Series LLCs may finally be the next big thing. A Series LLC is a limited liability company that acts as the master LLC with a group of sub-units acting as independent LLCs. There are a number of possible benefits to forming a Series LLC over a traditional LLC; however, there are also additional requirements that make them inappropriate for many smaller businesses.
Series LLCs allow companies to segregate assets amongst the various units, similar to a holding company. Each unit may conduct a part of the master LLC's business, or conduct totally separate business unrelated to the master. Each unit also maintains liabilities and assets separate from the master so that each unit is liable only for their own debts and obligations.
Series LLCs also have filing and maintenance requirements similar to regular LLCs. Each unit must maintain separate books and records, and each unit has its own members. Series LLCs can be more expensive to establish and operate, especially when operating in states that require each unit to register and file separately.
There are still some questions about the more widespread future of Series LLCs. The Internal Revenue Service has not indicated whether a series under the master LLC is a separate entity from the master LLC for tax purposes. According to one private letter ruling, it has treated the individual units as separate tax entities.
Additionally, the American Bar Association has declined to endorse Series LLCs after an early review. The group expressed concern that the rights and remedies surrounding financially troubled Series LLCs are not yet settled, and the promised protections of distinct liability may not always come through.
For now, California law does not provide for the formation of a Series LLC. However, a Series LLC that is formed in another state can register with the state and conduct business in California.
For California state tax purposes, the Franchise Tax Board has taken the position that each unit will be treated as a separate entity for tax purposes if it has the features of a Series LLC in the state where the LLC was formed. Essentially, each unit of a Series LLC will have the same tax requirements and filing guidelines as a traditional LLC.
There is a growing list of states that have approved Series LLCs. These include Alabama, Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Montana, North Dakota, Oklahoma, Tennessee, Texas, Utah, as well as the popular incorporation states of Nevada and Delaware.
There is nothing to indicate that California will join these states anytime in the immediate future. However, given California's acceptance of Series LLCs for doing business in the state, this may not be a problem.
If you have any questions about business planning, setting up an LLC, or the tax requirements for an out-of-state formed Series LLC, the law firm of Butterfield Schechter LLP is here to help. We will answer all your questions and make sure your business stays in compliance with the latest tax laws and filing requirements. Contact our office today with any questions on how we can help you and your business succeed.
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