Pros and Cons of a Delaware Series LLC
By Brett Melson
Tuesday, February 28, 2017
What is a Delaware series LLC?
Under Delaware law, a limited liability company (LLC) may be composed of an individual series of membership interests. This type of entity is referred to as a Delaware series LLC.
Keep reading to learn about the pros and cons of a Delaware series LLC so you can determine if the benefits of a Delaware series LLC are right for your business.
Pros of the Delaware Series LLC:
- It has a low start-up cost. Series LLC owners only need to form one LLC. They then have myriad series internally, without any additional expenses for the creation of an individual series.
- Series LLCs pay only a single Delaware Franchise Tax payment of $300, regardless of how many series are contained in the LLC.
- There is just one Delaware Registered Agent Fee, regardless of the number of series in the LLC.
- Each series is effectively treated as a separate entity, meaning the debts, liabilities, obligations and expenses of one series cannot be enforced against another series of the LLC or against the LLC as a whole.
- Each series can hold its own assets, have its own members, conduct its own operations and pursue different business objectives yet remain insulated from claims of members, creditors or litigants pursuing the assets of or asserting claims against another series.
Cons of the Delaware Series LLC:
- The legal separation of the assets and liabilities of each series in a Delaware series LLC has not been tested in court. Even if a Delaware series LLC were properly operated with distinct records relating to the assets and liabilities of each series, a court in another jurisdiction could determine not to recognize the legal separation afforded under Delaware law.
- The U.S. federal tax treatment afforded to individual series is not certain. The IRS and Treasury Department have proposed regulations that would make it clear that each individual series, within the Delaware series LLC, could be considered a separate entity for the purposes concerning the federal taxation of the entity. With the proposal, each individual series can elect the tax classification that best suits that individual series' needs. One series could be taxed like that of a partnership if there were two or more members, while another series can be considered a disregarded entity.
- Other states have not provided concrete guidance on the effect of the series' distinction for state tax purposes.
- When operating as a foreign LLC in California, there is a Franchise Tax of $800 per series. Other states are considering charging annual fees for each series within the LLC when operating as a foreign LLC in their jurisdictions.
- Banks are not familiar with the structure and have a hard time understanding that each series can open up a bank account.
- Many attorneys and tax professionals are not familiar with the structure and cannot provide counsel or guidance.
Once the IRS & Treasury Department finalize the proposed regulations on the series LLC, the structure will gain popularity and become commonplace.
If, upon weighing the pros and cons of a Delaware series LLC, you've decided the benefits of a Delaware series LLC suit your company and you would like to form one, please visit our easy-to-use order page or call (800-345-2677), email or live chat with a friendly, helpful representative.