Pros and Cons of the 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.” This posting is intended help go over the pros and cons of this type of structure.
Pros:
-Low start up cost, only need to form one LLC but have a myriad of series internally, without any additional expenses for the creation of an individual series.
-One Delaware Franchise tax payment of $250, regardless of how many series the LLC has.
-One Delaware Registered agent fee regardless of the number of series
-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.
Cons:
-the legal separation of the assets and liabilities of each series in a Delaware Series LLC has not been tested in court. 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.
-the U. S. federal tax treatment afforded to individual series is not certain. The IRS and Treasury Department have proposed regulations that would make crystal clear that each individual Series, within the Series LLC, could be considered a separate entity for the purposes concerning the Federal taxation. With the proposal, each individual series can elect the tax classification that would best suit that individual series needs! One series could be taxed like that of a partnership if there were 2 or more members, while another series can be considered a disregarded entity.
-Other States have not provided concrete guidance on the effect of the series distinction for state tax purposes.
-When operating as a Foreign LLC in California, there is a franchise tax of $800 per series. Other States are considering charging annual fees for each series within the LLC when operating as a foreign LLC in their jurisdiction.
-Banks are not familiar with the structure and have a hard time understanding that each Series can open up a bank account
-Many attorneys & tax professionals are not familiar with the structure and cannot provide counsel or guidance
Once the IRS & Treasury Department finalize the Proposed Regulations on the Series LLC the structure will gain popularity and become commonplace, potentially replacing the traditional LLC in the distant future.
Converting an LLC to a Series LLC
Filed Under: Delaware, Limited Liability Company, Series LLC
Tags: Delaware, Limited Liability Company, Series LLC
The most popular type of company formation in Delaware is, by far, the LLC. The Delaware Legislature created the LLC business form to give maximum effect to the members’ freedom to contract with one another upon whatever terms they deem best suited to their circumstances and goals. In a corporation, for example, Delaware law requires certain terms be included in the corporation’s constituent documents, mandates certain provisions related to corporate governance, and limits (to some extent) the ability of parties to modify certain terms relating to voting or fiduciary obligations, among other things. In an LLC, however, the members are free to organize the LLC in whatever manner they choose, with near-total freedom to define the relationship among the members and the terms governing the operation of the entity.
The Delaware Legislature also allows for the creation of a Series LLC. The Series LLC garnishes a lot of interest from clients because each series 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 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. As this structure gains traction and becomes more and more popular, our clients with a traditional LLC have been inquiring about transferring the existing LLC to a Series LLC. This can be achieved by amending the original Certification of Formation filed with the Delaware Division of Corporations, Secretary of State’s office to include an extra article allowing the LLC to establish designated series of members, managers or membership interests.
Should you like to make an amendment changing the existing LLC to a Series LLC, HBS will prepare a Certificate for signature, and forward via fax or email. Once executed by a member, the amendment document will need to be returned by fax or email to Harvard Business Services. Then the Certificate will be filed with the State of Delaware later that day. The State typically takes 3-5 business days to return the receipt of filing. As soon as the approved document is available we will forward it to you for your records; it is just that easy.
For any questions regarding the service please call me at 800 345 2677 ext 6131.
Proposed Regulations on the Series LLC
Filed Under: Articles of Interest, Limited Liability Company, Series LLC
Tags: Series LLC
We receive inquiries daily from clients wondering why everyone does not file a Series LLC instead of the traditional LLC. 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 franchise tax and fee that would otherwise be applied individually to separate LLCs.
Sound too good to be true? Many think that is the case. The myriad of issues concerning the series LLC such as the legal separation of the assets and liabilities of each series in a Series LLC has not been thoroughly 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.
Another issue is the mystery surrounding the taxation of the Series LLC, however the IRS is finally coming around and proposing new regulations governing the taxation of this unique and often misunderstood entity. The IRS and Treasury Department proposed regulations would make crystal clear that each individual Series, within the Series LLC, could be considered a separate entity for the purposes concerning the Federal taxation.
What does this mean? Is the IRS actually saying that each individual series can elect the tax classification that would best suit that individual series needs! One series could be taxed like that of a partnership if there were 2 or more members, while another series can be considered a disregarded entity? All under one EIN?
Keep in mind these are only proposed regulations and have not been finalized! However, the members and managers of Delaware Series LLCs should be aware that the IRS is focusing on them and proposing regulations that will have an impact on their tax positions.
For detailed information on the new proposals for the Series LLC view Series LLC Regulations regarding the tax classification of so-called series or cells.
La LLC de Series
Filed Under: Blog Posts in Spanish, Series LLC
Tags: Limited Liability Company, Series LLC, Spanish
Bajo la ley de Delaware, una LLC puede ser compuesta de series individuales de interés de membrecía. Este tipo de entidad se llama “LLC de Series”. Cada serie esta tratado como entidad separada – las deudas, responsabilidades, obligaciones y gastos de una serie no puede ser aplicado contra otra series de la LLC o contra la LLC en conjunto. Cada series puede tener su propio capital, miembros, realizar sus propios operaciones y seguir objetivos comerciales diferentes, pero se mantiene aislado de reclamaciones de miembros, acreedores, litigantes persiguiendo el capital de o haciendo reclamaciones contra otra series. La LLC de Series es la versión de Delaware de las “segregated portfolio companies” que se usan frecuentemente en las Islas Cayman, Jersey, British Virgin Islands y otros jurisdicciones fuera de EE.UU.
La forma de la LLC de Series rebaja las tarifas en el inicio y el mantenimiento anual a comparación de constituir y mantener varias entidades separados para cada inversión. Una única cuota es lo requerido para formar una LLC de Series sin importar el número de series que va a contener, a diferencia de las tarifas múltiples que serian en la creación de entidades separadas. Además, una LLC de Series está tratada como entidad individual, para los propósitos de impuestos de franquicia y representante autorizado. Esto quiere decir, que una LLC de Series tendría que pagar solamente una tarifa anual de $250 al estado y una tarifa anual de representante autorizado, en vez de pagar tarifas separadas que serian aplicadas a tener entidades múltiples.
El Acuerdo Operativo de la LLC de Series de Delaware (que no tiene que ser publicado) puede proporcionar cualquier número de series. Como sea, El Certificado de Formación para una LLC de Series tiene que mencionar específicamente que la LLC está dividida en series distintas y que el capital y obligaciones de una serie son atribuibles solamente a esa serie. Además, series pueden ser agregadas o terminadas en cualquier momento haciendo una modificación al Acuerdo Operativo de la LLC. Para poder mantener la distinción legal entre las series, una LLC de Series debe de mantener documentos documentando el capital y responsabilidades de cada serie; desde un punto práctico, los documentos deben ser organizados como si cada serie fuera su propia entidad separada.
Aunque sigue ganado popularidad, hay un cierto grado de dudas de la forma de la LLC de Series. Por ejemplo, la separación legal del capital y las responsabilidades de cada serie en una LLC de Series no ha sido probada en la corte tribunal. Aunque la ley de Delaware distintamente proviene para la separación legal de cada serie, no está claro si los tribunales en otros estados o otras jurisdicciones reconocerían la separación legal del capital y responsabilidades dentro de lo que es una sola entidad técnicamente. Por lo tanto, aunque una LLC de Series de Delaware está operando bien con documentos distintos sobre el capital y responsabilidades de cada serie, un tribunal en otra jurisdicción puede determinar el hecho de no reconocer la separación legal que este determinado bajo la ley de Delaware.
Además, el tratamiento de impuestos federales de cada serie no está asegurado. Aunque en Enero de 2008 el IRS ha dicho que las series distintas de la LLC de Series por lo general tendrían que pagar impuestos como si fueran entidades separadas para intenciones de impuestos federales. Muchos estados no han dado información concreta de los efectos de la distinción de series para impuestos estatales.
Harvard Business Services, Inc tiene más de 10 años creando Las LLC de Series y tiene la experiencia y conocimiento que le deja aprovechar de la flexibilidad de esta tipo de entidad. Si piensa que la LLC de Series puede ser la entidad adecuada para usted, llámenos para más detalles.
To read the English version of this blog posts click HERE.
More Info on The Series LLC
Filed Under: INC Knowledge, Limited Liability Company, Series LLC
Tags: Limited Liability Company, Series LLC
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.
