Real Estate Ownership Structures: Delaware Statutory Trust and Series LLC

Real Estate Ownership Structures: Delaware Statutory Trust and Series LLC

Posted by on Jul 8, 2021

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There’s good reason why more than 1 million businesses and nearly two-thirds of all Fortune 500 companies1 are incorporated in the State of Delaware -- the state is internationally recognized for its advanced statutory laws and judicial decisions regarding the governance of Delaware business entities.

Business entities can be structured in a number of different ways, from LLCs and LLPs to S and C corporations. Investors also are likely familiar with Delaware Statutory Trusts (DSTs), a real estate investment vehicle tailored to 1031 exchange investors. DSTs are created as distinct legal trusts under Delaware State law for the sole purpose of holding title to one or more commercial investment properties.

In this article we’ll look at potential benefits of two different ownership structures: Delaware Statutory Trusts and Series LLCs. We’ll examine key differences between the two entities so investors can gain a clearer understanding of the potential benefits and operating procedures of both types of ownership structures.

What Is a Series LLC?

Real property ownership is a common way for both accredited and retail investors to pursue yield and portfolio diversification. Investors often purchase commercial properties through limited liability corporations to shield personal and other assets from their investment properties, as well as for favorable tax treatment and other potential benefits.

Delaware LLCs -- there were more than 166,000 in 20192 -- can be structured in three ways:

  • Single member: Used by solo business ventures to create a legal division between the owner and any assets owned through the LLC.
  • Multi member: Often used for business entities with multiple owners.
  • Series LLC: Used to string together multiple LLCs under a single parent umbrella LLC.

In a series LLC, the assets held within each LLC, or “cell,” remain separate from each other, and each cell is controlled by its own members -- think of a corporation that has multiple subsidiaries, such as Disney or Nike. Delaware first allowed series LLCs; since then, 18 other states have followed its lead.3

LLCs and series LLCs can be taxed as either partnerships, S, or C corps. Members aren’t required to be listed in annual franchise tax filings or on the LLC’s certificate of formation, which provides important anonymity for investors who do not want to be listed on public records. Lastly, LLC members whose assets aren’t located in Delaware aren’t required to file state taxes; instead, there’s a nominal $300 fee due each year on June 1. 

What Are Delaware Statutory Trusts?

DSTs are investment vehicles that give individual investors access to purchase fractional interests in the types of commercial real estate that’s typically owned by pension funds, REITs, insurance companies, and other institutional investors. These professionally managed passive investments include multifamily, self-storage, industrial buildings, medical offices, and similar types of real estate.

DSTs provide investors with legal protection from the assets held within the trust. DSTs are bankruptcy remote, so investors are isolated from the performance of assets held within the DST. DSTs also provide anonymity for investors since the only name required on the certificate of trust is the name of the trust and a Delaware-based trustee. There also are no annual fees required to maintain a DST. 

The Bottom Line

DSTs and series LLCs share many similarities. Both provide investors with important protections against creditors. With a series LLC, only the parent LLC files an annual tax return, although the return must include each cell LLC.

Each cell in a series LLC must have its own registered agent, much like a sponsor in a Delaware Statutory Trust. There’s no limit to the number of cells in a series LLC, just like there are no limits to the number of investors that can participate in a DST (although that number is capped once the DST is fully funded). Although a DST requires its own tax return, tax treatment is passed through to each beneficiary in the trust.

Series LLCs are complex legal entities. Introduced in 1996, they also are relatively new and have yet to fully evolve. Like DSTs, however, they can help investors manage risk by mitigating liability from investment assets. Learn more by discussing the potential benefits and merits of each ownership structure with a certified financial planner and tax professional.


Sources

1. About the Division of Corporations, Delaware.gov, https://corp.delaware.gov/aboutagency/

2. How Many LLCs are there in Delaware? DelawareInc.com, https://www.delawareinc.com/llc/

3. The Series LLC: An Organizational Structure that Can Help Mitigate Risk, Wolters Kluwer, https://www.wolterskluwer.com/en/expert-insights/the-series-llc-an-organizational-structure-that-can-help-mitigate-risk

Benefits of a Delaware LLC, Harvard Business Services, https://www.delawareinc.com/blog/benefits-of-a-delaware-llc/

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

 


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