Get Serious with Series LLCs to Save Costs?
An article by a Robert Geurden about a novel idea here in Massachusetts called the Series LLC recently appeared in Mass. Lawyers Weekly. I wanted to comment on it, share the concept, and urge our business community and legislators to push for a change in the law to give us the same flexibility here as in some other states. A proposal to use series Limited Liability Companies (LLCs) through one “master” LLC with two or more LLC sub-entities – may provide two kinds of advantages.
First, there is “serious” savings in cost – avoiding multiple LLC tax returns, filing fees, and other requirements. The umbrella LLC is permitted under Delaware law (and several other states, but not in Massachusetts) to create a single entity for tax and filing purposes with separate sub-LLCs. With this concept, Guerden gave an example of 10 LLCs and a cost savings of about $ 10,000 in filing fees and income tax returns, with the parent set up here.
Second, each sub-entity provides asset protection from the activities and liabilities of the others and for your personal assets when properly set up and run. It provides separate asset protection usually found by setting up multiple corporations or LLCs. Guerden suggest doing a parent LLC here and sub- Delaware LLCs for which we file here as foreign LLCs.
Delaware law Title VI Subtitle II c.18 s.215(b) says that that if a LLC agreement provides for 1 or more series, and the records for any such series account for assets separately from the other assets of the LLC “[…] the debts, liabilities, etc. shall be enforceable against the assets of such series only […].”
As such, each series of an LLC can be owned and run by persons with a number of businesses or income producing properties, making each its own independent business. Each LLC set up in Delaware, can take legal action in its own name under Mass. law, be registered here as a foreign corporation governed by the state of organization. While this seems like a great idea, it would be much safer if Massachusetts law provided for series LLCs as does Delaware. Thus, I am not so sure that setting up the master LLC here makes much sense unless you want to be the test case. I also question, in the absence of proper legislation, whether it will be possible to avoid registering each of the sub-LLCs in Massachustts as a foreign LLC doing business here at the cost of $ 500 a pop. One of my pet peeves is the cost of filing for a LLC here at $ 500 to set up with an annual fee of $ 500. This makes some clients choose the S-Corps for its lower filing fee – $ 250 and annual report fee of $100. It is time to lower the costs of the preferable entity – the LLC – so these filings fees do not enter into the choice of entity.
For tax purposes, each series may be a separate entity or disregarded entity depending on the owners choice of treatment of the series business as opposed to the whole LLC. Provided that each subsidiary series LLC does not choose to be taxed as a corporation, tax rulings / regulations say they would be treated for Massachusetts and Federal income tax purposes as a disregarded entity. Thus for tax filings and other purposes the series can be treated as one entity under the parent LLC, with considerable savings.
Setting up a series LLC is similar to a regular LLC, with many of the filings being the same. However, there are three types of formalities required when setting one up. Failure to follow any of them may allow someone to pierce the corporate shield and go after the assets of the other entities, and that of the owners.
The Operating Agreement must authorize each separate series.
The Certificate of Formation must include a notice of each separate series.
Assets belonging to each series must be clearly identifiable as belonging to each, and in some cases records naming the assets to the series are required.
Due to Massachusetts laws not specifically authorizing series LLCs, there are some complications with holding real estate. To summarize, a nominee trust most likely needs to be used. The schedule of beneficiaries should identify the sole series that will own the property. In some circumstances, the trustees can be subjected to personal liability, but the new Uniform Trust Code ameliorates concerns to some degree.
While there isn’t much precedent for a series LLC, they may become a useful way of managing separate businesses centrally, while protecting the owners from the liabilities of the others.
DISCLAIMER: All content that appears on this blog or on the bizatty.com website does not constitute legal advice. Thus the materials in this advisory should not be relied upon in making decisions about your personal situation. Every person’s situation is unique and the appropriate legal advice depends upon the facts of your situation. You should seek competent, professional legal counsel from a lawyer, such as Attorney Morse, to learn about your specific case and your available options.