Series LLC’s – Advantages And Dangers (Beware)

	By David Zaslow Co-Founding Partner Partner Real Estate Services (310) 478-4148 | dzaslow@rbz.com
Publication Date: Summer 2006
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 The Limited Liability Company (LLC) has now been in existence for a number of years. It is classified as a partnership and has become the entity of choice because it allowed liability protection to its owners for debts of the business. This type of entity relatively passes its income and loses through to its owners with fewer restrictions compared to other types of entities.

The Series LLC offers different advantages and disadvantages and is relatively unknown even though it has also been in existence for a number of years. Delaware, Nevada and some other states now have paved the way with this concept. The basic concept of the Series LLC allows business owners and investors to place all their assets into one master LLC, but to segregate the assets for liability purposes. As an example, there would still be liability protection for each asset. If you had 10 separate businesses and each entity had its own California LLC (instead of a Series LLC), a gross receipts tax would be due for each entity. Whereas with a Series LLC, only one gross receipts tax would be due. Therefore, a Series LLC would still have asset protection and only one gross receipts tax.

Advantages of the Series LLC

1. For California entities: Reduced Gross receipts tax. For example, the maximum Gross Receipts Tax for 10 entities would amount to $117,900 per year. A Series LLC would pay one Gross Receipts tax of $11,790 for a yearly savings for $106,110. Please note that the FTB took a position that tax is applied on a per- Exhibit (e.g. each exhibit) level. Even though we believe that the FTB’s position is completely unjustified and lacks any kind of legal standing, as a practical matter it will most likely require litigation to prevail on this issue. As such, pursuing this issue might not be practical for some taxpayers.

2. Reduced legal fees: Instead of setting up a new entity or each separate LLC, the Series LLC would have one Master entity with each subsequent entity reflected as an Exhibit.

3. Reduced accounting fees: One master tax return would be prepared, which would include all entities, instead of preparing tax returns for each entity.

4. Reduced Administration costs: One master entity would reduce administrative and filing requirements and costs.

5. Separate liability protections of multiple business or assets: Each business or asset (such as real estate) could still have its own liability protection.

6. Ease of adding and dissolving LLCs: There would be an ease of adding sub-LLCs to the master entity as well as dissolving them.

Disadvantages of the Series LLC

1. Liability protection for each entity could be pierced: Insufficient maintenance of accounting records or bank accounts, related party transactions or co-mingling of funds could “taint” the creditability of each entity. There is no assurance that the California courts will respect the liability protection.

2. Records have to be meticulously maintained: Each entity should maintain its own separate financial statements and general ledgers. If not maintained properly, the liability protection could be in question.

3. Single asset entity: Lenders and major vendors might not accept the Series LLC. This concept is still new and lenders and vendors have not yet accepted this method.

4. California and/or other states might challenge the credibility of one master entity. Series LLCs are not without certain risks. For example, no California court has yet ruled upon its validity. However, legal commentators and practitioners believe that California will probably respect a validly formed out-of-state LLC that qualifies to do business in California, just as California respects other foreign entities under the “full faith and credit clause” of the US Constitution and under California Corporation Code Section 17450 to place all their assets into one LLC, but to segregate the assets for liability purposes.

This article has explored some of the advantages and disadvantages of the Series LLC. The advantages of tax and cost savings can be tremendous. However, even though Series LLCs have now been around for a number of years, there is still a lack of clearly established legal rules, tax rules and a lack of interpretations by different courts. In conclusion, Series LLCs should definitely be evaluated and the future rules and cases should be watched. In the meantime, these Series LLCs can be a blessing for certain business decisions, resulting in substantial tax savings.