Series Limited Liability Company (LLC)
In the last decade, business organization development took a step forward with the emergence of series LLC’s. In 2009, this business structure became available in Texas as an alternate to operating an ordinary LLC, limited partnership, or corporation. The insulation from liability that a series LLC can offer is unlike any other business formation, and allows the owner(s) great flexibility in its operations.
A series LLC under Texas law allows a business owner, in their company agreement, to establish or provide for one or more designated “series” of members, managers, memberships interests, or assets. These designated series have separate rights, powers or duties with respect to specified property, obligations, and profits and losses. Further, each series can have an entirely different business purpose or investment objective. Tex. Bus. Orgs. Code § 101.601(a).
If a business owner has several assets and/or conducts more than one line of business, a series LLC may be a better option than an ordinary LLC.
There are a few reasons for this;
- Filing as a series LLC does not require the series to be implemented right away. Therefore, there is no disadvantage to filing as a series LLC, even when the use of a series may not occur; it will otherwise function and behave as a regular LLC until the series aspect is utilized.
- Since it is registered as a single entity, a series LLC at the state level is only required to file one franchise tax report under a single Texas taxpayer identification number. This differs somewhat from the federal treatment, which is discussed in more detail below.
- The protection and flexibility series LLC’s offer are an attractive draw-in to business owners. It is similar to that of an ordinary LLC in that: it is an effective liability shield, it allows for informal management, and it allows for pass through tax treatment.
The fundamental difference with a series LLC, however, is the ability to isolate each series’ liabilities and assets from one another. Series LLC’s essentially create “sub-companies” even though it is recognized as a single legal entity for state law purposes. Thus, each individual series is protected from other series in the LLC from judgment creditors, law suits, debts and the like. Should the company at large be sued, the series will be protected from any judgments therefrom.
Each series, in many respects, acts as its own standalone entity. Per the Texas Business Organizations Code, an established series has the power and capacity, in the series’ own name to sue and be sued; sign and negotiate contracts; acquire, sell, and hold title to assets of the series, including real property, personal property, and intangible property; grant liens and security interests in assets of the series; and exercise any power or privilege as necessary or appropriate to the conduct, promotion, or attainment or the business, purposes, or activities of the series. Tex. Bus. Orgs. Code § 101.605. Because of the intricate nature of series LLC’s, complete and accurate record keeping is a vital necessity. Per the Code, series protections and insulation from liability will be available only if records maintained for that particular series account for the assets associated with the series separately from the other assets of the company or any other series. Similarly, the series LLC must also;
(1) have a company agreement that provides for the segregation of the series, and
(2) state the same in the certificate of formation. Tex. Bus. Orgs. Code § 101.602(b).
The records must be maintained in a manner where the assets of the series can be reasonably identified by specific listing, category, type, quantity, or computational or allocational formula or procedure.
Also, if any of the series of the LLC conducts business under a name other than the name of the LLC, an assumed name certificate must be filed for the name of the series in compliance with the Texas Business Organizations Code. This will essentially create a DBA, or “doing business as,” for each series operating under a name other than that of the LLC.
Because series LLC’s are relatively new to Texas, and to the U.S. in general (currently only 13 states recognize a series LLC), there are still some questions that have not been entirely answered. For example, the question of whether a series is considered an employer for purposes of employee benefit plan offerings. The IRS and Treasury Department have issued proposed regulations under 414(o) which would prevent the avoidance of any employee benefit plan requirement though the use of a series LLC. Effectively, the regulations would not allow businesses to intentionally side step the employee benefit plan requirement by conducting business as a series LLC.
Yet another question that remains unanswered is the federal tax treatment of series LLC’s. While a series of an LLC is not a separate domestic entity or organization per Texas laws, it may be treated as such for federal tax purposes. In fact, one of the most attractive qualities of a series LLC would be its federal tax treatment, and the ability to insulate the tax liability of each series. Under the IRS proposed regulations, each series of a series LLC will be treated as a separate entity for federal tax purposes. This means that, like an LLC, a series LLC will be subject to the “check the box” regulations. The check the box regulations are a liberal part of the tax code, which give substantial autonomy to the owners to decide how they’d like to elect their business for tax purposes. As an illustration, let’s say an LLC has 2 series; Series A, which has 2 owners, and Series B with a single owner. Unless the owners elect otherwise, Series A will automatically be considered a partnership and Series B will be disregarded as an entity. Series A would be considered a partnership because there is more than one owner. Series B would be disregarded as an entity since it’s a single owner, and the income from that series would flow through to the owner himself on his personal tax return.
Similar to how partnerships are taxed, the proposed regulations require a series LLC and each of its individual series to provide an annual statement to ensure proper assessment and collection of federal income tax. The information the statement should include, and when this statement would be due are both questions the IRS has yet to answer. As a precautionary measure, and as required by Texas law, the series LLC and all its series should keep detailed and organized company books and records for tax purposes.
Also of note, since the proposed regulations are still proposed, owners of series LLCs essentially have an even broader option in how they choose to be taxed. That is, reporting as a single entity (like a regular LLC would) or utilize separate reporting for each series. If the series LLC decides to elect as a single entity, and the proposed regulations are adopted as now written, the series LLC may have to change their reporting method unless the transition rule in the regulations applies. This poses a whole host of complexities that the business owner may find undesirable. For example, if the series LLC initially elected as a single entity and identified as a corporation for federal tax purposes, there could be adverse tax consequences in having to switch to separate reporting. In the context of a series LLC electing as a corporation, this could include a taxable liquidation of the corporation. To avoid adverse tax consequences, it may be beneficial to follow the proposed regulations and use separate reporting from the outset.