Series Limited Liability Company
A series limited liability company (Series LLC) is a derivative form of limited liability company that allows the members to segregate certain assets of the LLC into "cells" that provides extra protection for personal assets comprised of multiple business entities.
Series LLC Structure
Many form an LLC in order to protect personal assets from a legal claim relating to their real estate investment or business liabilities. Additional liability protection may be gained by properly forming and maintaining a separate LLC to hold each property or business entity. By forming a separate LLC to own and hold each legally titled separate property or business entity, theoretically only the assets owned by a specific LLC would be subject to claims or lawsuits arising against that LLC. However there are costs and administrative burdens associated with properly forming, qualifying and maintaining each separate LLC. Another option may be to form a Series LLC, a.k.a. the "cell" LLC, if permitted under applicable laws. Although each cell of a Series LLC can own distinct assets, incur separate liabilities, and have different managers and members, a Series LLC pays one filing fee and files one income tax return each year, if each series member is also a founding member of the LLC. When non-founding members are added to a newly created cell within the Series LLC, that new cell should file a separate partnership tax return for that cell. Furthermore, liability incurred by one unit does not cross over and jeopardize assets titled in other subsidiary units of the same Series LLC. Also, if a business owns real estate used in its operations, a Series LLC may avoid sales tax due on rent paid by the operating series to the real estate series. A Series LLC has been described as a master LLC that has separate divisions, which is similar to an S corporation with Q-subs.
The procedure for adding and deleting series is uncomplicated. Additional series can be added by simply amending the Series' “limited liability company agreement” (equivalent to an operating agreement for other LLCs). Under Delaware law, any particular series may be dissolved by two-thirds approval of the ownership interests, or a simple majority if provided for in the operating agreement.
Limited Use of Series LLC
The series LLC is not more widely used as a liability segregation technique because its tax treatment has not been fully resolved and because its effectiveness has not been tested judicially. Currently, the federal tax standards for a Series LLC with multiple members remains unclear. Some speculate that single entity federal tax treatment will require highly correlated assets, members and managers (particularly the last two). There is further speculation that California will only tax income from those series conducting business in California. Other states may follow. However, as of April 2006, The California Franchise Tax Board has determined that each Series of a Delaware Series LLC must report and pay taxes as a separate entity in California. Also, since the asset protection and planning advantages of the Series LLC have not been thoroughly challenged in asset protection cases, they remain theoretical, and unproven.
How We Serve Our Clients
With our experience working with entrepeneurs to establish new businesses we will guide you through the process of forming a new company, assisting you in choosing the appropriate legal structure and explaining the advantages of each for your particular enterprise. After the business is established, our attorneys will be at your disposal to answer general legal questions when they arise. Our clients also call on us to assist them during transitional periods, raising capital, locating venture partners, merging, selling, and closing a business.
