In part 1 of the Series LLC I discussed what the series LLC is and how it works. This post provides information on the tax implications and practical uses for the series LLC.
III. Tax Implications
As you know, federal tax law rather than state law determines the existence of an entity for tax purposes. In many cases, the members of each series of an LLC will be identical. In such cases, it is fairly certain that the series LLC as a whole will be treated as a single tax entity for federal tax purposes. On the other hand, if the series of an LLC has the same members, or identical or similar membership rights, or similar business purposes, each series may be treated as a separate LLC for income tax purposes.
In both cases, however, there should be only one filing with a state’s secretary of state for the LLC (rather than for the individual series). Furthermore, in most cases, there should be only one state franchise (or similar) tax filing.
IV. Practical Uses of the Series LLC
The most obvious use for the series LLC is to hold multiple parcels of real property in liability-segregated cells. Owners of small commercial or residential properties may find the series LLC particularly appealing. This is especially true in states with high minimum franchise taxes. Forming and maintaining a number of separate LLCs may cost several thousand dollars in the year of formation and several thousand dollars each subsequent year. The use of a series LLC with each property held by a separate series may save several thousand dollars in startup costs and another several thousand dollars a year in ongoing administrative and state tax costs.
Another use for the series LLC is to facilitate an equity compensation program in a business with multiple divisions. With each division segregated into a separate series, the LLC can give the key employees of each series some sort of equity interest tied to that series only rather than equity interests in the entity as a whole. This rewards employees at productive divisions and protects them from the potential downside of other divisions.
Finally, a series LLC could be used to facilitate the combination of business operations of distinct businesses. For example, rather than undertaking a traditional merger, two companies wishing to join forces might form a series LLC, with each company contributing its assets to a separate series, or with the owners of each company contributing their ownership interests to a separate series. The LLC agreement and series agreements could be drafted to determine exactly which rights and responsibilities are shared and which are maintained separately. The series LLC provides a unique and very flexible framework for this sort of business combination.