Series LLCs: The Pros, the Cons, and the Unsettled from the CPA Perspective
You may have heard about or even been advised to consider using a “Series LLC” structure. This article provides an overview of this new legal structure and the pros and cons from an accountant’s perspective. Please review this opportunity with your business attorney.
Since the passage of the first Limited Liability Company (LLC) legislation by the State of Wyoming in 1977, LLCs have catapulted to the top tier of available entity legal structures. Therefore, it was inevitable that creative offshoots would sprout from the basic LLC structure such as the Series LLC concept.
Delaware enacted the first Series LLC legislation in 1996, inspired by and modeled after the Delaware statutory trust vehicle, which allowed a single investment company to be formed as a trust with separate series.
What are Series LLCs?
Series LLCs generally consist of a parent or “Master” umbrella LLC under which unlimited numbers of Child (or “series”) LLCs can be formed, permitting each of the Child LLCs to have separate assets, liabilities, operations, members, and managers. This type of legal structure was authorized in South Dakota on November 15, 2020.
This structure is very similar to a traditional holding company — with parents and subsidiaries. The alternative to Series LLCs is to have “brother-sister” LLCs which merely have mirrored ownership.
The Pros of Series LLCs
- In some cases, Series LLCs are simpler to administer internally since there is only one legal entity rather than several legal entities to track.
- An ideal use for Series LLCs, for example, would be for someone owning several rental properties, or perhaps for a fast-food franchisee with multiple locations. The Series LLC (and wholly owned Children LLCs) only needs one income tax return, while a “brother-sister” LLC ownership would require one for each location.
- There may be decreased professional fees since there will not be separate LLCs to form. However, see the related “con” below for situations in which Series LLCs may result in higher professional fees.
- In South Dakota, there can be reduced annual state filing fees, since only the Master LLC needs to make annual filings, while Child LLCs do not.
Attorneys have informed us that even though Child LLCs are under one Master LLC, each Child LLC should only be liable for its own debts. Therefore, creditors of the other Child LLCs and Master LLC cannot gain access to its assets and vice versa. It is also important for your attorney to review bankruptcy laws with respect to these new legal entities.
The Cons and Unsettled Legal Areas Applicable to Series LLCs
- If the Child LLC is not entirely owned by the Master, a separate partnership return will still need to be filed for each Child. As such, Series LLCs are the most beneficial when the Master is the 100% owner of each Child. Because a wholly owned LLC is ignored for income tax purposes, only one tax return will need to be filed.
- For interstate Series LLC businesses, states without Series LLC legislation may choose to ignore the Series LLC and seek to consider each Child as a separate LLC entity. Furthermore, even for those states with Series LLC legislation, a state may interpret an out-of-state Series LLC business in a manner different from the resident state’s interpretation. These are legal issues which should be discussed with your legal counsel.
- Series LLCs may cause tax accounting nightmares for businesses operating in several states. For interstate businesses, if one Child has a loss and another has income, and both operate in the same state, the state’s apportionment rules may result in the ‘loss’ LLC’s members paying tax that they wouldn’t otherwise.
- Regarding professional fees, if the characteristics of individual subunits may be complex, folding them under one LLC umbrella may result in increased professional fees as advisors may spend additional time addressing the unique aspects of Series LLCs. This is particularly true if the Child LLCs are not 100% owned by the Master LLC.
As you can see, the ultimate answer depends on the specific facts of the situation. We do advise that you bring in your attorney and tax advisor to assist you in evaluating whether this type of structure is best for your situation.