Greetings All AP Guru's:

Please explain the negatives of a DST Delaware Statutory Trust (business trust) & compare to other favorable business entities on APC board.

I hope to be a productive contributor.

Thank U all in advance

In the right circumstances, it has a good chance of working in Delaware, for Delaware assets.

All other benefits dubious.

http://www.taxlawsb.com/resources/BusTax/SeriesLLC.htm

This FTB opinion appears to direct that each separate series of an LLC doing business in California should register as a separate LLC with the California Secretary of State. This requirement is not contained in any California statute or regulation, and has not been promulgated by the California Secretary of State. In light of Delaware law that is clear that a series LLC is one entity, which law is applicable to California by California Corporation Code section 17450(a), what kind of admission would a practitioner who separately files for each series be making?

This wouldn't be the first time the FTB has taken a position that has little or no legal basis. Do you really want to pick a fight with them? Be prepared to spend lots and lots of money in litigation, and the outcome will be a crap shoot at best. I instead suggest alternative strategies that mimic series LLC benefits.

Also, in regards to Cal. Corp. Code §17450(a), here's an excerpt from my book you will find useful:

Some asset protection planners claim the law mandates the jurisdiction of an entity’s domicile must govern matters of liability where managers or owners of the entity are concerned. The defendants in the case Butler v. Adoption Media, LLC made this exact argument, by stating that an Arizona LLC should be interpreted according to California rather than Arizona law (California being where the alleged tort occurred). However, the court in this case disagreed:

“Defendants argue that Arizona law applies because the Beverly-Killea Limited Liability Company Act, Cal. Corp.Code § 17000, et seq., provides for the application of the law of the state of organization (here, Arizona) to issues of liability between an LLC and its management and officers as well as to issues concerning the organization of the LLC. Cal. Corp.Code § 17450(a) (“The laws of the state ... under which a foreign limited liability company is organized shall govern its organization and internal affairs and the liability and authority of its managers and members.”). The court finds, however, that § 17450(a) simply codifies the internal affairs doctrine, as applied to LLCs. [FN1] In other words, § 17450(a) does not apply to disputes that include people or entities that are not part of the LLC.”

The internal affairs doctrine, in general, says that the state of domicile governs an entity’s internal affairs between itself, its managers or directors, and its owners. However, in Butler the court ruled that this does not extend to disputes with 3rd parties (although it’s certainly conceivable that other courts in other jurisdictions may rule otherwise). Therefore, of the four criteria listed in Higashi for determining which laws will govern a limited liability entity involved in tort litigation with a 3rd party plaintiff, the place of the entity’s incorporation or organization is probably the least important determining factor. Finally, even a dispute involving only parties related to a particular entity does not guarantee the internal affairs doctrine will govern the case at hand, as was demonstrated in Greenspun v. Lindley, wherein the court found “in consequence of significant contacts with New York State, … this investment trust, although a Massachusetts business trust, was nonetheless so "present" in our State as perhaps to call for the application of New York law. In that sense we reject any automatic application of the so-called "internal affairs" choice-of-law rule…”

The foregoing does not mean that the laws of a state where a limited liability entity is domiciled will never be used, if a case is tried in another jurisdiction. However, it does mean one should not count on the laws where their entity is domiciled to save the day in all circumstances.

[END EXCERPT]

When you apply the foregoing to Series LLCs, the obvious conclusion is that if a 3rd party litigates against a series LLC, he may convince the court that §17450(a) is inapplicable since the creditor/plaintiff is not a participant in the series LLC's internal affairs. Consequently, the court may decide California law should be used when determining how much limited liability a series LLC affords. Since California law does not allow for segregation of liability between series, a series LLC may be treated by a California court as no different from a normal LLC, meaning the limited liability between series is ignored.

In other words, you may end up paying $800 per series to the FTB, only to have the limited liability between series fail in court. A series LLC has yet to be tested in this manner in California, but from existing case law we can derive that such an outcome is quite possible if not likely.

On a different note, I agree with Jay on the Delaware Statutory Trust issue.

Regards,

Ryan Fowler
www.pfshield.com

We don't have much case law on series LLCs, in Delaware or California (or anywhere else, for that matter). As far as I know, we have no case law on how a series LLC will be treated in a non-series LLC jurisdiction. For that reason alone, I don't like them, regardless of how the statutes may be read. Maybe I'm old-school, or just plain too conservative on this, but I think you have little to lose (with the exception of a few dollars in administrative costs, perhaps) by simply setting up separate entities, rather than lumping all of your entities under the rubric of a series LLC which, if breached, puts the entire enterprise and all of its sub-enterprises at risk.

As to Jay's observations on the Delaware trust, I'd simply add "in Delaware state court." I'm not even sure that a federal court (including a bankruptcy court) would necessarily honor a Delaware statutory trust, and I think it's completely up in the air as to whether the courts of any other jurisdiction would uphold a Delaware trust.

I give the same advice with regard to domestic asset protection trusts (DAPTs) in other U.S. jurisdictions that allow them. If, for example, you're a Utah resident, putting your Utah property into a Utah DAPT and following Utah law, it's likely that a Utah court will honor the trust (although, as I mentioned, it's up in the air as to whether a federal court will). It's unlikely, however, that a California court, for example, will honor the "protection" of a Utah trust, holding California property.

Analysis of these issues is far more complicated than one might think, and depends in large part on an academic understanding of conflicts of laws, and on a practical understanding of how judges and juries view the application of legal principles.

"This requirement is not contained in any California statute or regulation, and has not been promulgated by the California Secretary of State."

Who doesn't collect the taxes.

The position of the FTB is quite logical: If you are going to try to treat each series as separate entities for liability purposes, then we'll treat them as separate entities too for purposes of collecting fees.

There are a bunch of unhappy people out there (and a few of them have sat in my office much displeased and wanted me to sue their planners) who formed Series LLCs to hold real estate just to avoid the multiple filing fees of separate LLCs, and then the LLC slammed them with $800 times the number of series.

Nobody wanted to take on the FTB; indeed, as far as I know, nobody has ever challenged the FTB on this issue. Longshot challenge, IMHO.

It is just so easy for amateurs and do-it-yourselfers to out-think themselves when it comes to entity planning.

"It is just so easy for amateurs and do-it-yourselfers to out-think themselves when it comes to entity planning."

Amen to that! I often come across people that think up complex schemes that sound really good to an untrained person, but the fact of the matter is they really don't know what they're doing and oftentimes these plans have massive tax, alter-ego, or fraudulent transfer concerns. Asset protection is much more specialized, nuanced, and complex than most people realize.

With that said, there is an alternative to putting different assets in different LLCs and then paying $800 per year for each LLC. Depending on the situation, you may want to put everything in one LLC and then equity strip it. Thus you keep your annual fees low and protect all assets from all creditor threats, which is IMHO superior to mere segregation of liability. Just remember I am speaking in very general terms and this strategy is not always viable.

Regards,

Ryan Fowler
www.pfshield.com

FYI give series LLCs 5 or 10 years. By then there will be more case law and I imagine several other states will have passed series LLC legislation.

Series LLCs right now are where regular LLCs were back in the early 1980's: they were a great tool whose time had not yet come. By the mid 1990's there was more case law on LLC treatment, definitive IRS guidance as to LLC taxation, and most states had passed LLC legislation. That's probably where Series LLCs will be by perhaps 2015 or 2020.

Regards,

Ryan Fowler
www.pfshield.com

I used to think that, but now am not so sure. The tax treatment of Series LLCs is so potentially hairy, and there are so many tax landmines, that I think they have a good chance of staying a niche entity for some time to come.

Unfortunately, the Series LLC will be oversold and abused on the low end for things like real estate for which they really don't work that well, and underutilized for things like hedge funds, fractional leasing, preferred-share arbitrage, derivative transactions, etc., for which they work great.

I do agree that since they're more complex than a standard LLC, they will be utilized less (and oftentimes less optimally) than standard LLCs. Nonetheless in 5-10 years they will be a great planning tool.

Regards,

Ryan Fowler
www.pfshield.com