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.

The Delaware Corporate law structure does not impose restrictions on foreign ownership or management, and it does not require a Delaware LLC to have any presence in Delaware except for a registered office and registered agent such as Harvard Business Services, Inc.

The only document required to be filed in Delaware to create the LLC, is the Certificate of Formation. Unlike other states, Delaware requires very little information to be made public in order to form an LLC. The Certificate of Formation filed with the Delaware Secretary of State is required to contain only two articles: the name of the Delaware LLC and the address of the Delaware LLC’s registered office and the name and address of the Delaware LLC’s registered agent in Delaware. At Harvard Business Services, Inc. we serve as registered agent for 30,000 companies.

In Delaware, your anonymity is maintained because members and managers are not required to be named in or to execute the Certificate of Formation. Preparation, execution and filing of the Certificate of Formation must be handled by an authorized person or entity such as Harvard Business Services, Inc. An authorized person is an individual or entity that forms an LLC on behalf of the members by filing the necessary formation documents with the Secretary of State and returning them to the members. Normally, the authorized person is the LLC’s registered agent or attorney. The powers of the authorized person are just to execute the filing of the document with the Division of Corporations. Once the document is filed the authorized person will release the LLC to the initial member(s). The legal instrument that releases the LLC to the initial member(s) is called the “Statement of the Authorized Person”, this statement is prepared and signed by your agent and is not provided to the State of Delaware. It is NOT required to be filed publicly in Delaware.

Why would someone from outside the U.S. file in Delaware? The advantages to our non U.S. clients bear considering. When all the LLC’s income is “Non-United States Source Income” (as defined by the IRS), the non U.S. members of the LLC are typically not subject to U.S. federal income taxation. Our non U.S. clients can take advantage of Delaware’s freedom of Contract and strong U.S. legal infrastructure, without having to provide any member information for public record, and the ability to operate anywhere in the world they choose, without being subject to filing U.S. tax forms.

For help determining if there is US source income, view the helpful Summary of Source Rules for Income of Nonresident Aliens provided by the IRS http://www.irs.gov/businesses/small/international/article/0,,id=96459,00.html

For detailed information regarding US Source income the 2nd chapter of the publication 519 from the IRS is very helpful http://www.irs.gov/publications/p519/ch02.html

For more information or questions regarding the benefit of the Delaware LLC for non U.S. clients please feel free to call or email us at 1-800-345-CORP or info@delawareinc.com!

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