Series LLCs – Better Asset Protection?
If you own several income producing properties or businesses, then lawyers typically recommend placing each property and/or business in a separate legal entity such as a limited liability company (“LLC”) so that creditors of one entity will not have access to the assets of any other entity or the personal assets of the owner. A question often arises as to whether there is an easier way to segregate liability without having to set up different legal entities. This is where the series LLC comes in.
In the last few years, Delaware, Illinois, Iowa, Kansas, Montana, Nevada, Oklahoma, Tennessee, Texas, and Utah have adopted legislation which allows for the formation of a single “parent” limited liability company which can segregate assets and operations into separate series. Each series is intended to function like a separate legal entity- having its own books, records, and operations, and with each series being insulated from the claims of creditors of the other series and the parent LLC.
The main advantages of series LLCs are reduced formation costs and annual filing fees. This is particularly attractive in states like Illinois and California where the formation and on-going annual fees can run into thousands of dollars. It is also attractive for people or businesses that own a large number of separate income producing properties and/or engage in frequent purchases and sales of property or limited duration financial transactions, e.g., formation of a separate series is simpler, faster and potentially less expensive, than forming a whole new entity each time a new transaction is entered.
Many clients question whether a series LLC will require only one Federal tax filing. While the IRS may arrive at different answers depending on the facts and circumstances, there is authority that suggests each series LLC may be treated as a separate legal entity for Federal Tax purposes (see National Securities Series-Industrial Stock Series v Commissioner, Rev Ruling 55-416, Proposed Reg. §30.7701-1, 75 Fed. Reg. 55,699(2010)).
The principal risk in establishing series LLCs is that a Court may not respect the separate liability shield of a series. For example:
- if the series qualifies to do business in a state other than the one in which the parent LLC was formed (and which has the applicable series LLC statute), then the Courts of that non-formation state may not respect the separate liability shield of each series in determining liability for a claim. This result is more likely in the case of tort claims and state statutes that heavily favor recovery for claimants.
- if the series provides services to consumers, or contracts with parties, who are not informed of, and who do not agree to, limit claims only to the applicable series, then there is a higher likelihood that claims could be made against the parent LLC and all the series rather than simply the one whose operations gave rise to the claim. The exception is if all claims will be brought only in the formation state of the parent LLC or another state with a similar series LLC statute.
- if the parent LLC or any of its series files bankruptcy, then it is unclear whether the parent LLC (if bankruptcy is in relation to a series), or the series (if bankruptcy is in relation to the parent) will be deemed a debtor to the bankruptcy and potentially be consolidated for purposes of liquidation or recovery.
If the liability shield of a series is not respected, then formation of a series LLC rather than separate LLCs (or other commonly used legal entities) could be a big mistake.
The best scenario for formation of series LLCs is:
- if the only claimants are those who enter into contractual arrangements with the series and who agree that they will only bring claims against the series in regard to which they are doing business (and not the parent or other series), and/or
- the series LLC conducts all of its activities in the state in which the parent LLC was formed.
Because series LLCs are a new development in the United States there is virtually no case law addressing the many issues posed by these entities compared to more common established forms of legal entities. As more states adopt series LLC legislation and as case law develops, series LLCs may explode in use or disappear with the refrain “it seemed like a good idea at the time”.
IMPORTANT NOTICE: The foregoing is NOT legal advice. We have prepared these materials to inform and educate. They are not, and should not be considered, legal opinions or advice to anyone, nor do they create an attorney client relationship by your reading them. These materials may not reflect the most current legal developments in the applicable area of law. Furthermore, this information should in no way be taken as an indication of future results.
Mathieu, Ranum & Allaire, PLLC is a boutique law firm with offices in Boise and Sun Valley, Idaho focusing exclusively in the areas of estate and trust planning, probate and trust administration, asset protection, business law and charitable organization laws. We represent individuals, families, trustees, heirs and beneficiaries, entrepreneurs and closely held businesses, tax-exempt organizations, and family offices, as well as professionals and business owners potentially exposed to future creditor claims. - See more at: https://www.mathieuranum.com/blog/use-of-llcs-in-estate-planning-small-business-planning/#sthash.BGjRKdt9.dpuf