Series LLC’s have become popular vehicles for separating assets within each series of a single LLC. While there is no legal cap, it's wise to consider a practical limit. A common number mentioned in practice is around one hundred, though this is based more on prudent risk management than a legal rule. The main reason for limiting the number of series in a single LLC is risk diversification.
The core purpose of a series LLC is to segregate assets and protect them from liability in other series. For example, if you have two rental properties, each in its own series within the same LLC, and one property is sued, the assets of the second property should theoretically be protected. However, there is always a small risk that a court might "burst" the entire series LLC, potentially making all assets vulnerable. To mitigate this risk, it is important to diversify assets across multiple LLCs.
Understanding the Risk
The risk of a series LLC being compromised, while small, is real. This could happen if a judge is not satisfied with the accounting or if the legal separation between the series is not maintained. A good rule of thumb for risk diversification is to not have more than 25% of your net worth in a single series LLC. For example, if you have a net worth of $2 million, it might be prudent to have no more than $500,000 of property in one series LLC.
Best practices to maintain the liability shield:
- Separate records: Maintain distinct accounting records for each series.
- Independent operation: Each series should operate as if it were a standalone entity.
- Contract Accordingly: Ensure legal contracts are entered into in the name of the correct series.
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