Series LLC
Encyclopedia
A series limited liability company, commonly known as a series LLC, is a special form of a limited liability company
that provides liability protection across multiple "series" each of which is theoretically protected from liabilities arising from the other series. In overall structure, the series LLC is comparable to a corporation with several subsidiaries.
Many form an LLC in order to protect personal assets from a legal claim relating to their real estate investment or business liabilities. Additional liability protection may be gained by properly forming and maintaining a separate LLC to hold each property or business entity. By forming a separate LLC to own and hold each legally titled separate property or business entity, theoretically only the assets owned by a specific LLC would be subject to claims or lawsuits arising against that LLC. However there are costs and administrative burdens associated with properly forming, qualifying and maintaining each separate LLC. Another option may be to form a Series LLC, also known as a "cell" LLC, if permitted under applicable laws. Although each cell of a Series LLC can own distinct assets, incur separate liabilities, and have different managers and members, a Series LLC pays one filing fee and files one income tax return each year, if each series member is also a founding member of the LLC. When non-founding members are added to a newly created cell within the Series LLC, that new cell should file a separate partnership tax return for that cell. Furthermore, liability incurred by one unit does not cross over and jeopardize assets titled in other subsidiary units of the same Series LLC. Also, if a business owns real estate used in its operations, a Series LLC may avoid sales tax due on rent paid by the operating series to the real estate series. A Series LLC has been described as a master LLC that has separate divisions, which is similar to an S corporation
with Q-subs.
The procedure for adding and deleting series is uncomplicated. Additional series can be added by simply amending the Series' “limited liability company agreement” (equivalent to an operating agreement for other LLCs). Under Delaware law, any particular series may be dissolved by 2/3 approval of the ownership interests, or a simple majority if provided for in the operating agreement.
This method of liability segregation was first called the "Delaware Series LLC" because it was first approved in Delaware. As of April 2005, Iowa and Oklahoma already had passed similar acts. Illinois followed suit in August of 2005. Tennessee and Utah passed legislation effective in 2006. Wisconsin passed a stripped-down version of the series LLC legislation. Series LLC enabling legislation was signed into law in Texas in 2009.
issued Private Letter Ruling
200803004, which ruled that the Federal tax classification (i.e., disregarded entity or partnership or taxable association) is determined for each series independently. So, for example, if there is only one owner of series A, then series A can be a disregarded entity (assuming it does not elect to be taxed as an association). And if series B has two owners, then it will be treated as a partnership. There is further speculation that California
will only tax income from those series conducting business in California. Other states may follow. However, as of April 2006, The California Franchise Tax Board
has determined that each Series of a Delaware Series LLC must report and pay taxes as a separate entity in California. Also, since the asset protection and planning advantages of the Series LLC have not been thoroughly challenged in asset protection cases, they remain theoretical, and unproven. To minimize the chances of one series being held liable for another’s liabilities, the owners of a Delaware Series LLC should do the following:
Limited liability company
A limited liability company is a flexible form of enterprise that blends elements of partnership and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions...
that provides liability protection across multiple "series" each of which is theoretically protected from liabilities arising from the other series. In overall structure, the series LLC is comparable to a corporation with several subsidiaries.
Many form an LLC in order to protect personal assets from a legal claim relating to their real estate investment or business liabilities. Additional liability protection may be gained by properly forming and maintaining a separate LLC to hold each property or business entity. By forming a separate LLC to own and hold each legally titled separate property or business entity, theoretically only the assets owned by a specific LLC would be subject to claims or lawsuits arising against that LLC. However there are costs and administrative burdens associated with properly forming, qualifying and maintaining each separate LLC. Another option may be to form a Series LLC, also known as a "cell" LLC, if permitted under applicable laws. Although each cell of a Series LLC can own distinct assets, incur separate liabilities, and have different managers and members, a Series LLC pays one filing fee and files one income tax return each year, if each series member is also a founding member of the LLC. When non-founding members are added to a newly created cell within the Series LLC, that new cell should file a separate partnership tax return for that cell. Furthermore, liability incurred by one unit does not cross over and jeopardize assets titled in other subsidiary units of the same Series LLC. Also, if a business owns real estate used in its operations, a Series LLC may avoid sales tax due on rent paid by the operating series to the real estate series. A Series LLC has been described as a master LLC that has separate divisions, which is similar to an S corporation
S Corporation
An S corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code....
with Q-subs.
The procedure for adding and deleting series is uncomplicated. Additional series can be added by simply amending the Series' “limited liability company agreement” (equivalent to an operating agreement for other LLCs). Under Delaware law, any particular series may be dissolved by 2/3 approval of the ownership interests, or a simple majority if provided for in the operating agreement.
This method of liability segregation was first called the "Delaware Series LLC" because it was first approved in Delaware. As of April 2005, Iowa and Oklahoma already had passed similar acts. Illinois followed suit in August of 2005. Tennessee and Utah passed legislation effective in 2006. Wisconsin passed a stripped-down version of the series LLC legislation. Series LLC enabling legislation was signed into law in Texas in 2009.
Acceptance by other jurisdictions
The series LLC is not more widely used as a liability segregation technique because its tax treatment has not been fully resolved and because its effectiveness has not been tested judicially. Currently, the federal tax standards for a Series LLC with multiple members remain unclear. Some speculate that single entity federal tax treatment will require highly correlated assets, members and managers (particularly the last two). On January 18, 2008, the Internal Revenue ServiceInternal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
issued Private Letter Ruling
Private letter ruling
Private letter rulings , in the United States, are written decisions by the Internal Revenue Service in response to taxpayer requests for guidance. A private letter ruling binds only the IRS and the requesting taxpayer. Thus, a private ruling may not be cited or relied upon as precedent...
200803004, which ruled that the Federal tax classification (i.e., disregarded entity or partnership or taxable association) is determined for each series independently. So, for example, if there is only one owner of series A, then series A can be a disregarded entity (assuming it does not elect to be taxed as an association). And if series B has two owners, then it will be treated as a partnership. There is further speculation that California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
will only tax income from those series conducting business in California. Other states may follow. However, as of April 2006, The California Franchise Tax Board
California Franchise Tax Board
The California Franchise Tax Board collects state personal income tax and corporate income tax of California. It is part of the California State and Consumer Services Agency....
has determined that each Series of a Delaware Series LLC must report and pay taxes as a separate entity in California. Also, since the asset protection and planning advantages of the Series LLC have not been thoroughly challenged in asset protection cases, they remain theoretical, and unproven. To minimize the chances of one series being held liable for another’s liabilities, the owners of a Delaware Series LLC should do the following:
- A separate bank account should be maintained for each series.
- All contracts, deeds, notes, etc. should be signed in the name of the series. Again, use something like "Abracadabra LLC, Blackacre Series only".
- Any loans between series should be properly documented.
- Any transactions between series should be conducted in an arms'-length manner at fair market prices using appraisals.
- Have each series file a fictitious business name statement in each county where it owns property. Each series should have its own name and the filing should emphasize the ownership of that series, for example, "Abracadabra LLC, Blackacre Series only". This is to put creditors on notice.
- Keep the assets and operations of each series separate from the other series. Each asset should be owned solely by one series. In other words, two or more series should not be co-owners of the same property.
- Make sure each series is adequately capitalized.
U.S. States where a Series LLC can be formed
- DelawareDelawareDelaware is a U.S. state located on the Atlantic Coast in the Mid-Atlantic region of the United States. It is bordered to the south and west by Maryland, and to the north by Pennsylvania...
(Limited Liability Company Act) - IllinoisIllinoisIllinois is the fifth-most populous state of the United States of America, and is often noted for being a microcosm of the entire country. With Chicago in the northeast, small industrial cities and great agricultural productivity in central and northern Illinois, and natural resources like coal,...
- IowaIowaIowa is a state located in the Midwestern United States, an area often referred to as the "American Heartland". It derives its name from the Ioway people, one of the many American Indian tribes that occupied the state at the time of European exploration. Iowa was a part of the French colony of New...
- NevadaNevadaNevada is a state in the western, mountain west, and southwestern regions of the United States. With an area of and a population of about 2.7 million, it is the 7th-largest and 35th-most populous state. Over two-thirds of Nevada's people live in the Las Vegas metropolitan area, which contains its...
- OklahomaOklahomaOklahoma is a state located in the South Central region of the United States of America. With an estimated 3,751,351 residents as of the 2010 census and a land area of 68,667 square miles , Oklahoma is the 28th most populous and 20th-largest state...
- TennesseeTennesseeTennessee is a U.S. state located in the Southeastern United States. It has a population of 6,346,105, making it the nation's 17th-largest state by population, and covers , making it the 36th-largest by total land area...
- TexasTexasTexas is the second largest U.S. state by both area and population, and the largest state by area in the contiguous United States.The name, based on the Caddo word "Tejas" meaning "friends" or "allies", was applied by the Spanish to the Caddo themselves and to the region of their settlement in...
- UtahUtahUtah is a state in the Western United States. It was the 45th state to join the Union, on January 4, 1896. Approximately 80% of Utah's 2,763,885 people live along the Wasatch Front, centering on Salt Lake City. This leaves vast expanses of the state nearly uninhabited, making the population the...
- WisconsinWisconsinWisconsin is a U.S. state located in the north-central United States and is part of the Midwest. It is bordered by Minnesota to the west, Iowa to the southwest, Illinois to the south, Lake Michigan to the east, Michigan to the northeast, and Lake Superior to the north. Wisconsin's capital is...