As an Asset Protection attorney, I’m often asked about the Series LLC. Most people are interested in the Series LLC as a costs saving device. But for my California clients, the Series LLC may not be the panacea it’s claimed to be.

A Series Limited Liability Company (“Series LLC”) is a relatively new form of LLC that may be formed under the laws of some States (e.g., Delaware, Illinois, Nevada, Iowa, Oklahoma, Tennessee, Texas, Wisconsin, and Utah). A Series LLC comprises of a Master LLC whose organizing documents and Operating Agreement provide for separate sub-units (or series), each of which operate as independent LLCs. When assets are placed into each series, they are theoretically protected from liabilities arising from activities in the other series. In overall structure, the Series LLC is comparable to a corporation with several subsidiaries.

California does not allow for a Series LLC to be formed in California. However, a Series LLC formed under the laws of another State may register with the California Secretary of State and transact business in California.

Pros:

•    The Series LLC only requires one Registered Agent and one State Annual Report Fee (Delaware) per year regardless of the number of series within the Series LLC.

•    Presumably, the Series LLC 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 tax return for that cell. The federal tax standards for a Series LLC with multiple Members remains unclear.

•    Each unit has the ability to hold many assets in separate “cells” under one Master LLC.

•    The Members of each unit are treated under the laws of the State where the Master LLC is formed as owning an interest in only that unit, and have no rights in the assets or income of another unit.

•    Each unit is liable only for its own debts and obligations. In general, creditors of one unit may only make claims against the assets of that unit.

Cons:

•    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.

•    As noted below, California does not have Series LLC legislation, and will require separate tax returns for each unit within the series.

Tax Filing Guidelines:

•    As of this writing, the Internal Revenue Service has not stated whether a unit within a Master LLC is a separate entity from the Master LLC for tax purposes.

•    On January 18, 2008, the Internal Revenue Service issued Private Letter Ruling 200803004, which ruled that the Federal tax classification (i.e., disregarded entity or partnership or taxable association) is determined for each series independently.

•    The California Franchise Tax Board has taken the position that if each unit will be treated as a separate entity for filing and tax purposes.

•    The FTB Form 568 Instructions contained in the package for the 2005 tax year specify that “each series in a Delaware Series LLC is considered a separate LLC and must file its own Form 568 Limited Liability Company Return of Income and pay its own separate LLC annual tax and fee if it is registered or doing business in California.” Presumably, these instructions apply to Series LLC’s created in jurisdictions other than Delaware.

The Series LLC is not more widely used because its tax treatment has not been fully resolved and because its effectiveness has not been tested judicially. Be very careful in following the advise of a promoter who would suggest a Series LLC in California. The Series LLC is mainly for people whose only alternative is a single traditional LLC. I always advise people to form separate entities as an alternative to a Series LLC. More predictable asset segregation comes from multiple entity filings.

If you feel that the costs to file and maintain multiple entities are not justifiable, as a baseball fan would say, “You may win the game, but lose the series.”