A series LLC is an entity structure permitted in certain states that allows for the formation of multiple segregated LLCs (or “series”) under the umbrella of a single “master” LLC. Generally, in the states in which they are recognized, these series LLCs are viewed as segregated entities which are permitted to have separate managers and members, distinct assets and individual operating agreements, and which can incur separate liabilities. However, the series LLC is still viewed from the states’ perspective as a single entity for filing and reporting purposes.
The most notable advantage of series LLCs comes in the form of cost savings associated with state business filing fees. In Illinois, where business filing fees are higher than most states, the cost to form a standard LLC is $600. While series LLC filing fees involve a higher up-front cost ($850), the benefit arises in the long-run because only a nominal registration fee is necessary to form each additional series by filing a Certificate of Designation ($50) and amending the master LLC operating agreement. To illustrate, an Illinois developer with ten properties would pay $6,000 to form a standard LLC for each property ($600 x 10 properties). Instead, by forming each entity as a series LLC, the developer would pay $1,350 in initial filing fees ($50 x 10 + $850). In some states, such as Delaware, only the initial filing fee is required to form a series LLC, and individual series can be created via the LLC operating agreement without any additional fees.
In addition to the administrative streamlining, a major benefit of series LLCs lies in the separate corporate liability protection of each series. Debts and liabilities of one series cannot spill over and be enforced against a different series so long as certain statutory conditions are met at formation. Essentially, if each series keeps separate records and bank accounts, and is treated as its own entity, the assets of each series will be unaffected by judgments against other series. However, not all state statutes regarding the series LLC are identical, and series LLCs are not available in all states. In jurisdictions where series LLCs are not available, each series may not be recognized as a separate entity or for state tax purposes.
Although the IRS has yet to issue official federal tax regulations governing the treatment of series LLCs, it has issued proposed regulations (Prop. Treas. Regs. Secs. 301.6011-6; 301.6071-2; and 301.7701.7701-1(a)(5)) providing insight into the IRS’ treatment of these entities :
- Each series within a series LLC will be treated as a separate entity for federal income tax purposes;
- Each series is allowed to choose its own entity classification independent of the classification of other series; and
- Each series should only be liable for federal income taxes related to that series.
The proposed regulations do not address the entity status of a series organization for federal tax purposes nor do the proposed regulations specifically address whether each series within a series LLC should obtain a separate employer identification number (EIN) and file a separate federal tax return. It is anticipated that the Treasury Department will issue its official regulations regarding series LLCs by the end of the summer. Until final regulations are issued, we are advising clients to obtain separate EINs and file separate income tax returns for each separate series which, in turn, allows for each series to maintain their respective individual identities.
While the series LLC may appear to be an attractive investment vehicle, it does not come without risks. Series LLCs have largely been untested in the courtroom, and there is not much precedent as to how these entities will be respected going forward. In addition to questions regarding whether the separate liability protection of the series LLC structure will be respected in states that do not recognize series LLCs, various issues exist regarding how series LLCs will be handled in bankruptcy proceedings, and it is possible that a bankruptcy court will not recognize the separateness of the series within the LLC. As a result, until more courts have ruled on the legality of the series LLC structure, it is unclear whether the series LLC will be afforded all of the protections intended by the state statutes.