Taxation


A Series LLC has the same taxation options available to it that a regular LLC does. In other words, anything goes.

For your long-term real estate rentals or other passive income-generating businesses, you can elect to have your Series LLC treated traditionally as a partnership (if you’ve got more than one Member), or as a single member disregarded LLC (if you’re the only owner). If your LLC is taxed as a partnership, it will file a Form 1065 partnership return, and flow profit/loss through to the owners on a K-1. If your LLC is taxed as a single member disregarded entity, it won’t file a tax return at all, and will just report income and expenses on a Schedule E (or C) to your personal tax return.

For your active business operations, like the sale of services or products, your Series LLC could choose to be taxed as either a C Corporation or an S Corporation.

One of the questions we get frequently is how you should tax the main LLC, or whether you should use it at all. The answer really depends on what kind of business you are going to operate. If you are planning to use your Series LLC with your real estate investments, then it probably makes sense to have the main LLC elect either partnership or disregarded entity status. That will allow you to roll up the Cells with common ownership for taxes, so you just file a single return.

For example, let’s say you had six rental properties, all generating passive income, divided up into three Cells. If these Cells were separate LLCs, they would each file a tax return, and pass the net income or loss through to you on a Form K-1 (which gets reported on your personal tax return).

But, even though you would have a separate K-1 for each LLC, the income they generate will be treated the same by the IRS. With a Series LLC, properly structured, you could instead have all of these returns consolidated together in a single return, under your Series LLC. Instead of 3 separate tax returns, you would have one single return, yet there would be no impact on your ownership or the liability barriers between the Cells.

That takes care of your passive income, but what about your other business activities that are generating active income? You can apply the same principles. For example, maybe you provide consulting services to individuals or businesses. The income earned here is treated differently by the IRS. You could put it into a Cell, but the default taxation wouldn’t help you here – it would actually increase your taxes. Not a problem. The IRS permits each Cell to make a separate tax election. You can make the appropriate IRS filing to have this Cell treated like an S Corporation for tax purposes. That gives you the ability to establish a payroll under the Cell, along with all the same tax benefits you’d receive if you had set up a separate S Corporation. At tax time, this Cell won’t roll up into the Series LLC with your income properties. It will prepare and file a separate tax return to deal with its income.

Where you have multiple business operations, you have a choice. You can operate them through a single Cell, or you can separate those operations out the same way you would divide up your income producing assets.

How you choose to split things up will depend on a few things. For example, does one of your businesses have a lot of risk associated with it? If so, it may be better off on its own. Or, perhaps you have several affiliate marketing sites that you maintain. These are generally low-risk operations. You are simply providing a gateway through which a buyer and seller come together, and receive a commission on sales originated through your website. Rather than starting up several separate Cells, this may be a situation where you can safely group activities together into a single structure.

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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