Wednesday, December 14, 2011
What is a Series LLC?
A series LLC is a special form of limited liability company intended to provide liability protection for a "series" of different activities. In theory, the assets of each “cell” in the series should be protected from liabilities of the other cells. In overall structure, the series LLC is comparable to a parent corporation with multiple subsidiaries.
For asset protection reasons, business owners commonly form a parent company and then put each business operation into a separate subsidiary. This works well as a liability shield. But having multiple subsidiaries involves additional costs to set-up, administer and maintain the parent company and the multiple subsidiaries. A series LLC avoids these additional costs and is an alternative to consider.
Each cell of a series LLC has its own assets and liabilities, and may have different managers and members (owners). A series LLC pays one filing fee. The rights and obligations of the managers and members of each cell in the series LLC is set forth in the series LLC operating agreement.
To minimize the risk that courts will find one cell in a series liable for debts of another cell in the series, owners of a series LLC should do the following: (1) register and use a separate “doing business as” name for each cell; (2) set-up a separate bank account for each cell; (3) sign legal documents (deeds, lease agreements, bills of sale, contracts, etc.) for each cell using its own distinct dba name; (4) conduct all transactions between cells at arms-length and document such transactions; (5) adequately capitalize each cell; (6) avoid having multiple cells be co-owners of assets; (7) avoid having cells lend or borrow money regularly and repeatedly from other cells; and (8) prepare (or be able to prepare) separate financial statements for each cell showing the assets, liabilities, income and expenses of such cell.
The federal income tax entity classification system will apply separately to each cell in a series LLC. So if cell A has one member, that cell would be treated as a disregarded entity unless the member elected to treat the cell as a corporation for federal income tax purposes. Likewise, if cell B had two or more members, that cell would be treated as a partnership unless the members elected to treat the cell as a corporation. Most states have indicated that they will follow the federal income tax entity classification system for income tax purposes.
Using a series LLC rather than a parent-subsidiary organization may present some state tax savings opportunities. For example, under some state statutes, sales tax specifically applies when one subsidiary sells or rents equipment to another subsidiary. Using a series LLC in which one cell rents equipment to another cell may work to avoid this sales tax.
Series LLCs are available in Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, Utah and Wisconsin. Ohio Has not yet enacted legislation to permit series LLCs to be created in Ohio. The series LLC is not yet embraced as a liability protection technique because some of the federal and state tax treatment of series LLCs has not been fully resolved.
If you would like to know about series LLC nad how they might benefit your business, give me a call or email. Jsenney@pselaw.com or
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