Asset Protection and the Oklahoma Series LLC

Asset protection is the use of available laws and techniques to (1) protect assets from liabilities arising outside of the assets being protected (“outside-in” protection), and (2) contain liabilities generated by an asset within the asset itself (“inside-out” protection). The limited liability company (LLC) has long been recognized as a formidable “outside-in” and “inside-out” asset protection tool. However, to achieve the maximum asset protection using LLCs, each LLC should hold only a single asset. Structured any other way, every asset held in the LLC is exposed to the liabilities generated by every other asset in the LLC (e.g., premises liability at one property in the LLC puts the equity in all other properties in the LLC at risk). This creates a considerable dilemma for investors as improving asset protection by using multiple entities adds significant administrative burdens and expense (i.e., multiple bank accounts, multiple EINs, multiple tax returns, multiple operating agreements, multiple entities to maintain). In 2004, Oklahoma joined only a handful of states that permit the use of a special type of LLC- the Series LLCs. A Series LLC allows investors to achieve excellent “outside-in” and “inside-out” asset protection for multiple assets with minimal administrative burden and expense. In effect, a Series LLC works like a holding company with each “series” inside the LLC being a separate subsidiary of the holding company.

Some of the benefits of an Oklahoma Series LLC include:

Ability to hold multiple assets in one entity with an asset protection firewall between each asset by placing each asset in a separate series within the LLC.
Liabilities generated by assets in one series don’t attach to assets in any other series.

Significantly reduced administrative burden compared to other asset protection techniques.
No need to maintain a separate bank account for each series or asset. In most cases, file only one tax return regardless of the number of series or assets in the entity. Only one entity to maintain.

Can be used with single-member or multiple-member LLCs.
A viable tool for every investor from the owner of a few rental properties to the manager of a large real estate investment fund.

An existing LLC can be converted to a series LLC.
Dramatically improve asset protection posture without changing title to assets.

Minimal legal and accounting expense to create and operate.
Asset protection firewall is achieved by adding a statement to the entity’s Articles of Organization, including certain provisions in the entity’s operating agreement, and maintaining separate “books and records” for each series.

Assets can be easily added to or removed from a series.
Title is held in the name of the LLC and assets are designated to a series within the LLC by the LLC’s operating agreement, meaning that changes are as simple as an amendment to the operating agreement.

Series structure is a creation of legislative act.
As of November 1, 2004, Series LLC entities are expressly authorized by the Oklahoma Limited Liability Company Act, meaning that courts must respect their statutorily-created asset protection features.

An Oklahoma Series LLC may hold assets located in another state.
The asset protection features of an Oklahoma Series LLC are not impaired by the ownership of assets located outside of Oklahoma. Assuming proper registration of the Oklahoma LLC to do business and own property in another state, the courts of that state should honor the asset protection provisions of the Oklahoma Series LLC statutes.

Despite their many benefits as an asset protection tool, Oklahoma Series LLCs have been used only sparingly to date. This is most likely due to a lack of awareness and understanding on the part of investors, lenders and their professional advisors, who opt for the more complex asset protection structures with which they have grown accustomed.