Series Limited Liability Companies
The Series Limited Liability Company provides asset protection through the segregation of subsidiary assets and liabilities. This information is is provided in the following subsections:
The Series Limited Liability Company provides asset protection through the segregation of subsidiary assets and liabilities. A Series LLC consists of a "Master" company and (series) of subsidiary companies, which may conduct unrelated business activities with differing ownership interests.
Originally designed to assist investment companies in the mutual fund industry avoid a multitude of SEC filings, Delaware introduced special interest legislation in 1996 to enable one company to act as an "umbrella" for the activities of all their individual client funds. Nevada is one of the only states in the United States to allow businesses to operate under an organizational structure known as a “Series LLC.”
The Series Limited Liability Company has been successfully implemented internationally with "Segregated Portfolio Companies" (which we offer in the British Virgin Islands and Belize) and "Protected Cell Companies" (which we offer in the Republic of Seychelles) for insurance companies and other industries servicing large quantities of related clientele.
This method of shielding large institutions from mass claims arising from catastrophic events was brought to the average individual engaged in common business activities with varying degrees of risk such as, real estate investing, construction and fund raising. However, many questions have since arisen regarding the best practices for using a Series LLC with regard to banking, documentation and taxation.
EFFECTIVELY IMPLEMENTING SERIES LLCS
A Series LLC is an ideal structure for the ownership of income-producing real estate holdings, such as rental properties. In forming a Series LLC, the organizer files only one set of Articles of Organization to establish a master or “umbrella” Limited Liability Company. If the Articles of Organization and Operating Agreement provide for the establishment of a series under the umbrella LLC, as provided by Nevada statutes, the LLC organizer can establish cells or “series” underneath the Master LLC in order to hold assets.
For example, the organizer establishes “Marsh Lake, LLC,” which under its Articles of Organization and Operating Agreement allows for the creation of a series within its structure.
Marsh Lake Properties, LLC then purchases three (3) rental properties and the title is taken to each property in the names of Marsh Lake Properties, LLC Series 1; Marsh Lake Properties, LLC Series 2; and Marsh Lake Properties, LLC Series 3 respectively. As long as each series is governed by its own Operating Agreement and is treated by membership and management as separate and distinct business entities, the liabilities of one series will not affect the others.
Series LLCs reduce costs by enabling the formation and maintenance of only one LLC with the Nevada Secretary of State (and therefore the payment of formation and annual renewal fees for only one LLC) while providing the limited liability benefits of multiple LLCs. Under the right circumstances, Series LLC may have to file only one federal income tax return, as well.
Series LLCs are yet another component of Nevada’s pro-business offerings and favorable corporate climate. In order to benefit fully from this unique business structure, however, it must be properly formed. Consult with your Nevada business lawyer to ensure the proper formation and operation of the Series LLC.
Nevada added the Series LLC in 2005 and, along with a growing number of states, allows a Series LLC to enter into contracts, hold title to assets, grant security interests and to sue or be sued, just like other types of entities.
Although no legal cases have reached a State Supreme Court to establish a precedence for the efficacy of a Series LLC, there are nearly ten years of use in their history. While many states do not recognize a Series LLC, as they have not yet enacted any such Series LLC legislation in their state laws, it is possible to avoid "foreign filing" (registering in another state) by combining a Series LLC with other structures like land trusts, on-the-ground "processing centers" and third-party management companies contracted to perform certain state-specific activities.
Of the thirteen states which currently have legislation enacted for a Series LLC, only Illinois requires the subsidiaries (or series) to be registered with the Secretary of State. All other jurisdictions leave the responsibility of maintaining proper books and records to the company ownership.
The tax treatment of a Series LLC is also becoming clearer as their use continues to spread. A Series LLC can be formed with a single member (not recommended) or with multiple members and, if not acting as a disregarded entity for tax purposes, may choose to file either a 1065 (partnership) or 1120 (corporate) tax election.
In 2008, the IRS issued Private Letter Ruling 200803004 which ruled that the Federal tax classification for a Series LLC (whether a disregarded entity, partnership or taxable association) shall be determined for each subsidiary independently. And, proposed Treasury Regulation §301.7701-1(a)(1) states subsidiaries shall likely be treated (for tax purposes) as a separate entity regardless of whether the subsidiary is considered an entity under local law.
There are two primary benefits to a Series LLC and one responsibility that remains unchanged:
- The ability to form and renew only one company, as opposed to multiple entities.
- A Series LLC only requires one tax return to be filed by the master LLC and can encompass a multitude of subsidiary LLCs with it.
The "responsibility which remains unchanged" is that you must keep separate books and records for each subsidiary, including operating agreements, meetings, minutes and resolutions.
If your Series LLC is to be respected as such, then your business formalities must be in order. Take these action steps into consideration when investigating the use of a Series LLC.
Each subsidiary is a separate and distinct company from the Master Company and keeps its own respective books and records. Separate EIN (Employer Identification Numbers) are obtained and maintained to segregate the bank accounts of each subsidiary.
- All agreements, contracts, deeds and notes, etc. are signed in the name of the respective subsidiary LLC.
- Each subsidiary name should include the name of the master in its title, thus providing notice or disclosure of the subsidiary’s existence. i.e. “Marsh Lake Properties, a Nevada Series LLC.”
- Each subsidiary is to be properly capitalized with no one subsidiary co-mingling funds or ownership interest in another. If each subsidiary is to be treated and respected as a company, with its own legal personality, then it must behave accordingly.
For more information on how to "Cover Your Assets", please feel free to contact Nevada Corporate Associates for a free private consultation.