Many regard the LLC as the new business entity, and compared to the traditional corporation, it is. As businesses get more complex, and with more divisions, the need arose to legally separate these various divisions, and to do it as economically as possible. Thus, the Series LLC was born. It was started in Delaware, and came about due to the need of businesses to add, delete, or maintain different business groups within the LLC. The various business groups operating within the same LLC are called a cell, or a series. Each series has their own assets and liabilities, and these specific series assets are protected from lawsuits arising from a different series within the same LLC. The different series can also have different managers and members, although it is not required.
Series LLC Tax Return
The Series LLC is allowed to file one federal tax return, so long as all the members are original members. If one or more series adds a non-original member, those series should file a separate federal tax return.
A series may be added or deleted by amending the Series LLC Agreement. The Series LLC Agreement serves the same purpose as the operating agreement of the traditional LLC.
Series LLC Benefits
The Series LLC seems to offer many of the benefits of the traditional LLC. It provides asset protection, and it eliminates the need to have multiple LLC’s; formerly one LLC for each division would have been formed. The ease of adding or deleting a series is very impressive. The big benefit in all this is the economics. Just one LLC filing starts the Series LLC, and only one LLC to pay annual fees on. Depending on how many series there are, this could save tens of thousands just in the formation of LLC’s, plus the savings of annual fees.
Series LLC Disadvantages
There are disadvantages, and they can be significant. Due to the brief time Series LLC’s have been used, there are both tax treatment and asset protection questions. The IRS has issued a Private Letter Ruling in 2008 stating that single member series are to be treated as a disregarded entity (sole proprietorship), and a multimember series is to be treated as a partnership. The IRS still allows both to be taxed as a corporation if they choose. So, depending on the number of members in a series, and the total number of series, it is very possible that a single Series LLC will likely file multiple federal tax returns. The California Franchise Tax Board has already ruled that each series of the Series LLC will have to pay its own tax; California will not allow the taxes to be combined and paid only once by the Series LLC.
Again, due to the brief time Series LLC’s have existed, there is not sufficient case law to confirm the asset protection status of each series. A judge may see things differently, than what the Series LLC intends for asset protection. The intention is clearly to have each series enjoy asset protection, even though the same Master LLC is made up of several series. It remains to be seen how asset protection is treated. It is interesting to note that the Delaware Series LLC provides for separation of assets for each series in the Delaware statutes, so there is little doubt a Delaware Series LLC operating in Delaware enjoys series asset protection. This same asset protection offered in Delaware may not be recognized in states outside Delaware.
Experts state that each series should operate separately and apart from other series. This tends to create more of a legal separation, and the definite appearance of not being interrelated. Steps to create this distance are very similar to the steps taken by owners of a corporation to prevent the appearance of establishing the corporation as an alter ego of the owner.
Recommend Steps to Follow
Recommended steps to follow are: maintain separate bank accounts; all paperwork, legal and otherwise, should be in the specific name of the series; document all transactions including those between series; a series should have a unique name, yet one that acknowledges the Master LLC; keep assets and liabilities separate; and fund each series a reasonable amount for the activity engaged in.
States Offering a Series LLC
The following states offer the Series LLC: Delaware; Illinois; Iowa; Nevada; Oklahoma; Tennessee; Texas; Utah; and Wisconsin. Should the Series LLC fit your needs, but you do not do business in one of the above states, you can form the Series LLC in a state offering it, and probably foreign file it to do business in the state you are operating in. The Secretary of State of the state you are operating in should be contacted to verify if that state accepts the Series LLC to do business. Also research the degree of asset protection offered to see if it fits your needs.