownerships merely by hiring a good attorney who makes his living suing the pants off of people. In my opinion, there is no substitute for good liability insurance.

[Nashville]

Delaware Series

Ginger Snap, having multiple EIN#s may hinge on whether these properties are different states, or what state they are domiciled.

At present, there is no such federal requirement, as they are regarded as only one entity and can file a consolidated return. They can do so and still not jeopardize their risk-protected status.

Keep in mind that not all states have subscribed to the so-called "Delaware series." As of last fall only 6 states, including Delaware, Oklahoma, and Illinois. (I don't know the other three). In Tennessee, for example, I believe each separate LLC would have to carry its own number and file a separate corporate return.

The future of the Delaware series for federal purposes is perhaps unstable. At present, gains and profits of goods and property sold from one LLC to another is not taxed, as it falls out as an elimination on the consolidated return. Finding ways to tax these profits are fair game to avaricious revenuers who savor the idea of taxing every transaction.

[gingesnap]

Consolidated return

I don’t know if this is what you are looking for, but one of the reasons why a group of brother/sister corporations exist is because they wish to separate liability into multiple business groups. For state liability purposes, each business unit of a consolidated group is shielded from the liability of a brother/sister corporation. Yet for federal tax filing purposes, they all file one consolidated return.

You can form multiple LLCs and have each one elect to be taxed as a C corporation, thus allowing you to file just one return as a consolidated group. That may solve the multiple filing issue. However, I’m not sure electing C corporation status merely to avoid filing multiple returns is best for your client.

Bees Knees,

Thanks for that. We'll want partnership status rather than C Corp, so consolidated returns are not an option. Sounds as though from the other posts that multiple returns may be difficult to avoid and not worth the trouble.