What is a Series LLC?
Series Limited Liability Company (LLC) is a business entity that was introduced by the State of Delaware nearly nine years ago. The concept is innovative and based on the fact that several series or “cells” may be created within a single LLC. Basically, a Series LLC possesses the ability to divide its assets and liabilities into various sub-LLCs or series while still controlling them from one umbrella company. The closest analogy in the business world would be a corporation with several subsidiaries.
What are the advantages of a Series LLC?
A Series LLC eliminates the expense and administrative duties related to forming multiple LLCs. A Series LLC is preferred to a corporation with subsidiaries because it does not have the taxation, expense or formalities associated with a parent-and-subsidiary corporate structure.
Each cell in a Series LLC has its own profits, losses and liabilities and is legally separate from the other series. These sub-LLCs also have their own economic structures, members, managers and assets. The assets in a sub-LLC are protected from legal enforcement against the assets of another LLC.
Another, lesser-known advantage is that a Series LLC may not be required to pay sales tax on rent paid by the operating series. The business must own the real estate and the rent must be paid to the sub-LLC owning the real estate series. In this respect, the Series LLC may also be compared to an S-Corporation with Q-subsidiaries.
What States Currently Offer the Series LLC Option?
Though Delaware was the first to form the Series LLC, other states are also adopting the practice. Currently, District of Columbia, Illinois, Iowa, Kansas, Minnesota, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah, Wisconsin and Puerto Rico also allow the formation of Series LLC.
How to Form a Series LLC
Forming a Series LLC is similar to forming an LLC or corporation in any state. Today, only Illinois requires a different application and charges higher registration fees for forming a Series LLC rather than a simple LLC.
Once the company is formed with the state, a Series LLC will require some extra documentation compared to an LLC. A 50 or more page Operating Agreement must be prepared to establish a Series LLC. This document must be signed and created according to the rules and regulations governing the Series LLC. In most instances, an attorney is needed to draft the Operating Agreement and an accountant will be needed to explain related tax laws governing the Series LLC.
Each sub-LLC will have to create a separate Series Agreement. Each sub-LLC will have its own asset name, bank account and a separate EIN (Federal Tax ID) number. While the Operating Agreement will be amended as series are added or deleted, the Certificate of Formation (also called Articled of Organization) filed with the state does not require amendment.
How to Add and Delete a Series
A series may be added or deleted by amending the Series Operating Agreement. The Series LLC members must sign an Addendum to the Operating Agreement and then separate accounts must be established and records maintained for the new cell.
In Delaware, a sub-LLC only requires approval by 66% of the owners of a Series LLC.
Deleting a sub-LLC from the umbrella company requires a similar procedure, along with a proper liquidation of its assets and liabilities.
Requirements for Forming a Series LLC
Each sub-LLC should maintain a separate bank account. If there is real estate purchased by a sub-LLC, all deeds should be in the name of the series or sub-LLC (for example ‘SuperCompany, LLC – Green Series’). This should be designated on the document to avoid confusion. All contracts, loans and other notes should also be designated in this format as well. If there are any transactions between series, they should be conducted as though they were an outside entity. For instance, when involved in a real estate transaction with a sub-LLC, the deal should be negotiated at fair market prices according to current appraisal values. All loans between sub-LLC have to be interest-bearing and properly documented.
All assets and operations should be kept separate from other sub-LLCs. Each asset should only be owned by one sub-LLC or series. For example, the same property cannot be owned by more than one series. Each sub-LLC should have enough capital to support itself apart from the other sub-LLCs (a series cannot be undercapitalized).
It is advisable for each sub-LLC must apply for its own ‘doing business as’ name (sometimes called a DBA, a fictitious name or an assumed name). The DBA records should indicate the owners of the sub-LLC. This alerts all interested parties, including creditors, as to which sub-LLC is responsible for any assets or debt accrued. The fictitious name should be obtained in the state or county where the property is owned or the assets of that particular sub-LLC reside.
Only one registered agent and a single annual report are generally required for a Series LLC.
Issues with Series LLC Formation
Currently, governing bodies have not resolved the problems surrounding tax and creditor issues related to the Series LLC. There is some conflict between the Federal Bankruptcy Code and the State Series LLC law. Some current Series LLC owners have expressed concerns about their inability to file one tax return for all of the sub-LLCs. Many attorneys are reviewing the tax laws to determine the best way to resolve tax issues. The resolution will also determine whether or not they will endorse the Series LLC nationwide. However, a pending IRS regulation may solve at least the federal taxation questions related to Series LLC. It is expected to be enacted in the near future.
In California, where Series LLC is not officially recognized, each sub-LLC must file separate state tax returns since it is considered a separate LLC. This process usually requires its own Form 568 Liability Company Return of Income. Each sub-LLC must also pay its own separate LLC annual tax and fee. In Delaware, however, where the Series LLC originated a Series LLC is considered a single entity for state tax purposes. An experienced professional tax consultant should be consulted to avoid problems associated with a Series LLC tax return.
Some professionals have agreed that California’s interpretation of the tax law for Series LLC may be the most prudent way to handle taxes. However, their interpretation does not allow the tax benefits that were initially proposed by the formation of the Series LLC in Delaware. This fact is preventing the concept from being adopted nationwide.
Investors are advised not to group high liability assets with low liability assets in a Series LLC. High liability assets are defined as active businesses, and low liability assets are defined as real estate. This practice is not recommended even if the assets are in separate sub-LLCs.
Who Will Benefit from the Series LLC?
The Series LLC is preferred by savvy investors or ambitious entrepreneurs. Many business owners use Series LLCs as planning tool for venture capital funds, hedge funds, oil and gas deals and fractional share arrangements. Such complex business arrangements often use the series LLC as a management tool. The concept may also be used for Mutual Funds to avoid filing more than one application for separate classes of funds with the SEC. The Series LLC is also useful for entrepreneurs with multiple business ideas or for franchise businesses. Many companies may also use a Series LLC to establish incentive compensation for employees, to own intellectual property or for real estate investments. This concept may also be used as a part of family gifting.
Real Estate investors with multiple properties often use the Series LLC to isolate each property and the liability associated with it into a separate sub-LLC. To save on annual filing fees, the Series LLC may be registered as a single foreign entity in the states other than its home state. This practice is common among entrepreneurs who use Series LLCs to own properties in New York, Texas and California.
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