Introduction
The past few years have been exciting for those watching and keeping up with the entity known as the “Series Limited Liability Company” (Series LLC). So much has happened and so much has developed. From the treatment given from the IRS, state trends, and case law, we are now getting a clearer picture of what is and will become of the series LLC.
Background
The Series Limited Liability Company is based upon the Limited Liability Company (LLC). The LLC is a business structure created and allowed by state statute. This is unlike sole proprietorships and partnerships that do not necessarily owe their existence to statute, but more based upon formal or informal agreements. Though states vary, most states also permit “single member” LLCs, those having only one owner. There are limits that exist as to what kinds of businesses endeavors LLCs can partake in. Banks and insurance companies cannot hold LLC status for instance. Further, the name of an LLC MUST include LLC, L.L.C., or Limited Liability Company AND CANNOT HAVE Inc, Corp, Corporation, or Incorporated following the name. All of the rules in this paragraph apply to the Series LLC.
What is a Series LLC?
The Series LLC is a new creature born from a past design. The statutes were created as early as the past 10 years. Liabilities and such are only enforceable against the particular series in question and are not against assets of other series. They are more expensive to set up as opposed to other A series LLC is simply an LLC formed at the state level and then the client requests, via a written instrument to the state, how many series are desired. For example a client has ABC, LLC. That client can request to have ABC, LLC, series 1, series 2, 3, 4 and it can go on and on. They are in essence sub companies.
Protection Based On Separation
The most important theme now is separation. You must account for the assets separately. Liabilities and assets are reported separately for accounting and legal purposes. Surprisingly, the IRS has acknowledged the existence of the Series LLC and respects the existence as such.
Fortunately, accounting programs via computer make this easier than before. Schedule E already requires a quasi separateness. In addition, it is advisable to have separate books, separate records, even separate checks that say series 1, series 2, and series 3. The reason for the separateness is simple: it provides a greater barrier to each company’s assets and is a shield from liability.
Illinois’ Departure from the Mold
When Illinois enacted legislation in 2005, it seriously departed from the Delaware legislation. The reason for the departure is notice. Delaware and many previous states do not have much of a demand for notice in their statute. Illinois on the other hand is very stringent. The policy is to notify who you are doing business with and that you are in fact a series LLC. In Illinois, the client must use the complete name of the series. This extends to the client’s entire contract and leases.
While it may seem like a detriment to the client, the fact of the matter is that disclosure such as these are always a good thing when trying to defend your firm from liability. The plaintiff does not have the argument of ignorance or fraud against the defendant, thus potentially damaging legal protections.
In Illinois, the Secretary of State has a record of LLCs. Every year, LLCs must declare how many series they have. This way, each year the Secretary of State has a record of each series.
Conclusion
The Series LLC will be the premiere business type for this decade as far as new companies are concerned. The Series LLC gives unsurpassed liability protection along with the advantages given by the old type of LLC. Additionally, the IRS openly recognizes Series LLCs as legitimate business types and has rules and regulations concerning the filing of their returns. While some states such as Delaware allow their companies to “hide the ball” from their creditors, Illinois takes a different approach. It is a more honest and more respectable approach when it comes to utilizing your Series LLC. If you have any questions, concerns or would like to set up a Series LLC, please feel free to call the professionals at The Center at 618 997 3436.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors