Kansas Newest Series LLC State

On July 1, 2012, Kansas’s new Series LLC legislation became effective. That makes Kansas the ninth state to fully adopt Series LLCs onto their entity structure rolls. (You can read the text of the new legislation here).

A Series LLC is a special kind of LLC that is permitted, under state law, to establish an unlimited number of subsidiaries, called Cells, under the parent LLC. Each Cell can have separate ownership and management from the parent. Cells can also choose to be treated independently for tax purposes, applying for their own federal Tax ID numbers, making elections to be taxed as C or S Corporations, and filing their own returns. Yet in most cases Series LLCs file just one Annual Report and need one Resident Agent, which means you can save thousands over setting up separate LLCs to do the same thing.

Right now Series LLCs are legal in Delaware, Iowa, Illinois, Nevada, Oklahoma, Tennessee, Texas, Kansas and Utah. These states have fully adopted legislation that specifically gives asset and liability protection between the Cells, so the problems in one Cell won’t stick to the others.

There are also some “kind-of” states, like Wisconsin and District of Columbia, that have Series LLC law, but it’s not as comprehensive. For example, you can set up a Series LLC in D.C., but the Cells are limited, by law, to not acting independently of the parent LLC, even though the Cells get liability protection from each other.

Kansas has modeled its legislation after that of Delaware, the first state to adopt Series LLC laws about 16 years ago, although there are some Illinois-derived elements in there to. For example, you have to be explicit when drafting Articles of Organization, that you are creating a Series LLC. Like Delaware, that means adding in extra language to the Articles pointing to the parts of the law that allow for the separation of liability. And, like Illinois, you also have to file secondary Certificates of Designation that identify the names and management structure of each Series you are creating.

So, is the Series right for everyone? That depends. If you’re in one of the 9 full Series LLC states, I have no problems using a Series LLC at all. If you’re in a “kind of” state, like Wisconsin or District of Columbia, you can still probably use a Series LLC in some circumstances, especially if you’ve got a real estate portfolio you’re trying to divide up.

But if you’re not in one of those states, then you have to consider how that state’s law will treat your structure in the event of a lawsuit. Usually we look to existing case-law for help, but with Series LLCs, here’s the thing: there really isn’t any that decide things one way or another.

Some legal analysts look at the structure and feel that a state may ignore the Cells and treat the whole structure like one big happy family for a lawsuit. Other analysts reason that because states uphold each other’s laws all the time, there’s no reason to think that Series LLC laws would fail.

Then there are states that want to have it both ways. Even though California hasn’t enacted Series LLC legislation of its own, the Franchise Tax Board long ago took the position that if one part of a Series is connected to California the whole structure has a duty to register in the state and pay the $800/year franchise tax on each Cell. While that would give you a powerful argument that the state should uphold the separation of Cells for liability purposes, it can also make for a pretty significant tax bill where you’ve got a Series LLC with lots of Cells. If you’re in California, or you have business interests in California, you may be better off doing something different.

For me, the key is going into a Series LLC with your eyes wide open. Understanding the pros and cons of your own situation is vital to putting your best tax and asset protection plan into place. What works for your colleague won’t necessarily work for you.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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