101 on the Series LLC
Filed Under: Delaware, INC Knowledge, Limited Liability Company
Tags: Delaware, Series LLC
Under Delaware law, a limited liability company (LLC) may be composed of individual series of membership interests. This type of entity is referred to as a “Series LLC.” Each series effectively 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 operations and pursue different business objectives, but remain insulated from claims of members, creditors or litigants pursuing the assets of or asserting claims against another series. The Series LLC form is Delaware’s version of the “segregated portfolio companies” which are widely used (under various names) in the Cayman Islands, Jersey, British Virgin Islands and in other non-U.S. jurisdictions.
The Delaware Series LLC business form reduces the fees incurred in creating and maintaining separate business entities for different ventures or investments. Only one filing fee is required to form a Series LLC regardless of the number of series it contains, rather than the multiple fees that would be required to create separate entities. In addition, a Series LLC is treated as one entity for franchise tax and registered agent fee purposes, meaning that it is assessed one $250 annual tax and one registered agent fee, rather than the separate tax and fee that would otherwise be applied individually to separate LLCs.
The Delaware LLC Operating Agreement of a Series LLC (which is not required to be publicly filed) may provide for any number of series. The Certificate of Formation for a Series LLC must specifically note, however, that the LLC is divided into distinct series and that the assets and obligations of a series are attributable only to that series. Additional series can be added or series can be terminated at any time by an amendment of the LLC Operating Agreement. In order to maintain the legal distinction among the series, a Series LLC must maintain records documenting the assets and liabilities of each series; from a practical perspective, records should be kept as though each series were a separate entity.
Although increasingly popular, there is a certain degree of uncertainty surrounding the Series LLC form. For example, the legal separation of the assets and liabilities of each series in a Series LLC has not been tested in court. Although Delaware law clearly provides for legal separation of series, it is unclear whether courts in other states and/or jurisdictions would recognize a legal separation of assets and liabilities within what is technically a single entity. Therefore, 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.
Additionally, the U. S. federal tax treatment afforded to individual series is not certain. Although in January 2008 the Internal Revenue Service has held that distinct series of a Series LLC will generally be taxed as separate entities for federal income tax purposes, many states have not provided concrete guidance on the effect of the series distinction for state tax purposes.
Harvard Business Services, Inc. has been creating Series LLCs for the last 10 years, and has the experience and understanding to allow you take advantage of this flexible and efficient business form. If you think the Series LLC may be right for you please call or email us for more details.
If I understand you properly regarding a Series LLC, it is risky in that the federal or another state government or arbitrator may overlook series separation and treat all series as one entity regardless of how rigorously company records are kep separately, attaching judgments and liens against property of unrelated members of series entities other than the one involved in a specific case. Of all the Series LLCs you have set up over the past decade, has any one ever been treated in this disadvntageous way?
Thank you,
Sid Bursten,
949-226-7359
From the clients that have decided to file a Series LLC, we are not aware of any that have been pierced. Most just do not want to test the waters and tend to stay with a proven method of seperate entities.
Great article Brett. Your last comment above implies that most of you clients just file a standard LLC. I plan to talk to an attorney, but would like your initial thoughts or “gut reaction” on whether the following plan would be viable as a Delaware Series LLC.
I live in Washington DC and design websites for profit using online advertising, such as adsense. I work alone – no partners. I would like to create a Delaware Series LLC and place each website in its own series. My only expenses would be my monthly ISP hosting service cost and my monthly web design software fees (I use a program to help make sites, they charge a monthly fee). Those fees would apply to all the series (that is, the websites). The assets would be the money each website makes, which could be recorded separately. I have no debt. Although I’ve read that the IRS has not issued guidance on how to treat Series LLCs for tax purposes, wouldn’t I just be taxed as a sole proprieter? Your thoughts on whether a Series LLC would be a good fit for my business is appreciated. I also fully understand that your comments are not legal advice. Thanks! Thomas
Since the series LLC posting, I have heard many stories from clients that have tried using the Series LLC, without much success. Accountants, the IRS, bankers, the individual states are just bewildered by this type of structure and the clients have run into bureaucratic nightmares! Many have decided to forego the Series LLC structure and stick with the time and true method of separate LLC’s for each aspect of the business.
The IRS has not been clear on how the Series LLC is to be taxed, however they are generally taxed as separate entities for federal income tax purposes.
Does a Series LLC work in Ohio or Indiana?Thanks,Dr.Biery
Clients use the series LLC all over the world. I have not heard from others about any draw backs using the Series LLC in Ohio or Indiana.
Very infomative post~ thank you.
I’m in the process of selecting a service to create a series LLC for me and wondered what packages your firm offers. Also, can you provide concrete clarification on the tax filing requirements of each series? It appears that a return must be filed federally? Does the state of Delaware also require a return for the series LLC or each series individually?
Thank you,
Dawn-Marie
Great article, Brett. LLCs are indeed the best of both the legal and tax planning worlds, so to speak. Then the series simply enhances the benefits. Having this arrangement enhanced even further by the service and efficiency that DE’s Chancery Court offers to DE companies is invaluable. I’m glad that at least some other states are following suit, as well. I look forward to some case law to further validate and solidify this strategy, although I am also very comfortable using and recommending it in the meantime, as well.