If you are one of those people who is tired of having to form seperate entities (LLCs or corporations) for each type of business you operate, or for each piece of real estate that you own, a Series LLC may be useful to you. Nearly a decade ago, the state of Delaware introduced a legal entity that would become known as the Series LLC. Despite its origins in Delaware, several other states have now started to permit the usage of Series LLCs. Those states/territories include:
– Wisconsin, and
– the territory of Puerto Rico.
To this day, the concept of what a Series LLC is exactly is still somewhat of an obscure notion. First off, let’s take a look at a series LLC in relation to its more traditional counterpart, the LLC. An LLC, or limited liability company, is a type of business organization which is a blend of the essentials of a partnership (disregarded entity for tax purposes) along with certain aspects of a corporation (limited liability being the major aspect). This type of organization operates as its own individual business and is crucial in protecting a business’s assets by limiting one’s personal liabilities. On the other hand, a Series LLC is a single company which is composed of several units or series, all of which are allowed to act as their own separate companies.
Series LLCs are forms of limited liability companies in which articles of organization allow indefinite separation of membership interests, assets, and operations into individual series or cells; each cell of which is separate from any other series/cell. The purpose of these Series LLCs is to do away with the excessive costs, as well as executive duties that are created from having multiple LLCs. As a result, it is capable of holding its own earnings, losses, as well as legal obligations.
For example, if I owned a Series LLC called For Example, LLC, it could have three different series, an A series, a B series and a C series. The A series could own and operate a store and website through which the LLC sell goods. The B series could own real estate. The C series could provide consulting services.
Each series is seperate from a legal and tax perspective, meaning that each individual series can own property, contract with others, make income, etc. Each series has to pay taxes as if it were a seperate LLC. If the entity was set up properly and all formalities followed, and one series is found liable in a lawsuit or some other action, the rest of the series should not be effected (subject to what state you are in). It is good form for when one series takes an action, like buying real estate or entering into an agreement, to list what series is doing so. If in my example, the C series of my For Example, LLC is signing an engagement letter with a client, I would list the company as For Example, LLC – C Series. Each series should have its own EIN and bank account and should be treated as a seperate LLC (which adds to the cost – although the incorporation costs are not there).
For taxation purposes, the IRS has somewhat informally stated that each series can elect to be taxed as it chooses. (see IRS Private Letter Ruling 200803004). This is helpful as some series of a Series LLC can be taxed as a disregarded entity, some as an S-corporation and some as a C-corporation as they chose. But as stated earlier, the idea of Series LLCs are still not recognized in all fifty states or the District of Columbia. Therefore, Series LLC owners are unable to file a single tax return for all of their series together. It is not certain as of yet whether or not the practice of Series LLCs will ever be fully adopted on a nation scale in the near future; however, this issue is more likely to be resolved once the IRS develops a means of proper tax classification for businesses that choose to implement this idea into their business model.
Some of the business models which would thrive off series LLCs, in particular, are those looking to create fractional share arrangements, devise oil and gas deals, as well as venture capital funds and hedge funds. Series LLCs have been known to benefit striving entrepreneurs with various business propositions, as well as knowledgeable investors with many years of experience. Businesses with complex arrangements are also able to use series LLCs as management tools which can keep their companies operating smoothly.