Advantages & Disadvantages of a Delaware Series LLC

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benefits of a Delaware Series LLCThere are several advantages to a Delaware series LLC, which is why so many people inquire about the structure of the Delaware series LLC.

In a series LLC, owners need only form one LLC; they can then establish any number of separate series internally, without any additional expenses for the creation of an these individual series.

Regardless of how many entities are contained in your Delaware series LLC, there is just one Delaware Registered Agent Fee and just one Delaware annual Franchise Tax payment of $300.

Each series can hold its own assets, have its own members, conduct its own operations and pursue different business objectives, yet all of the series remain insulated from claims of members, creditors or litigants pursuing assets or asserting claims against any of the other series.

If there are so many benefits of a Delaware series LLC, why doesn't everyone use the Delaware series LLC structure?

The structure, which has been likened to a piece of honeycomb, has existed for years, but there are still some unknown factors about the Delaware series LLC. The legal separation of the assets and liabilities of each series has not been tested in court. 

The United States federal tax treatment afforded to individual series is still uncertain as well. Even though Delaware law clearly provides for the legal separation of each series, it is unclear whether courts and/or jurisdictions in other states would recognize a legal separation of liabilities and assets within what is essentially a single entity.

In addition, other states have not provided concrete guidance on the effect of the series' distinction in regard to state taxes. Furthermore, many banks are not familiar with the series LLC structure and have difficulty comprehending that each series can open up its own bank account.

This is often the biggest hurdle for business owners, as most banks just do not understand the Delaware LLC structure and thus do not know how to open separate bank accounts for each series contained in a single LLC.

Should the owners of a series LLC need to seek council or tax advice, it may be difficult, as many attorneys and accountants are still unfamiliar with the structure and therefore cannot provide competent assistance. Regulations on the taxation of the series LLC were proposed back in 2010; however, there is still minimal guidance on how these entities are to be taxed.

Due to the uncertainty of these issues, some people opt to form their new LLC as a series LLC but simply hold off on using the individual series until the myriad issues mentioned above are clarified, and attorneys, accountants and other states become more familiar with the unique structure of the Delaware series LLC.

This way, the series LLC is ready to be utilized in the future and it will not be necessary to amend the Certificate of Formation to allow for the series LLC structure.

 

More By Brett Melson

There is 1 comment left for Advantages & Disadvantages of a Delaware Series LLC

Vito De Marco said: Thursday, November 24, 2016

If I form a Delaware series LLC is this considered by the IRS as a pass thru income tax as individual? Also I am looking to put the Delaware LLC in a Nevada Asset Protection Trust.

HBS Staff replied: Monday, November 28, 2016

Usually each individual series can elect a tax classification that best suits it. Typically, for tax purposes, the IRS considers a single-member LLC a disregarded entity and a multi-member LLC a partnership. However, since there is a lot of confusion surrounding the Series LLC, it is best to consult your tax profiessional.

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