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What is a Series LLC? Should I Form One?
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What is a Series LLC? Should I Form One?


By Brett Melson Tuesday, July 7, 2015

what is a series llc?What is a series LLC?

 

The Delaware LLC laws allow for the creation of a very interesting and unique entity, the series LLC.

 

In a Delaware series LLC, each series is 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 business and pursue different business objectives, yet they remain shielded from claims of members, creditors or litigants pursuing the assets of or asserting claims against another series.

 

In addition, a series LLC is treated as only one entity for Franchise Tax and Registered Agent Fee purposes, meaning the LLC is assessed one $300 annual Franchise Tax Fee and one Registered Agent Fee, rather than the separate taxes and fees that would otherwise be applied, individually, to separate LLCs.

 

While in theory the structure of a series LLC sounds perfect, in reality it is too good to be true. Due to all the uncertainty amongs series LLCs, many Harvard Business Services, Inc. clients have encountered frustrating complications and challenges when trying to utilize a series LLC.

 

Problems with a 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 decide not to recognize the legal separation afforded under Delaware law.

 

  • The United States federal tax treatment afforded to individual series is uncertain. The Internal Revenue Service and the Treasury Department have proposed regulations that would, indeed, clarify that each individual series within the series LLC could be considered a separate entity for federal taxation purposes. According to the proposal, each individual series can elect the tax classification that best suits that individual series needs; for example, one series—with two or more members—could be taxed like a partnership while another series can be taxed like a disregarded entity. However, none of these proposed regulations have yet been finalized.

 

  • Other states have yet to provide concrete guidance on the effect of the series LLC distinction for state tax purposes if a Delaware series LLC operates in another state.

 

  • Banks are totally unfamiliar with the structure of a series LLC and have a very difficult time comprehending that each series can open its own separate bank account.

 

  • Many attorneys and tax professionals are also unfamiliar with the series LLC structure and cannot offer adequate counsel about them.

 

advantages of a series llc

As the series LLC structure gains traction and becomes more popular, more and more buisness owners with traditional LLCs have been inquiring about transforming their existing LLC into a series LLC.

 

This can be achieved by amending the original Certification of Formation filed with the Delaware Division of Corporations to include an additional article; this article will allow the LLC to establish multiple, designated series of members, managers or membership interests.

 

The best solution, at the moment, may be what some of our clients have been doing in order to avoid the current uncertainity of the series LLC; they are opting to form their new LLC as a series LLC and simply not utilize the individual series until the above issues are clarified.

 

This way, the series LLC structure is established and ready to be used in the future, and it will not be necessary for them to amend their Certificate of Formations in order to allow for the series LLC structure.

 

Since the fees to file a Delaware series LLC are the same as a traditional LLC, we would be happy to help you create a series LLC—which can function as a traditional LLC for the time being—for you.

 

You can do so online www.delawareinc.com/order/ or, if you have any questions regarding the Delaware series LLC, please feel free to call me at 800-345-2677, Ext 6131 or email me at brett@delawareinc.com.
 

Photo credit: Horla Varlan

More By Brett Melson

 

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