Proposed Regulations on the Series LLC

We receive inquiries daily from clients wondering why everyone does not file a Series LLC instead of the traditional LLC. The Delaware Series LLC business form reduces the fees incurred in creating and maintaining separate business entities for different ventures or investments. Only one filing fee is required to form a Series LLC regardless of the number of series it contains, rather than the multiple fees that would be required to create separate entities. In addition, a Series LLC is treated as one entity for franchise tax and registered agent fee purposes, meaning that it is assessed one $250 annual tax and one registered agent fee, rather than the separate franchise tax and fee that would otherwise be applied individually to separate LLCs.

Sound too good to be true? Many think that is the case. The myriad of issues concerning the series LLC such as the legal separation of the assets and liabilities of each series in a Series LLC has not been thoroughly tested in court. Although Delaware law clearly provides for legal separation of series, it is unclear whether courts in other states and/or jurisdictions would recognize a legal separation of assets and liabilities within what is technically a single entity. Therefore, even if a Delaware Series LLC were properly operated with distinct records relating to the assets and liabilities of each series, a court in another jurisdiction could determine not to recognize the legal separation afforded under Delaware law.

Another issue is the mystery surrounding the taxation of the Series LLC, however the IRS is finally coming around and proposing new regulations governing the taxation of this unique and often misunderstood entity. The IRS and Treasury Department proposed regulations would make crystal clear that each individual Series, within the Series LLC, could be considered a separate entity for the purposes concerning the Federal taxation.

What does this mean? Is the IRS actually saying that each individual series can elect the tax classification that would best suit that individual series needs! One series could be taxed like that of a partnership if there were 2 or more members, while another series can be considered a disregarded entity? All under one EIN?

Keep in mind these are only proposed regulations and have not been finalized! However, the members and managers of Delaware Series LLCs should be aware that the IRS is focusing on them and proposing regulations that will have an impact on their tax positions.

For detailed information on the new proposals for the Series LLC view Series LLC Regulations regarding the tax classification of so-called series or cells.