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Series LLC’s

  1. Series Are Similar to Subsidiaries. A Series LLC is (so far) unlike anything else. At the moment, Delaware, Illinois, Nevada and Oklahoma allow the formation of a Series LLC. There is a single LLC with one or more "series". Each "series" is treated much like a separate subsidiary – except there are not the same formation and administration expenses.

    1. Each series operates as its own profit/loss center.

    2. Each series may have different owners.

    3. Each series may have different management.

    4. Voting may be different for each series.

    5. There may be tax-free transfers within the LLC (though apparently this has not been tested).

    6. . The assets of one series are, theory, protected from the losses and liabilities of the other series.

  2. Adding and Dissolving Series. Additional series can be added by simply amending the "limited liability company agreement" (equivalent to an operating agreement for other LLC’s). A series may be dissolved by the vote of 2/3 of the ownership interests.

  3. Savings. For investors owning more than one piece of property, a Series LLC may offer significant savings over multiple regular LLC’s. Please note that the legal and accounting fees in the following chart may vary substantially from these figures.

    Item

    10 California LLC’s

    Single Del. Series LLC (with 10 series)

    Savings

    Filing Fees in Delaware

    $0.00

    $210.00

    ($210.00)

    Filing Fees in California

    $1,500.00

    $90.00

    $1,410.00

    Legal Fees

    ~$10,000.00

    ~$1,500.00

    $8,500.00

    Accounting Fees

    ~$2,000.00

    ~$400.00

    $1,600.00

    Franchise Tax

    $8,000.00

    $900.00

    $7,100.00

    TOTAL

    $21,510.00

    $3,100.00

    $18,400.00

  4. Liability Among Series. Delaware clearly intends its Series LLC law to prevent someone suing one series from pursuing assets held by other the other series. The question is whether California (and other states) will honor this approach. There are no cases on this point. Probably California will honor Delaware’s intent, given that California law requires it to respect another state’s determination of liability of its entities’ owners. Still, there is no guarantee. To minimize the chances of one series being held liable for another’s liabilities, the owners of a Series LLC should do the following:

    1. Keep the assets and operations of each series separate from the other series. Each asset should be owned solely by one series. In other words, two or more series should not be co-owners of the same property.

    2. Make sure each series is adequately capitalized.

    3. Have each series files a fictitious business name statement in each county where it owns property. Each series should have its own name and the filing should emphasized the ownership of that series, for example, "Abracadabra LLC, Blackacre Seriesonly". This is to put creditors on notice.

    4. All contracts, deeds, notes, etc. should be signed in the name of the series. Again, use something like "Abracadabra LLC, Blackacre Series only".

    5. A separate bank account should be maintained for each series.

    6. Any loans between series should be properly documented.

    7. Any transactions between series should be conducted in an arms’-length manner at fair market prices using appraisals.

  5. IRS Tax Issues. Although this is not definite, some commentators believe that a Series LLC will be taxed as one entity for federal tax purposes (which is usually desirable) IF there is not too much disparity in the assets, members and managers among the series. To maximize the chances of this:

    1. Every member should own a least a minimum amount (perhaps at least 10%) in each series.

    2. The managers should be the same for each series.

      The reason is that, since there is then commonality of ownership and management, the IRS should find it difficult to find that each series is a different entity.

  6. California Income Tax Issues. Although there is nothing official on this point, commentators believe that California will tax only the income from series that are conducting business in California, rather than taxing all income of the LLC.

  7. California Franchise Tax on LLC’s. Unfortunately, California has taken the position that California’s $800/year LLC franchise tax applies to each series that does business in California (as opposed to it only applying once to the whole LLC.)