Deciding how to structure your business is an important decision that determines how the company will be taxed by the IRS. A series LLC structure is a relatively new option raising a lot of questions and speculation amongst business owners and advisors.
What is a series LLC?
A series LLC is an entity which includes multiple series of members, managers, interests or assets under one master LLC. This structure can consist of a single organization, which divides its assets and entities as separate LLCs, the series, that all are within a master LLC. Each one can exist separately from the others. A series LLC has been compared to a corporation with several subsidiaries. Series LLCs have only been enacted in a limited amount of states but could expand in future years.
Uncertainty Around Series LLCs
Since series LLCs haven’t been around very long, there isn’t much guidance on them yet. There is uncertainty around tax classification and the ‘check the box rules’, which allow an LLC to either elect to be treated as a partnership or as a corporation. The question arises on whether it is the master LLC or its series members that are subject to the classification. Certain questions are left unanswered, including:
- If the master LLC elects to be treated as a partnership, does the election take effect for the series LLC as well, or does it have to make its own election?
- Can each series LLC within the master LLC elect its own classification, or are they all subject to the same election?
- Is each entity seen as a separate taxpayer, or is the master LLC the only entity for purposes of filing with the IRS?
While there has not been much IRS guidance, there have been a few tax court rulings and a letter ruling on how they could be treated in future proposed regulations. The general view from these cases is that each separate LLC within the master series is treated as a separate LLC for tax purposes under the normal check the box rules.
Future Tax Planning
Depending on how this develops in the future, tax planning opportunities could arise to structure series LLCs in a way to take advantage of this “separate entity” treatment. Types of planning opportunities and areas of interest include, but are not limited to: accounting methods, income and liability allocation, the UNICAP rules and allocation of deductions within the series.
What are the advantages of a series LLC?
– Cost of formation
– Asset protection: The usage of a series LLC can allow for separate entities within the master LLC to protect their individual assets from the liabilities of the other
– Single federal tax return
– Distinct structures
What are the disadvantages of a series LLC?
– Separate bank accounts and accounting for each LLC
– Separate registered agent for each LLC
– Bankruptcy concerns: Because the series LLC concept is new, questions remain unanswered regarding each LLC within the series.
Since the laws about creating series LLCs are different in every state and there is limited case law, a series LLC may not be the first choice when deciding the structure of a business. As the IRS and states release more guidance, businesses will want to address the possible benefits of this structure with respects to their specific tax situations and needs. Contact an Anders advisor with questions about your specific situation.
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