Operating in A Non-Series State (Part 2)

But perhaps the biggest question surrounding Series LLCs is the issue of liability and the inter-Cell protection. What will Idaho do with your Iowa Series LLC, in the event that you are sued in Idaho. Will it respect Iowa laws, and allow you to maintain the division between Cells? Or, will it look at your Series LLC as one big LLC, collapsing the Cells into the main structure and thus putting all of your assets at risk? And, what happens in the event of a bankruptcy?

The answer you get is also going to depend on who you ask. Many attorneys feel that a state will apply its own laws first, and that they have no real interest in putting the laws of another state first. They feel this is especially true if you haven’t made it clear to your vendors, business associates and those you contract with that they aren’t dealing with XXX LLC – they are dealing with a subsidiary Cell of XXX LLC. Remember, where there is legal confusion (especially in contract law), the courts usually come down in favor of the party who DIDN’T create the contract.

And that could very well be true. So far, the issue hasn’t been firmly decided by the Courts one way or another, even though the Series LLC has been in existence for about 14 years now. We just have not seen any litigation on that point. However, we have seen litigation and IRS rulings on other issues involving Series LLC in non-Series states. So, it stands to reason that state courts are aware of the existence of the Series LLC, and haven’t seen fit to send clear messages saying “You aren’t welcome here.”

In fact, the tax stance of California on Series LLCs could work in your favor here. In a case where someone in California argued your Series LLC should be collapsed for litigation, you could argue that the state has given its de facto approval of the structure, by choosing to accept it as separate entities for tax purposes. By recognizing each Cell as a separate taxable entity, the state has set itself up to respect and uphold the legal separation of the Cells, even though it has no domestic Series LLC law on its own books.

We also don’t have any firm guidance from the bankruptcy courts on how a Series LLC will be treated. It seems logical that if the Cells are properly following corporate formalities, then they should be treated by the bankruptcy court as separate entities in the event of a bankruptcy.

This is especially true if you live in a state that has enacted Series LLC legislation providing those rights under law. But there’s no firm guarantee at this point whether that will happen, or whether the bankruptcy court will ignore the Cell and only consider the entire LLC. As always, you need to take a close look at your situation, consider both sides of the argument and make the choice that lets you sleep peacefully at night.

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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