In May of 2009 we published an article entitled 101 on the Series LLC in which we discussed the pros and cons of using the Series LLC. Here is a little recap of the May 2009 article:

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.

In that post we discussed the primary drawback of using the Series LLC; the lack of certainty surrounding whether courts in other states and jurisdictions would recognize a legal separation of assets and liabilities within what is technically a single entity.  As we discussed, even though the legal segregation of the series is set forth expressly by statute in Delaware, no court has ever been called upon to rule on the validity of the legal segregation of assets within a Series LLC or articulated the circumstances under which a court would ignore the distinction among series.

Many of you have reached out to us and inquired whether the courts or legislature have provided any guidance or clarification on some of the issues surrounding the Series LLC.  Unfortunately, there have no significant developments that alleviate the concern we expressed in the May post.

California has arguably supported the notion that each series of a Series LLC is a separate entity; the California Franchise Tax Board ruled that each Series of the Delaware LLC is responsible for the $800 annual California franchise tax. Although this is not welcome news for our California clients that employ the Series LLC structure, it supports the concept that each series should be considered a distinct entity. Other states are expected to follow the same path as California and charge an annual fee on a per series basis.

Additionally, the U. S. federal tax treatment afforded to individual series is still not certain.  For now, it appears the series of a Series LLC will generally each be taxed as a separate entity for federal income tax purposes.

For now, despite the theoretical savings in franchise taxes, registered agent fees and other costs, the Series LLC form is still a work in progress.  Regulators, attorneys and accountants are all grappling with issues raised by the possibility of legal segregation of assets and liabilities within a single entity.  Given this, while the Series LLC shows great promise and segregated cell companies are gaining in popularity and acceptance outside the U.S., typically most of our clients tend to use the safer alternative of creating separate entities for each venture.

Back in October, 2009 we discussed how the LLC is owned, operated and maintained in a post titled 101 on an LLC Agreement. Many clients have come to us with questions and are curious about the fact that Delaware LLC law provides for an oral LLC agreement.

The Delaware Supreme Court recently issued a decision that effectively requires all limited liability company agreements (“LLC Agreements”) for Delaware LLCs to be in writing.  The decision holds that LLC Agreements are subject to Delaware’s Statute of Frauds, which requires certain types of contracts to be in writing in order to be enforceable.  This decision appears to contradict the express language of Section 18-101 of the Delaware Limited Liability Company Act (the “Act”), which states that a limited liability company agreement may be “written, oral or implied”

Although clients typically commit an agreement to writing, some small or relatively newly formed LLCs operate pursuant to an oral understanding or implied course of dealing among the members. For example, members of an LLC may have orally agreed upon or may have simply accepted over time a certain distribution of profits and losses, or assumed that voting rights were distributed among the members in a certain way.

A member seeking to assert his or her rights in court, however, could not rely upon the oral agreement or implied understanding as an LLC Agreement governing the operations of the entity, despite the language of the Act.

This decision reinforces the importance of putting an LLC Agreement in writing as early as possible, and having all members sign the agreement. Business partners or investors in the first stages of an exciting business opportunity often do not foresee (or do not consider) the possibility of a later disagreement and the potential need to assert their respective rights, but putting the terms governing the operations of an LLC in writing at an early stage protects the interests of everyone involved.

Question: What Is an ITIN?

Answer: The ITIN number or “Individual Taxpayer Identification Number” is similar to that of the Social Security number. The ITIN is for individuals that cannot acquire the SSN but have tax filing requirements with the IRS. The ITIN is 9 digits in length just like a SSN, but it will always start with a 9. The number was created 13 years ago to assist individuals without a SSN to comply with Federal tax law. The thought process is if income is earned here, then filings need to be made with the IRS, whether you are here legally or not. Not just anyone will receive an ITIN number, the IRS stipulates that the individual requires a filing of a federal return in order for it to be issued. Possession of an ITIN does not indicate permission to work in the US or obtain benefits from the Social Security Administration, it is simply a number to identify an individual to the US tax system.

I was surprised to learn that the IRS is not allowed, by Federal Law, to share any of this information with any of the other US Agencies. This was enacted to encourage filings with the IRS without the fear of retribution, such as deportation. The goal of the legislation was to allow illegal immigrants to pay their fair share of taxes. More than 1.5 million applications for the ITIN were processed in 2008. A recent study by the Treasury Inspector General for Tax Administration took a sampling of 510 ITIN applications and found that 78% of these contained errors, but they were processed anyway. In addition, the government also admitted that more than 55,000 ITIN’s were used multiple times on different returns within a year, with refunds totaling over $202 Million!

If you need an ITIN don’t let the lengthy application deter you from proceeding, as the statistics above show, even if you mess up the application they will still issue the number…..

If you would like information on how to obtain the ITIN number visit http://www.irs.gov/individuals/article/0,,id=96287,00.html