WHY NEVADA CONTRACTORS SHOULD BE USING SERIES LLC’S

Introduction

The state of Nevada is one of a handful of states that has enacted “Series LLC” legislation. Series LLC’s are an invaluable tool to business owners seeking to segregate their assets. The assets and liabilities of each series are separate from those of the other series, but the administrative cost and expense can be significantly reduced in comparison to owing multiple LLC’s. Furthermore, an infinite number of series can be created without additional fees payable to the Secretary of State, or additional paperwork required by the state.

 

Benefits

For contractors, series LLC’s can provide tremendous benefits. Specifically, a contractor who puts each separate job into a separate series of the LLC can protect his overall assets, and the revenue from each specific job from liabilities that may be incurred by another job. For example, if a contractor puts a commercial office complex project in one series, and a retail shopping center project in another series, the commercial office project will be insulated from any liability that is incurred from the commercial retail center project. Therefore, if there is a warranty claim, an injury or some other liability that occurs on the commercial retail project, it will not affect the revenue that is being generated from the commercial office project.

The series LLC can also be used to reduce the contractor’s exposure to long term potential liabilities arising out of a patent defect. Specifically, in the state of Nevada, the statute of limitations for a patent defect (also called a hidden defect) is generally ten years. A contractor can limit his exposure to the long term liability, by setting up a reasonable warranty reserve to cover any warranty claims that would be excepted from a specific project, and then after a certain time, perhaps a year or two, the series can be liquidated. While the law makes a contractor generally liable for a ten year period, there is no law that says that the company (or series) that built the project has to remain in business for ten years.

 

Structure

 

The structure of a series LLC is designed to permit the members to segregate the assets and liabilities of the LLC from one another. This is one of the features that makes series LLC’s so attractive to many business owners, in particular contractors. In the past, business owners and others holding significant assets would be required to organize a separate LLC for each asset or group of assets that they wanted to segregate.

On the other hand, with a series LLC, each series of the LLC effectively serves as a “separate LLC” because the assets and liabilities of each series are separate and distinct from each other. Furthermore, the members of the LLC can create an infinite number of separate series, and can terminate a series when it no longer serves a purpose.

A contractor would only need one entity to properly house all of its operations and segregate its assets and/or separate projects, while receiving all of the benefits of having multiple entities. For example, a series LLC could be used as follows:

  1. Series No. 1 can be used as the management series (“Management Series”);
  1. Series No. 2 can be used to hold the real property and the office building (“Property Series”);
  1. Series No. 3 can be used to house tools and equipment (“Tools Series”);
  1. Series No. 4 can be used to house vehicles (“Vehicles Series”);
  1. Series No. 5 can be used for the operations of Job No. 1 (“Job No. 1 Series”);
  1. Series No. 6 can be used for the operations of Job No. 2 (“Job No. 2 Series”); and
  1. Series No. 7 can be used for the operations of Job No. 3 (“Job No. 3 Series”).

 

In the example above, the Management Series would serve an administrative function, and would not hold any significant assets. The Property Series would lease the property and the office building back to the Management Series for common use by all the series. Similarly, the Tools Series and the Vehicle Series would rent the tools and vehicles to the Job No. 1, Job No. 2 and Job No. 3 Series for use on each particular project. Finally, each of the separate series for Job No. 1, Job No. 2 and Job No. 3 would only hold the revenue from that particular job.

This structure groups each asset or group of assets into its own series so that they are insulated from each other in the event of a lawsuit. Therefore, if the contractor were to get sued for an injury or construction defect occurring on Job No. 2, the judgment creditor would only be permitted to reach the assets of Job No. 2, which, in our example would only be the revenue generated by Job No. 2. Meanwhile, the real property, tools, vehicles, and revenue from Job No. 1 and Job No. 3 would be beyond the reach of the judgment creditor.

 

Costs, Fees and Administrative Expense

 

For a business owner, such as in the example above, that does not elect to utilize the series LLC structure and opts for the more traditional multiple entity structure, the costs, fees and administrative expense associated can be significantly greater. Along with the burden of managing each individual LLC, the members would have to bear the expense of separate filing fees for each LLC, which currently total $325 annually in Nevada, as well as the expense of organizing separate entities, which can amount to quite a bit of legal fees. It is not uncommon for the price of setting up an LLC to be anywhere from $1,000 – $3,000 in legal fees alone. As such, it is easy to see that setting up multiple LLC’s can be expensive.

Another attractive aspect is that there are no additional costs or fees payable to the Secretary of State in order to create or terminate a series, nor is there is any additional paperwork that needs to be submitted to the Secretary of State.

          In terms of record keeping, a series LLC is no more work than owning multiple LLC’s, as the members of the series LLC will be required to keep separate books and records for each separate series. However, unlike owning multiple LLCS, the members of the series LLC will not be required to have separate bank accounts, which will cut down on the time needed to manage the entity. In addition, the business owner must be relatively diligent in setting up a new series for each project, and at the consummation of the project shutting down the separate series that was used for a specific project. Nonetheless, the administrative burdens are far outweighed by the benefits.

 

Examples

In order to illustrate how beneficial segregating assets of a business can be, let’s use our contractor above as an example and examine how a lawsuit would affect the contractor’s business.

 

Scenario No. 1

In this Scenario our contractor, let’s call him Bob the Builder, is a sole proprietorship. Bob does not have a corporation or an LLC, and is merely doing business under his own name. If Bob were to get sued for a construction defect occurring on Job No. 2, the judgment creditor would be permitted to reach all of Bob’s business and personal assets. The creditor could foreclose on Bob’s property, sell his tools and vehicles, and would be entitled to any other cash or assets that Bob has, including his personal assets, up to and including the entire amount of the creditor’s judgment amount. In other words, if the assets of the business were not sufficient to satisfy the judgment, Bob would have to take money out of his pocket to pay the judgment.

 

Scenario No. 2

          In Scenario No. 2, Bob operates his business using an LLC. All of Bob’s assets are held by the LLC including the real property and office building, tools, vehicles and all of the revenue that Bob’s business brings in. In this case, the judgment creditor would not be able to reach the assets themselves of the LLC. However, the creditor would be able to obtain a charging order, which would permit the creditor to receive distributions from the LLC that would have otherwise been distributed Bob, as a member of the LLC, in the total amount of the creditor’s judgment.

 

Scenario No. 3

In Scenario No. 3, Bob operates his business utilizing the series LLC structure detailed above. Similar to Scenario No. 2, if the LLC were to get sued for a construction defect existing on Job No. 2, the judgment creditor would be able to obtain a charging order, which would permit the creditor to receive distributions from the LLC. However, the creditor would by statute only be entitled to distributions made by Job No. 2 Series. In comparison to Scenario No. 2, this difference is critical because in Scenario No. 2 the creditor is entitled to distributions from the entire LLC. The vast majority of LLC’s are structured in such a way that distributions to the members are taken from net profits of the LLC. Therefore, in Scenario No. 3, the creditor is only entitled to distributions from the net profits of Job No. 2 Series, rather than from the net profits of the entire LLC, which is the case in Scenario No. 2.

If you would like additional information concerning the use of series LLC’s, please contact Nevantage Law Group, and we would be happy to provide you with a no obligation half hour consultation where if you decide that a series LLC is not beneficial for your needs then there will be no charge. However, if you do decide to use a series LLC, then we will role the consultation into the flat fee cost for setting up your series LLC.