Series LLC: A History (Part 2)

Shortly after the Delaware law was enacted other states began to sit up and take notice. By 2011, seven more states – Illinois, Iowa, Oklahoma, Nevada, Tennessee, Texas and Utah – had enacted Series LLC legislation of their own. There is also a similar type of entity in Puerto Rico.

Texas was the newest state to jump on the bandwagon, enacting legislation in the fall of 2009. Legislation is under review in other states.

Of the states that have adopted Series LLC law, most follow the format and framework of the Delaware legislation. Illinois is the notable exception, with legislation that is more detailed and deals with much more of the practicalities of running this kind of multi-subsidiary structure.

Early adopters of the Delaware Series LLC pushed the entity structure hard, but the legal world moves slowly. Remember, regular LLCs only came into being in the United States in 1970. Attorneys, financial planners and tax professionals were concerned, not so much by what the Delaware law did say, as by what it didn’t say. Could a Series LLC operate in a state that had not yet enacted Series LLC legislation? Would the inter-cell liability protections hold up in Court? Were the Cells truly independent of the main LLC? What rights did Members of a Cell really have? And, more importantly, how did the IRS view this structure? Would they allow Cells to file separate tax returns, or would they insist that the structure file a joint tax return, consolidating all of the income and expenses of the various Cells with the main LLC.

Without that clarity, industry professionals did not really have anything other than previous court cases to rely on. And that has been a huge reason why the Series LLC has been slow to gain acceptance on a wider stage. A lot of our existing law is based on what has happened before. But case law takes years to develop, and while that’s happening there is no firm guarantee that a Court will always act a certain way. Without a clear roadmap, few professionals wanted to put their clients into untested structures. No-one wanted their client to become “that test case,” or to wind up being sued by a client for malpractice, if things went wrong.

So, the Delaware Series LLC remained on the fringes of asset protection for several years. But as other states came online over the years, we did see some things change. For example, in Nevada, the legislation enacted in 2005 clearly stated that regular LLC members and Series members were synonymous terms. There were no rights given to regular LLC members that did not also apply to Cell members, unless the Operating Agreement specifically allowed for it. And in Illinois, lawmakers drafted their Series LLC law with specific rules around how Cells should be named, plus instituted a framework to register the Cells at the Secretary of State. (Illinois remains the only state so far that requires you to file separate paperwork to register each Cell).

Early Series LLC adopters also began to explore the possibilities of using the Series LLC for other things. They began to ask the IRS to clarify how a Series LLC should be taxed, and more importantly, how the Cells were to be taxed. Slowly a “generally accepted” standard began to emerge.

We saw our first major IRS movement in 2008, when the IRS issued a Private Letter Ruling (PLR) that stated each subsidiary was permitted to adopt its own tax classification and this would be upheld as long as that subsidiary operated independently, and kept separate records. Even though you can’t rely on a PLR (they are specific to the person who requested the ruling, and the IRS specifically states they may not form general practice), the reality is that PLRs are often used to demonstrate an existing IRS position by others wanting to do the same thing.

Having a PLR supporting the adoption of separate tax classifications was a huge shot in the arm for Series LLC proponents, as it was the first major sign that the IRS was going to legitimize the Series LLC.

Things improved again in 2010, when the IRS released draft regulations on how the Series LLC and its Cells would be treated for taxes. The IRS reaffirmed the position it had taken the 2008 PLR, in that each Cell can make its own tax election. In fact, the IRS went one step further and stated that each Cell must make its own tax election. Once these are finalized, there will be more certainty in tax treatment, which again will help to bring the structure into more common use.

While things are still developing (and will continue to develop for years to come), Series LLCs are becoming a safer and more acceptable business structure across the country. Is it right for you? The answer depends on your unique circumstances, but in many instances, you will find that yes, the Series LLC will work, and will save you some money along the way.

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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